Editorial: Strategic mistakes

Govt should have focussed on SUUTI, strategic sales

The disinvestment target of Rs 69,500 crore for FY16 always appeared a tall order, given that the maximum that has been garnered in a year was Rs 24,349 crore in FY15. Not surprising, then, that with a mere Rs 12,700 crore collected so far—and of this, Rs 8,077 crore was contributed by LIC to Indian Oil’s share sale—and just five months left in the year, the government has said the year’s target will not be met. While the main reason given for this is the low level of commodity prices—many PSUs where divestment was planned are commodity stocks—the problem with the argument is that, while it is true commodity prices continue to fall, this trend was obvious even at the time of the budget, so the government needed to have taken this into account. Crude oil prices, for instance, had fallen from $116/barrel in February 2013 to $109 in February 2014 and to $59 in February 2015—these are at $48.5 right now.

Similarly, in the case of copper, prices were $8,061/tonne in February 2013, $7,149 in February 2014 and $5,729 in February 2015—prices are down to $5,142.5 now. In the case of zinc, prices fell from $2,129/tonne in February 2013 to $ 2,034.5 in February 2014 and rose a bit to $2,098 in February 2015—prices are down to $1,687 now. If the government still went ahead and set an aggressive target for FY16, this implied it planned to be selling shares regularly, irrespective of the price—clearly that was an incorrect perception. Also, given the trend in commodity prices is not expected to correct quickly, what does this say for the FY17 targets?

In any case, it is important to keep in mind that old-style stake sales were budgeted at R41,000 crore, or under 60% of the target—the rest was to come from ‘strategic disinvestment’. At least so far, there has been little action on this front. The number, of course, was always a bit vague since it was never clear how much of this was to come from genuine privatisation and how much would come from selling the SUUTI shares of L&T, Axis Bank and ITC. The SUUTI shares are currently worth R59,000 crore, and none of the shares are really of any great strategic interest for the government—so it is unfortunate that there has been no attempt to sell these shares in the market in small lots evenly spread through the year. It would appear the managements of these firms have managed to convince the finance ministry that there is a strategic gain by not selling the shares. As for privatisation, the fact that this has not been attempted so far is very disappointing since it suggests that private control—the surest way to improve efficiencies—is going to be given the go by. What is also odd is the fact that sales of the government’s residual stakes in HZL and Balco are not part of the plan—while the budget for FY15 had R15,000 crore under this head, the FY16 has nothing. Which means that while LIC will continue to be depended upon to rescue whatever other disinvestment is planned, RBI will be depended upon to give more than the R64,477 crore it is supposed to give this year.

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