Budget | Disinvestment or Dividends: Which Way Will the Government Turn?

Should the Modi government choose between the two or maximise both?

Finance Minister Nirmala Sitharaman, while presenting the Interim Budget 2024-25 in Lok Sabha on Thursday, 1 February.

(Image: PTI)

Disinvestment floundered in the second term of the Modi Government. In 2023-24, as per the DIPAM website, total disinvestment receipts amounted to only Rs 16,507 crore. In contrast, the government received disinvestment receipts of over Rs one lakh crore in 2017-18.

On the other hand, dividends from the public sector enterprises are on a roll. In 2022-23,  the government received Rs 59,953 crore from non-financial enterprises and Rs 9,654 crore from financial institutions, aggregating to Rs 69,607 crore. Dividend receipts in 2023-24 are sure to surpass the previous year’s performance and are likely to exceed Rs 80,000 crore.

There is no necessary conflict between the government maximising both disinvestment and dividend receipts. It should be able to aim for both. Yet, it has become uninterested in disinvestment and is banking on dividend receipts to close the fiscal gap.

Is this the right policy? Should the government choose between the two or maximise both? Which way will Modi 3.0 turn?

Complete Disarray in Disinvestment

The Modi government ran an exceedingly successful disinvestment programme in its first term, despite a slow start in the first two years. In 2014-15 and 2015-16, the Modi government received Rs 32,620 crore and Rs 41,132 crore respectively against the budget estimates of Rs 63,425 crore and Rs 69,500 crore. The government could not achieve 100 percent of BE (Rs 56,500 crore) in 2016-17, though it got to Rs 47,743 crore—84.50 percent of the target.

Disinvestment performance was undoubtedly fabulous in both 2017-18 and 2018-19. In 2017-18, against the budget estimate of Rs 72,500 crore, the Modi government received Rs 1,00,045 crore. The last year of Modi 1.0, 2018-19, was also memorable, as the government counted disinvestment receipts of Rs 94,727 crore against the budget estimates of Rs 80,000 crore.

In the first term, the Modi government received Rs 3,17,267 crore in disinvestment receipts against the budget targets of Rs 3,41,925 crore, delivering quite a credible achievement of 92.79 percent.

Surprisingly, the disinvestment programme was a miserable failure in the second term.

The government set ambitious budget targets in the first three years—Rs 1,05,00 crore in 2019-20, Rs 2,10,000 crore in 2020-21 and Rs 1,75,00 crore in 2021-22. The performance, however, was hugely disappointing.

The government received Rs 50,300 crore in 2019-20 (47.90 percent), Rs 32,886 crore in 2020-21 (15.66 percent) and Rs 13,534 crore in 2021-22 (only 7.73 percent). All these receipts numbers are from the DIPAM website as budget papers don’t provide separate disinvestment receipts.

Upon discovering its inability to carry out privatisation and disinvestment, the government lowered budget targets to Rs 65,000 crore in 2022-23 and Rs 51,000 crore in 2023-24.

The disinvestment performance continued to be disastrous in these two years, although the stock markets were doing well and public sector share prices were rising phenomenally. In 2022-23, the government received only Rs 35,294 crore, which included over Rs 22,000 crore from the IPO of LIC. In 2023-24, the disinvestment receipts were again miserably low at Rs 16,507 crore only.

It sounds strange that Indian stock markets are at an all-time high and the market value of the government’s take in listed public sector enterprises is touching Rs 50 lakh crore, yet the government cannot capitalise on the opportunity. The disinvestment programme of the Modi government needs to be fixed.

A Turnaround in Receipts of Dividends

The budget papers provide information on dividends received from public sector entities (financial and non-financial).

Information for the total dividends (not enterprise by enterprise) received from the real/non-financial sector enterprises like NTPC, Powergrid, Indian Oil etc. is available under the head ‘dividends from public sector enterprises and other investments’.

The information for dividends received from public financial enterprises like public sector banks (PSBs) and insurance companies is available from the head ‘dividend/surplus of Reserve Bank of India, nationalised banks and financial institutions’.

The total receipts in this head minus the RBI dividend are the dividend receipts from public sector financial institutions.

The dividend receipts touched a rock bottom in 2019-20. The government received Rs 35,543 crore from non-financial/real sector public enterprises and only Rs 2,602 crore from financial enterprises, aggregating to Rs 38,145 crore that year.

The dividend receipts from the financial enterprises reached the nadir in 2020-21 when the government did not receive a single rupee in dividends from these enterprises.

There was a surprising turnaround from the year 2021-22. The dividend receipts from non-financial enterprises hit a high of Rs 59,294 crore in 2021-22 and began scaling new highs from that year.

Financial enterprises also made a cautious start in 2021-22 and paid dividends of Rs 2,231 crore. Their dividend also increased to Rs 9,654 crore in 2022-23 and Rs 16,991 crore in 2023-24RE.

Total dividend receipts exceeded Rs 60,000 crore in 2021-22 (Rs 61,525 crore), touched nearly Rs 70,000 crore in 2022-23 (Rs 69,607 crore) and are most likely to exceed Rs 80,000 crore in 2023-24.

Can the Government Bank on Rising Dividend Receipts?

Sometimes, senior government officials dismiss concerns about the big thaw in disinvestment and privatisation of public sector enterprises by arguing that the government can focus on sound management of public enterprises and meet its budgetary needs from higher dividend receipts. Questions arise on whether this is possible, and what the dividend yield will be if it continues to rise.

As of 18 July 2024, the market value of the government’s stake in 62 listed real sector/non-financial public enterprises and 16 public sector enterprises, in all 78 enterprises, was Rs 48.14 lakh crore.

Rs 80,000 crore of estimated dividends receipt in 2023-24 amounts to about 1.6 percent of the market value of government stake. It is worth remembering that the public sector enterprises are paying dividends through their nose.

Most public sector enterprises, including banks, are at the peak of their profitability in the current cycle and cannot be expected to raise or even maintain current levels of profits in years to come.

The profitability of a few public sector enterprises, especially in railways and defence sectors, is quite deceptive. A good deal of their profits are made from the orders they are receiving from the government. Hence, it might not be wise to depend upon increasing dividend receipts from public sector enterprises in times to come.

Government Sitting Over Big Disinvestment Opportunity

As of 18 July 2024, the market value of the government’s stake in 62 (including three subsidiaries- HPCL, REC and Balmer Laurie) real sector/ non-financial PSUs was Rs 27.89 trillion. The total market capitalisation of these companies was reported at Rs 45.88 trillion, which meant that the government’s stake was 60.79 percent overall, though the government’s stake varied from company to company.

On the same day, the market value of the stake held by the government in 16 financial enterprises (12 PSBs, 3 insurance companies and IDBI Bank) was Rs 20.25 trillion out of the total market capitalisation of these entities of Rs 26.58 trillion, which indicates that the government’s stake is over 76 percent.

The government held stakes worth Rs 48.14 trillion—out of the total market capitalisation value of Rs 72.46 trillion in the 78 listed financial and non-financial public enterprises—over 66 percent overall.

The government is indeed sitting over this big opportunity to capitalise on this humongous pot of gold to raise disinvestment receipts. In numerous sectors, there is no better time than today to privatise enterprises completely.

Selling 10 Percent Stake Can Easily Bring Rs 5 Trillion

The government holds stakes in excess of 50 percent in many highly valued public sector companies. For example, the government has over 63 percent stake in Coal India valued at Rs 1.97 trillion. It has about 72 percent in Hindustan Aeronautical Ltd. valued at Rs 2.40 trillion. In ONGC, it has about 59 percent stake valued at Rs 2.45 trillion. In IRFC, the government’s 86 percent stake is valued at Rs 2.32 trillion.

Amongst the financial enterprises, the government’s 96.5 percent stake in LIC is valued at Rs 6.77 trillion. Likewise, the four PSBs (Central Bank of India, Indian Overseas Bank, Punjab and Sind Bank and UCO Bank), where the government has stakes above 90 percent, are valued at Rs 2.83 trillion.

The government can raise Rs five lakh crore by selling stakes in these 9 companies, without diluting its stake to less than 51 percent. There are various other ways of performing the same task. If they bite the bullet, it is possible to privatise four to five companies to raise Rs five lakh crore.

Will the Government Bite the Bullet?

The Modi government announced an ambitious privatisation policy in the 2021-22 Budget. Three years later, the policy lies forgotten, and not a single public sector enterprise was sold other than Air India Ltd. This was not to raise resources but to get a hugely loss-making enterprise off its back.

There is a big opportunity to raise significant resources from privatisation and disinvestment today. For reasons that the government has not explained, its reluctance to walk the 2021-22 budget talk looks likely to remain unchanged. Presently, it seems this opportunity will get lost. India might have to wait for many years to reap the benefits of much-needed privatisation and disinvestment.

(The author is former Economic Affairs Secretary and former Finance Secretary of India. This is an opinion piece and the views expressed above are the author’s own. The Quint neither endorses nor is responsible for the same.)