ET Explains: The long and short of Modi govt's big-ticket privatisation drive
The move to privatise some of these big state-run firms reinforces Modi govt's reform credentials.
The government hopes to complete the strategic disinvestment in at least two major state-run firms — Air India and BPCL — by the end of the current fiscal.
The move to privatise some of these big state-run firms reinforces the reform credentials of the Modi government. It is being seen as a bold step by the government at a time when the economy is experiencing a severe downturn and revenue collection targets are under stress.
An Economic Times report estimates that the government's mega disinvestment drive in BPCL, SCI and CONCOR will fetch Rs 78,400 crore based on current market prices. In case Air India also finds a buyer, the government's disinvestment proceeds could well exceed the current year's target of Rs 1,05,000 crore.
Here's a look at the factors behind the sudden spurt in major decisions by Modi government.
Deepening fiscal stress
The downtrend in the economy has meant that the government may struggle to meet its revenue collection target for the current fiscal. The sub Rs one-lakh crore GST collection figures coupled with a corporate tax cut are likely to weaken tax collection targets for this fiscal.
Of the Rs 1,05,000-crore disinvestment target set for FY20, the government was able to collect just over Rs 12,000 crore in the first half. It has added to the pressure to find buyers for Air India and BPCL to get to the budgeted target before the fiscal ends.
Staying true to reform agenda
The privatisation push is in line with Modi government's reform agenda. The government has been trying to unlock value in PSUs through strategic disinvestment and transfer of management control.
Recently, the government also opened up the retail fuel market for private players. The BPCL privatisation has attracted the gaze of many private players and other major oil players like Saudi Aramco. Privatisation will help the government in monetising its asset base and also efficient management of resources.
Escape hatch for the Maharaja
The government has already spent thousands of crores in keeping Air India afloat. The debt-laden carrier is struggling to find itself competitive in an already stressed aviation market which is struggling with overcapacity.
The government had attempted to sell Air India last year but couldn't find any buyers. It is now hoping to sell off the airline before March.
To attract buyers, the government is mulling options to clear dues of Air India worth Rs 22,000 crore and also the working capital debt of around Rs 15,000 crore. The move will reduce the debt load on Air India's books to Rs 20,000 crore and make it more attractive to potential suitors.
Persisting paint points
Shortfall in tax collection has put pressure on the government to ramp up its non-tax revenue. Because of the stress in telecom, the government may not be able to go ahead with spectrum auction in the current fiscal — something that will deprive the government of any non-tax revenue it was hoping to get from auctions.
With various agencies forecasting a bleak second quarter economic growth and downgrading full year growth as well, things are not looking up for the economy and hopes of revival in the second-half may be distant. The only recourse is to speed up the disinvestment drive to meet revenue collection targets and not deviate from the fiscal deficit roadmap.
Riding out the storm
Many analysts say that the government probably bit off more than it could chew by announcing the tax bonanza for corporates at a time when slowdown was already showing up in weak GST collections.
The tax cut was done with the intention of spurring investment in the economy. But with corporates already struggling with excess capacity and demand not picking up, it appears uncertain if more cash India Inc's hand will translate into more investment. A successful disinvestment may boost the government's hopes of riding out the worst economic storm in recent memory.