Government Eyes Rs 11.5 Trillion Potential in Public Sector Divestments - CareEdge Ratings

CareEdge Ratings estimates a potential Rs 11.5 trillion in divestments from public sector enterprises. The government targets Rs 500 billion in the 2024-25 budget, influenced by market conditions and profitability. The divestment strategy reconsideration follows years of missing targets and procedural delays.

A total divestment potential of approximately Rs 11.5 trillion at current market capitalization is estimated, according to CareEdge Ratings. This assumes the government retains control by maintaining at least a 51 per cent stake in these public undertakings, divesting any excess shares. Disinvestment or divestment typically refers to the sale, partly or fully, of a government-owned enterprise.

CareEdge Ratings notes that this estimate is more than double the Rs 5.2 trillion divested since 2014. Of the Rs 11.5 trillion potential, public sector enterprises could contribute around Rs 5 trillion, while public sector banks and insurance firms might add another Rs 6.5 trillion.

This represents the maximum amount that could be raised at current market prices without the government losing control of these entities, as stated in a report this week. However, the government may not opt to divest all its potential. Factors influencing this decision include the strategic nature of the industry, company profitability, financial market conditions, and welfare/social considerations.

"After missing the divestment target for five consecutive years, a fresh look at the divestment strategy is essential. The government cannot rely solely on small ticket sales of minority shares by OFS (offer for sale) to meet its divestment target over the medium term," said Rajani Sinha, Chief Economist of CareEdge Ratings. The end of the election season and stock market highs offer a perfect opportunity for significant divestment initiatives. "However, procedural delays, labor union litigations, and pricing issues continue to slow divestment despite favorable conditions," Sinha added.

In the interim budget tabled in February this year, the 2023-24 divestment estimate was revised downward to Rs 300 billion from the previously budgeted Rs 510 billion. According to data from the Department of Investment and Public Asset Management (DIPAM), total divestment in 2023-24 fell short of even the revised estimate, achieving approximately Rs 165 billion, about 32 per cent of the initial target.

The absence of big-ticket divestments resulted in the government falling short of its target. CareEdge believes the government will maintain its divestment target (as a miscellaneous capital receipt) at Rs 500 billion in the upcoming budget, comparable to the interim Budget target. The achievement of this target depends on big-ticket divestments.

Following the demerger of land assets of the Shipping Corporation of India (SCI), its possible divestment looks likely in 2024-25, provided favorable market conditions prevail. Offloading the entire stake in SCI could generate Rs 125-225 billion in divestment proceeds, the report said.

The report also asserts that with the significant dividend from the RBI, the central government's fiscal position remains comfortable, potentially limiting the urgency to push big-ticket divestments. CareEdge Ratings believes the government will adhere to the 2024-25 target of miscellaneous capital receipts (including divestment) of Rs 500 billion. In 2023-24, the government monetized assets worth Rs 1.6 trillion under the National Monetization Pipeline, against the target of Rs 1.8 trillion.

(With inputs from agencies.)