The government is battling crisis on several fronts, a sputtering economy, soaring crude oil prices and inflation amongst others. One of the biggest concerns is the spiraling fiscal deficit. The central government has found it tough to rein in the deficit given the high spending on fuel subsidies and social welfare programmes, coupled with heavy borrowing and low collection through taxes. Though the government believed that its disinvestment programme would help tide over the cash crunch to an extent, the plan has not panned out as per expectations.
In order to get the fiscal situation under control, the government is using Life Insurance Corporation (LIC) and other public sector undertakings (PSUs) to fill its cash kitty. LIC of India has come to the Government's rescue repeatedly in the recent past. It bought shares in state-owned banks in 2009. In 2010, it bought the government's stake in a mining firm. This time, it is injecting a billion dollars into some state banks. It has also bought out part of the government's stake in an oil firm. It held 4% stake in 34 PSUs in December 2008. This increased to 5.6% stake in 42 PSUs at the end of 2011.
LIC's role was highlighted in the recent Oil and Natural Gas Corporation Ltd. (ONGC) episode. The insurance company invested more than Rs 150 bn in ONGC this quarter, which includes the shares divested by the Government recently. It is also planning to infuse Rs 78 bn into public sector banks in the coming months. The insurance giant is however not showing a similar preference for private sector companies. Its stake in private companies has more or less remained the same.
In the middle of all the drama, perhaps the biggest losers from the government's arm-twisting of LIC are the policyholders of LIC's insurance contract. They might have lost 25% of the value of their investments so far in government-owned businesses. LIC is also facing flak from both the insurance regulator (IRDA) and market watchers for its investment policies. It is interesting to note that LIC has invested more than Rs 80 bn in various public sector banks at a time when these banks are struggling with a host of issues ranging from slowing credit growth and the rising threat of non-performing assets.
Thus, if the government continues with its policies of raising cash at the expense of PSUs and LIC, investors will simply stay away from these stocks. While the government owned companies may be in great businesses and enjoy dominance, it is not working in the best interest of minority shareholders and policy holders. One wonders how long will such wealth destroying strategies last.