India plans to overhaul more than 200 state-run firms to make them more profitable, signalling a departure from Prime Minister Narendra Modi’s aggressive privatisation programme that has struggled to take off, government sources said.
Background
The programme to privatise a major portion of India’s $600 billion state sector, announced in 2021, had slowed ahead of the general election in April-May. It now faces more resistance after Modi lost his majority in parliament and had to rely on coalition allies to return to office.
New Strategy
Expected to be unveiled as part of the annual budget on July 23 by Finance Minister Nirmala Sitharaman, the new plans include selling large parcels of underutilised land owned by these companies and the monetisation of other assets. The aim is to raise $24 billion in the current April-March fiscal year and reinvest the funds in the companies, while setting five-year performance and production targets for each company, instead of short-term targets.
The share price of PSU companies has increased a lot in the recent times.
Confidentiality
The plans to overhaul state firms have not been reported previously. The officials declined to be identified as they were not authorised to speak on confidential deliberations. The finance ministry did not respond to requests for comment.
Budget Context
In an interim budget presented before the election, the government did not provide any figures on stake sales for the first time in more than a decade.
Shift in Focus
“The government is shifting focus from indiscriminate asset sales to enhancing the intrinsic value of state-owned companies,” said one official.
Management and Recruitment Plans
Among other plans, the government intends to introduce succession planning in majority-owned companies alongside a proposal to train 230,000 managers across firms to prepare them for senior roles. Currently, the government appoints top executives in state-owned companies. The government is likely to implement a plan that includes training managers, professional recruitment to company boards, and incentives for high performance from the 2025/26 fiscal year, with the expectation that increased autonomy would make companies more competitive.
Privatization Efforts
The 2021 announcement to sell most state-run companies included two banks, one insurance company, and firms in the steel, energy, and pharmaceutical sectors besides the closure of loss-making companies. But India has only been able to complete the sale of debt-ridden Air India to the Tata Group while rolling back plans to sell some others. Only a 3.5 per cent stake in LIC has been sold, besides shares in a few other companies.
Recent Developments
Hardeep Puri, India’s oil minister, said last week a plan to sell state-owned Bharat Petroleum Corp was no longer on the table as the company was making almost as much profit in a year as the price it was to be sold for.
Expert Opinions
Sunil Sinha, chief economist at India Ratings, the local arm of Fitch Ratings Agency, highlighted the challenges. He said the sale of government companies, marred by allegations of “selling family silver” at a cheaper price, would be difficult to push after Modi’s reduced majority in parliament. “This (privatisation) can actually snowball into a political slugfest…recouping it may become very difficult and they may have to pay a political price for it,” he added.
Market Performance
Despite hurdles in privatisation and stake sales, the overall market valuation of state-run firms has more than doubled in the past year on hopes of reforms in the sector. The BSE PSU Index, which tracks state-owned companies, has surged over 100 per cent in the last year, outperforming the benchmark BSE Index’s 22 per cent rise.
Analyst Insights
“We find the valuations of many PSU stocks to be quite bizarre when compared with their fundamentals,” Sanjeev Prasad of Kotak Institutional Equities said in a note. “Some of these companies will require extraordinary assumptions and a massive turnaround in their operations (and financials) to justify their current market caps.”
Government Outlook
The government views the market’s response as a mark of investor confidence, said a senior official at NMDC, India’s state-run iron ore company. Looking ahead, the government expects its reforms would translate into higher profits and, subsequently, increased returns for the state. State firms were expected to pay substantially higher dividends to the government, compared to earlier estimates of Rs 48,000 crore ($5.8 billion) in 2024/25, said the second government source.
Risk and Opportunity
Analysts caution that India risks missing the opportunity to cash in on the booming valuations of state companies. The government could raise about Rs 11.5 trillion ($137.75 billion) at current market capitalisation by selling minority stakes in state-owned companies while maintaining a 51 per cent stake. “The conclusion of the election season, combined with the stock market hovering around all-time highs, provides a perfect opportunity to advance some significant divestment initiatives,” said Rajani Sinha, chief economist, CareEdge Ratings.
