Divestiture Sells Indian PSU Icons For Sale As Modi Government Scrambles For Money

Modis' political opposition has been more energetic. (Photo by Bloomberg)

After years of small divestments, Prime Minister Narendra Modi launched the largest asset sale ever in India, a $ 29 billion privatization campaign that would help support the economy, but could also spark workers' protests as some of the icons of national companies come into play.

Faced with the highest unemployment rate in 45 years and a parallel banking crisis that paralyzes loans, Modi needs money to fill a budget hole and finance spending on infrastructure and reforms.

But the plan has sparked protests, even among some of its supporters, over the extent to which it will pursue a policy that could jeopardize millions of livelihoods and dismantle entities that have been a source of pride for citizens in in the decades since independence.

The breadth of the sales program aims to signal that it is driven by government reformist tendencies rather than just tax needs, said Eswar Prasad, a professor at Cornell University. A key question is whether Modi is ready to use part of its political capital to advance privatization and related reforms of the financial system, labor markets and infrastructure, said Prasad.

Privatization policies around the world have always drawn criticism over the sale of family money, but since the historic divestment campaign of former British Prime Minister Margaret Thatchers in in the 1980s, governments defended the strategy as one that brings efficiency and growth in the longer term.

The Modis program also sparked a chorus of disapproval. Affiliates of his party Bharatiya Janata have called it a transfer of state assets to multinational companies at affordable prices.

The difference is that Thatcher had a complete plan that she supported with income tax, sales tax and so many other things, said Subramanian Swamy, a legislator from the ruling party who recently criticized the government's economic policy. It was a package to move the country from left to right. Here there is no overall plan. It is a horrible mixture of state control and privatization.

Missed deadlines

We also wonder if the plan is feasible. In fiscal year 2019-2020, the government did not meet its divestment target after failing to close the sale of Air India Ltd. and Bharat Petroleum Corp., a state-owned petroleum refiner. Having missed its budget gap targets for a third consecutive year, these sales have been postponed.

In total, the federal government aims to sell interests in more than two dozen of some 300 state-owned companies in the next fiscal year starting April 1. So far, Modis' corporate reforms include a sharp reduction in corporate tax, the merger of some lenders, and measures to encourage foreign investment.

If sales go as planned in the next fiscal year, they will bring in almost half the amount that India has raised on no less than 283 transactions in the past three decades, according to stock market data. . They would also increase the share of divestment revenues to 7% of government revenues, compared to just over 2% five years ago.

The big ticket for the coming year is Life Insurance Corp. of India, or LIC, which is expected to raise up to 900 billion rupees for just a piece of the state giant. Investors compared the proposal to the record high initial sale of Saudi Aramco shares, which raised more than $ 25 billion in December.

The Mumbai-based insurer has more than one million agents and 300 million policies, as well as interests in hundreds of other companies, including its subsidiary IDBI Bank Ltd. and the country's largest listed company Reliance Industries Ltd. But LIC is much more than that for many Indians. It is a symbol of government support since its inception in the decade after independence to provide universal coverage.

Why should there be an IPO? This is public money, said Shiva Nimje, 52, who has worked for the insurer for 27 years and is part of a workers' campaign to derail the plan. I am confident that we will be able to stop the sale, even if we have to fight for it, he said by phone from the central Indian city of Nagpur.

National protest

Rajesh Nimbalkar, secretary general of the National Federation of Employees of National Life Insurance of India, the union that represents many workers in LICs, said that 100,000 of the company's employees protested. The LIC is a goose that lays golden eggs, he said. The government should not kill him.

Even without staff opposition, the history, size and operations of LICs mean that listing will not be easy, said Mahesh Patil, director of equity investments at Aditya Birla Mutual Fund.

LIC being the largest piece of life insurance will undoubtedly be of interest to investors, he said. However, they will have to overcome many problems such as tidying up their accounts, more online disclosures with listed players and employee resistance before they can hit the market.

While LIC is the elephant in the room, its offer would be a minority stake, not a privatization. Companies where the government sells control – including Shipping Corp. of India Ltd., the country's largest sea freight carrier, manufacturer of construction equipment BEML Ltd. and Container Corp. of India Ltd. – are a mix of investment point of view bags.

Bharat Petroleum, for example, earned just over 76 billion rupees last year, while Air India lost almost as much at the same time and did not gain any money since 2007. The sales plan also fits in the context of the coronavirus epidemic, which is shaking global confidence. The benchmark of India lost 7% last week.

On December 3, Finance Minister Anurag Thakur told lawmakers that the divestment strategy is guided by the principle that the state withdraws from sectors where competitive markets are mature and profitability is not Is not a criterion.

Air India

India has injected $ 4.2 billion into Air India since a 2012 bailout, but the airline is still $ 8.4 billion in debt and continues to lose money.

The government has tried for many years to turn around the business, but it has been unable to do so, said Joshua Felman, director at JH Consulting and former head of the International Monetary Fund.

He said government subsidies that allowed Air India to offer lower fares were among the reasons why rival Jet Airways India Ltd. was not able to compete. Jet went bankrupt last year, leaving more than 20,000 people unemployed.

The government plans to complete the sale of $ 7.4 billion of its stake in Bharat Petroleum by September, with some of the major oil producers in the Middle East and Russias Rosneft PJSC, eager to acquire this asset , according to Indian officials.

Skeptics say the sales could have unitary consequences – that the loss of control of Shipping Corp. would affect the country's oil supply and the listing of LIC could make its investments more risky.

Modis' political opposition has been more energetic.

These companies were created by the founding fathers of the country to provide employment for people who did not have a job, said Ashok Singh, national vice president of the National Congress of Indian Trade Unions, trade union wing of the main opposition party. Today, unemployment is rising and the economy has entered the intensive care unit. In winter, you keep a blanket to keep you safe and warm. You don't give it away.

Government benefits

This idea of ​​the duty of states to protect citizens is at the heart of employee opposition. In India, working for the government is not just a job. It often has prestige and benefits such as job security, better health care, a retirement package, or even housing. Each year, millions of people apply for public jobs for which they are clearly overqualified.

State-owned enterprises provide decent employment in terms of promotions, annual increases and wages, said Brijesh Upadhyay, secretary general of Bharatiya Mazdoor Sangh, a union linked to the BJP. After the privatization, conditions will change for employees and the takeover of the company risks cutting jobs.

The government argued in a response from Parliament on February 11 that companies freed from state control would generate higher economic activity, stimulate auxiliary industries and create jobs. His recent economic study indicated that research has shown a very strong positive effect on labor productivity and overall efficiency.

Modi has four years to prove that this is the case before the country judges the success of the program at the polls.