The recent Budget 2021-22 has brought the spotlight back on the government’s disinvestment and privatisation plans. The Finance Minister, in her Budget, announced the disinvestment of the government stakes in two Public Sector Banks (PSBs) apart from one general insurer, apart from disinvestment of IDBI Bank.
The markets reacted positively to the Budgetary announcement pertaining to divestments. On Budget day, the shares of PSBs rose 3 per cent while Nifty PSU Bank Index went up too by 3 per cent. The BSE PSU Index rose 4.5 per cent on Budget day, making it its best performance over the last ten such Budget days.
The government has clarified its intentions of retaining a minimum number of PSUs in sectors. It also announced that the much-awaited LIC IPO would be brought in this financial year. The aim of the government is to gain Rs 90,000 crore from the LIC listing and dilution of stakes in IDBI Bank. The strategic divestment in BPCL, Air India and other sales would also be done in 2021-22, the Budget speech noted.
The Finance Minister underlined the importance of having a comprehensive Public Sector Enterprise (PSE) policy and said the policy would be classified into two areas: strategic and non-strategic. The new PSE policy does not apply to some PSE types which are not-for-profit or related to development.
Accordingly, government departments like Railways, Airports Authority of India (AAI), key port trusts and Posts will not be considered as part of the PSU privatisation announced in the Budget. Among four sectors like atomic energy, space and defence; transport and telecom; petroleum, power, coal and other minerals; and insurance and financial services in the non-strategic sectors will be considered for privatisation.
The NITI Aayog will make recommendations for divestment of PSUs among strategic sectors. In effect, the government’s aim of PSU divestment and privatisation may lower the number of PSEs in India to just under 25, from the current 300 plus.
What does this mean for the markets?
According to Morgan Stanley analysts, the BSE Sensex is on its way to scaling the 55,000-mark towards the end of 2021. Among the reasons that the brokerage states, an important aspect is government plans of privatisation, divestment of some PSBs and a general insurer and the LIC IPO. The analysts said in a note that if such measures are implemented well, they will pave the way for a fresh private investment cycle, recovery in domestic equity flows and earnings growth. The announcements will also help the Indian equity markets to gain ground and catch up with emerging markets by way of stock market performance.
The Morgan Stanley outlook finds backing in analysis from Jeffries as well. The latter is also bullish when it comes to Indian equity markets for the year.
The current liquidity surge in the markets will also provide a fillip to the government’s plans of divesting its stakes in certain firms. As more PSUs get privatisation or divestment push, the value of these firms will be unlocked. The RBI monetary policy has ensured that low-interest rates are maintained and there is a high level of foreign institutional investment in India, ensuring that the liquidity levels are high. The disinvestment and PSU sell-offs if timed well can absorb this market liquidity and ensure more investment opportunities.
Divestment, privatisation and foreign investment
Foreign institutional investment in India is currently on a high, and FIIs bought shares worth Rs 1.7 lakh crore in 2020, and raised stake quarter on quarter in over 400 companies in December, according to data from news reports. FIIs have turned net buyers in the equity markets ever since the Budgetary announcements and the stock market rally. Between February 1 and 5, FIIs pumped in a net Rs 10, 793 crore into equities, and this has ensured that the markets have been buoyant. Foreign portfolio investors have pumped in $4.05 billion in Indian equities since January 1, making the country the second-best among emerging markets apart from Brazil, in this period.
With government policies geared towards attracting more overseas buyers, the atmosphere may be more conducive for divestment plans of the government. More privatisation and lower government stakes in enterprises would mean that these firms can attract foreign investment. The stock markets will only cheer the opportunities that divestment will bring, as it helps in building a broadened and deep capital market, with enhanced listings and market size. The country’s stock market has now become the seventh-largest globally and has a total market cap of $2.7 trillion.
Privatisation or divestment in a piecemeal manner may not help boost the markets in a big way and therefore, the announcement of reforms by way of a comprehensive PSE policy announced in the Budget gains in importance.
When governments divest their stakes in PSUs, they are in return raising funds for infrastructure projects, lowering debt or narrowing the fiscal deficit. Asset creation by way of infra projects such as roads or ports will boost economic activity and jobs, and the cascading effect of such economic revival will be felt in the markets as well. Divestment or sell-offs also enhance productivity and transparency of said enterprises by bringing in private interest. All these measures will be seen in a positive light by the markets.