India is planning to revamp over 200 state-run enterprises to enhance their profitability, marking a shift from Prime Minister Narendra Modi's aggressive privatisation strategy, which has encountered challenges. The privatisation program announced in 2021 has slowed down, particularly before the general elections in April-May, and now faces more resistance due to Modi's reduced parliamentary majority, which necessitates coalition support to stay in power.
The new overhaul plans are expected to be revealed by Finance Minister Nirmala Sitharaman in the annual budget on July 23. These plans include selling large parcels of underutilised land and monetising other assets of these companies, aiming to raise $24 billion in the current fiscal year (April-March). The funds will be reinvested in the companies, with five-year performance and production targets set for each, rather than short-term goals. The plans for this overhaul have not been previously reported.
Two officials, who requested anonymity due to the confidential nature of the discussions, disclosed these details. The finance ministry did not respond to requests for comment.
In the interim budget presented before the election, the government did not include any figures on stake sales for the first time in over a decade. According to one official, the government is shifting its focus from indiscriminate asset sales to enhancing the intrinsic value of state-owned companies.
Additional plans include introducing succession planning in majority-owned companies and training 230,000 managers for senior roles, starting from the 2025/26 fiscal year. This initiative aims to prepare managers for senior roles, implement professional recruitment for company boards, and provide incentives for high performance, thereby increasing company competitiveness.
The 2021 privatisation announcement included the sale of two banks, an insurance company, and firms in the steel, energy, and pharmaceutical sectors, as well as the closure of loss-making companies. However, India has only completed the sale of debt-ridden Air India to the Tata Group and sold a 3.5% stake in LIC, along with shares in a few other companies. Plans to sell Bharat Petroleum Corp were abandoned as it was generating substantial profits.
Sunil Sinha, chief economist at India Ratings (Fitch's local arm), noted that privatisation could become politically contentious, especially after Modi's reduced majority in parliament. He cautioned that pushing privatisation might incur significant political costs.
Despite the privatisation hurdles, the overall market valuation of state-run firms has more than doubled in the past year, driven by reform hopes. The BSE PSU index, tracking state-owned companies, has surged over 100% in the past year, outperforming the BSE Index's 22% rise. However, analysts like Sanjeev Prasad of Kotak Institutional Equities expressed skepticism, noting that the valuations of many PSU stocks seem inflated compared to their fundamentals.
The government views the market's response as a sign of investor confidence, according to a senior official at NMDC, a state-run iron ore company. Looking ahead, the government expects its reforms to lead to higher profits and increased returns for the state. State firms are projected to pay significantly higher dividends to the government, beyond the earlier estimate of 480 billion rupees ($5.8 billion) for 2024/25.
Analysts warned that India risks missing the opportunity to capitalise on the booming valuations of state companies. According to CareEdge Ratings, the government could raise about 11.5 trillion rupees ($137.75 billion) at current market capitalisation by selling minority stakes in state-owned companies while maintaining a 51% stake. Rajani Sinha, chief economist at CareEdge Ratings, highlighted that the conclusion of the election season and the stock market's high levels present an ideal opportunity for significant divestment initiatives.