Why has the Government’s Disinvestment Programme Slowed Down

The Economic Survey, released earlier this week, has made a forceful argument for reducing government stakes in most public sector enterprises to 26%. If Finance Minister Nirmala Sitharaman goes by her own ministry’s advice, the coming Sunday’s Budget should be going big on disinvestment.

A closer look at disinvestment outcomes of recent years, however, suggests otherwise.  Not only have disinvestment proceeds been falling short of budget targets by huge margins since FY2019-20, the government has also been scaling down on its ambitions.

Disinvestment After Manmohanomics
When Prime Minister Narendra Modi came to power in 2014, there was an enthusiastic push for stake sale in PSUs. Disinvestment proceeds almost tripled in the first three years, from ₹377.37 billion in FY2014-15 to a record ₹ 1.00 trillion in FY2017-18. The realisations in the following two years – ₹947.27 billion in FY2018-19 and ₹503.04 billion in FY2019-20, an election year, – were equally impressive.

Unsurprisingly, the government set an even ambitious aim of ₹2.10 trillion for FY2020-21. The Covid-19 pandemic, however, poured cold water on the plans. Even a fifth of the target could not be met. It got worse through FY2021-22, when actual proceeds from disinvestment totalled ₹146.38 billion against a target of ₹ 1.75 trillion – the lowest ever since the NDA has been in power at the Centre.

Things changed thereafter, not because of the shortfall but for a combination of political and economic reasons. Finance Minister Sitharaman has since considerably moderated disinvestment targets in her successive budgets – ₹650 billion in FY2022-23, ₹610 billion in 2023-24, ₹500 billion in FY2024-25 and ₹470 billion in FY2025-26. Even these modest aims have been missed by wide margins .

Other than the sale of Air India to the Tata Group in early 2022, the government has chosen to essentially meander for the past five years on any big ticket PSU disinvestment plans.  The accruals have been mostly on account of minority share sales in the stock market. Even that isn’t given much priority.

Sample this: For FY2025-26, the government had planned to offload minority stakes in nearly a dozen companies, including Life Insurance Corporation and several PSU banks that do not have 25% of their equity on float as required by SEBI norms. With only two months to go before the financial year closes, there is no sign of much progress on this front.

Reality Check
There could be a number of economic and political factors that may have constrained the government’s disinvestment plans.

For one, nearly half of the PSUs and their subsidiaries are not profitable, which is why it is difficult to find buyers for them. On the other hand, there some PSUs that have become very profitable following impressive turnaround stories. PSU economic success, however, automatically produces resistance against privatisation.

Many of the profitable PSUs that are listed have, in fact, seen their share prices surge over the past five years. The valuation of shares of many of these companies remain attractive even after rising multi-fold in recent years, which is why even minority stake sales in these companies would make little sense at a time when stock market sentiments are subdued.

Also, with higher profits comes higher dividend payout for the government. So why should it rush to sell its stake? The government’s revenue on account of dividends and profits of state-owned companies, financial institutions and the Reserve Bank of India has increased more than three-fold in the past 10 years – from ₹898.33 billion in FY2014-15 to ₹2.89 trillion in FY2024-25. In the current fiscal year, it is projected to grow further to ₹ 3.25 trillion.

That said, the real dampener for disinvestment could be rooted in a growing and worrying realisation that the Indian private sector has been unable to provide meaningful economic leadership despite soaking up and being awarded multiple incentives over the years:  from large- tax concessions, to easier access to credit and public funded enabling infrastructure. As a result, the Indian public sector continues to do the actual heavy lifting for the economy.

The post-2014 disinvestment push, in effect, has come up against a hard reality check. If the private sector is yet to walk the talk and continues to fight shy about boosting their spending and ramping up investments within the Indian economy, the public sector will need to hold the fort.
 
More so, given larger geo-political instabilities and the ongoing Trump generated wobble within global trade and security, the Indian government will increasingly feel the need to hold onto the commanding heights of the economy. In other words, selling the family jewels is to be put on pause till the future appears more promising.