Analyzing the Big Privatization Push Of the Modi Government

The government will maintain a bare minimum presence in strategic public sector units. This is being seen as part of an aggressive reform push by the government to put the economy on the path to recovery
Analyzing the Big Privatization Push Of the Modi Government
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Founder & MD, Singhi Advisors
5 min read
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Among the global emerging economies, India was the worst affected on account of the COVID-19 pandemic. The country’s fiscal deficit was pegged at 9.5 per cent with the economy contracting for two consecutive quarters. Faced with the challenges of tackling a sharp downfall in tax revenue collections and countering a deepening recession, finance minister Nirmala Sitharaman unveiled a roadmap to boost public spending on a massive scale. The finance minister proposed to do this by bolstering revenue by offloading government share in public sector enterprises and privatizing them.

The government will maintain a bare minimum presence in strategic public sector units. This is being seen as part of an aggressive reform push by the government to put the economy on the path to recovery.

Outlining a clear commitment to remain steadfast on the path to disinvestment, the Narendra Modi government announced its intention to divest a controlling stake in two public sector banks (PSBs) and a prominent general insurance company in the financial year commencing April 1, 2021. To expedite the stake sale process, the government has already shortlisted four mid-sized banks in the country. Depending on the initial stage success of its privatization drive, the government may contemplate privatizing other small to mid-sized PSBs in the country. It is likely to expand its privatization drive to larger banks and other big-ticket financial institutions in the country in the years to come. With a clear focus on shoring up depleted coffers by monetizing its asset base, the government is anticipated to bridge the shortfall in revenue and expenditure, expedite infra spending to generate large-scale employment in the economy and boost social sector spending in areas such as health, education and community housing.

Representatives of bank unions and employee associations have been continually urging the government not to privatize nationalized banks. Past and present agitations of bank employees have stressed on the fact that unleashing a wave of hastened consolidation in the country’s banking sector will do it more harm than good. They have debunked the privatization argument by stating that though the move will inject a greater degree of competitiveness and efficiency in Indian banking, it may lead to banking institutions becoming profit-seeking entities and create monopolies in the sector, which may actually not be true. In order to fast-pace its agenda of banking sector consolidation, the government will need to take banking unions into confidence, allay their fears and assure them that the move would help banks leverage the benefits of economies of scale, deter risky credit decisions and improve corporate governance standards.             

The government has taken several important steps to restore the confidence and trust of the common man in the country’s banking system. Policymakers have undertaken measures like the budget proposal to amend the Deposit Insurance and Credit Guarantee Corporation Act, 1961 (DICGC Act) and moving the Banking Regulation (Amendment) Bill, 2020 to bring cooperative banks under the RBI’s supervision. These initiatives reiterate the government’s commitment to ensure that interests of depositors are not compromised and the growing trust deficit in banking operations is effectively addressed. With enhanced service delivery standards and substantial improvement in asset quality, privatization has the potential to ensure that the trust of depositors remains the pivot around which banking operations revolve.

The offloading of equity in state-owned enterprises by the government will not only unlock significant value in these firms but also insulate the government from doling out large amount of capital infusion and periodic recapitalization of such banks. With bold reform initiatives like privatization of key state-owned assets, the Modi government has created conducive ecosystem for global investors to invest directly in India. The Modi government has sent a clear signal to the global investor fraternity that India is one of the most open and transparent economies and ready to do business with the world. With key investor-friendly interventions and business-centric policy reforms, investors stand to reap windfall gains from the privatization initiative.

The government is most likely to part divest its stake in the Life Insurance Corporation (LIC) through a public issue thru OFS. It could be described as the IPO of the decade, with comparison to systematic important companies the Saudi Aramco which was the world’s largest ever IPO or TCS from Tata group which made a history. Though a specific timeline cannot be assigned to the government’s stake sale in LIC, it has all the potential to command a valuation to be one of the top four “most valuable companies in India”.

Though the government has embarked on an ambitious privatization program, it needs to ensure that its targets are not met in an ad hoc manner. This will have to be done within specified timelines with the right policy intent and regulatory support.

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