Disinvestment: The more things change, the more they remain the same - The Daily Reckoning
The Daily Reckoning by Vivek Kaul
On This Day - 3 November 2015
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Disinvestment: The more things change, the more they remain the same A  A  A

- By Vivek Kaul

Vivek Kaul
When finance minister Arun Jaitley presented the budget of the Narendra Modi government in February 2015, he set an aggressive disinvestment target of Rs 69,500 crore. Disinvestment refers to the government selling the shares it holds in public sector companies.

In late October, this aggressive disinvestment target was given a quiet burial.

A series of statements have been made in order to justify the slashing of the disinvestment target. "The target of Rs 30,000 crore seems more reasonable for current fiscal given that there is no big stock to sell," a source told The Economic Times.

The minister of state for finance Jayant Sinha blamed it on the falling and low commodity prices. As he recently said: "One of the reasons why the divestment process is challenging right now is because many of the companies we are considering for divestment are in the commodity industries...Whether it is Coal India or OMCs (Oil Marketing Companies) and so on. They are impacted by global commodity prices."

Sinha's boss Jaitley more or less came up with the same reason when he said: "I don't think it makes sense divesting at a time when [commodity] prices are low."

How much sense does this argument make? Did commodity prices start to fall from March 1, 2015, a day after the budget was presented? On May 26, 2014, when Narendra Modi was sworn-in as the prime minister of India, the price of the Indian basket of crude was $108.05 per barrel. By February 27, 2015, a day before Jaitley presented the budget, the price of the Indian basket of crude oil had fallen by 44.6% to $59.85 per barrel. Hence, the price of oil had already been falling for a while at the time the budget was presented. The price of the Indian basket of crude oil is currently at $44.72 per barrel.

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In fact, oil was not the only commodity falling. As an editorial in The Financial Express points out: "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."

So commodity prices were falling even in February when the government presented the budget. Why offer the reason now? Sinha offered another explanation as well: "Obviously, we have to ensure that we get best possible valuation for these valuable enterprises," he said.

What does he mean here? On February 27, 2015, the BSE-Sensex had closed at 29,220.12 points. Since then it has fallen by around 9.1% and closed yesterday (November 2, 2015) at 26,559.15 points. This is not such a big fall in the context of the stock market.

In fact, Jaitley had clearly pointed out in June earlier this year that a fall in the stock market would not lead to the government going slow on the disinvestment programme. As Jaitley had said: "I don't read too much on daily movements as far as markets are concerned. By and large with the health of economy recovering, I see much greater stability as far as markets are concerned. And therefore, the disinvestment programme of the government will continue as it has been planned."

So, if Jaitley was not reading too much into daily movements of the stock market in June, why is Sinha (and by that definition Jaitley as well) reading too much into the daily movements of the stock market, now?

Also, when an aggressive disinvestment target of Rs 69,500 crore was set, wasn't the chance that the stock market will ‘fluctuate' taken into account?

And why has all the optimism that was being projected on the disinvestment front by the government ‘suddenly' evaporated now?

The stock market had touched a level of 26,500 points (as it is now) even in June earlier this year. So what has changed between then and now?

The broader point here is that the logic of commodity prices falling offered by the government to go slow on disinvestment now, was valid even at the time of presenting the budget. As The Financial Express edit quoted earlier points out: "If the government still went ahead and set an aggressive target for FY16[ 2015-2016], this implied it planned to be selling shares regularly, irrespective of the price-clearly that was an incorrect perception."

Up until now the government has managed to disinvest shares worth only Rs 12,700 crore. Of this Rs 8,077 crore has come from the Life Insurance Corporation of India. So, there hasn't been much disinvestment in the strictest sense of the term, nearly seven months into the financial year. What this tells us is that the government was not serious about disinvestment in the first place.

Given this, it is not surprising that the government has now decided to slash the disinvestment target. In fact, this has been a regular feature with almost all governments since disinvestment of public sector shares came to the fore in the early 1990s.

As AK Bhattacharya writes in a recent column in the Business Standard: "Since disinvestments of government equity in PSUs began in 1991-92, only on two occasions has a government met its target set at the start of the year. In the last year of the Narasimha Rao-led Congress government in 1994-95, total disinvestments of Rs 4,843 crore exceeded the target of Rs 4,000 crore set for that year and in the first year of the Atal Bihari Vajpayee-led government in 1998-99, total disinvestment proceeds were estimated at Rs 5,371 crore, compared with the target of Rs 5,000 crore."

Of the total disinvestment target of Rs 69,500 crore, the government had budgeted Rs 28,500 crore to come in from the strategic sale of equity, which was basically a euphemism for privatisation. Nearly seven months into the financial year the government has given only given some indication of privatising IDBI Bank.

In this reluctance to privatise and continue holding on to companies, Narendra Modi is only following the Congress governments before him. In fact, TN Ninan makes an excellent summary of the way things stand as of now in his book The Hare and the Tortoise-The Challenge and Promise of India's Future: "It is a matter of regret that Narendra Modi, who got elected on the promise of ‘minimum government, maximum governance', has shown no taste for radical change or minimizing government...The government system continues to run loss-making airlines and hotels, three-wheeler units and Mahanagar Telephone Nigam, whose sales revenue is less than 40% of expenditure."

Meanwhile, as I sit writing this column, its one am in the morning and one of the TV channels is replaying Modi's election speech in Bihar.

As the old saying goes, the more things change, the more they remain the same.

Postscript: Meanwhile as the Indian business media keeps talking about an economic recovery, here is a thorough analysis of the latest quarterly results (subscription required) of L&T by Rahul Shah, Co-Head of Research at Equitymaster . As Shah puts it, the investment environment continues to remain subdued for the company. Happy reading.

Vivek Kaul is the Editor of the Diary and The Vivek Kaul Letter. Vivek is a writer who has worked at senior positions with the Daily News and Analysis (DNA) and The Economic Times, in the past. He is the author of the Easy Money trilogy. The latest book in the trilogy Easy Money: The Greatest Ponzi Scheme Ever and How It Is Set to Destroy the Global Financial System was published in March 2015. The books were bestsellers on Amazon. His writing has also appeared in The Times of India, The Hindu, The Hindu Business Line, Business World, Business Today, India Today, Business Standard, Forbes India, Deccan Chronicle, The Asian Age, Mutual Fund Insight, Wealth Insight, Swarajya, Bangalore Mirror among others.

Disclaimer:
The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

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3 Responses to "Disinvestment: The more things change, the more they remain the same"

Dr G L Moondra

Nov 3, 2015

This not a sound argument. It just shows lethargy. just because bureaucracy could not move fast enough both FMs are trying to hide their inefficiency behind commodity prices. At the same time loading the stocks upon Govt controlled financial institutes needs to warded off. The result of loading SAIL shares on UTI 64, during Narsingha Rao Govt, caused its death which many unit holders mourned by their hard earned money and Mr Damodaran mourned by going to jail for no fault on his part. Dr G L Moondra

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Girish Patkar

Nov 3, 2015

It is all about balancing the budget and managing the fiscal deficit. If the FM can manage the fiscal deficit why should all of us be concerned about only disinvestment proceeds. In that case we should be analysing the entire sources and uses statement and then commenting.
Rahul Shah has been recommending investment in Equity month on month indicating confidence in economic recovery.

Girish

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C K VAIDYA

Nov 3, 2015

you have correctly stated that commodity prices were moving downward even at the time of budgeting. Does this mean that the budget should have been made on the assumption that they would continue going down? A conservative approach to budgeing would result in assuming the average prices would stay at the same level or in fact rise somewhat. If this assumption is made across the budget, then further fall in commodity prices has resulted in 2 things:
a) The lower crude oil prices gave govt an opportunity to more through taxes while at the same time
b) Reducing the 'value/worth' of the OMCs further.
Since the Govt seems to be in a position to meet its budgetary deficit goals without disinvesting the planned assets, why should one find fault if it avoids selling at rock bottom prices? Should we not appreciate the fact that the jewels are being saved for another day, hopefully when the commodity prices reach the top? If the Govt does not disinvest at the top of commodity cycle (having in-principle decided to do so), then we should question motives including wanting controls at any cost etc.
No point in nitpicking on every move of the Govt.

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