India's new BJP government likely to push for privatisation in minerals, energy, metals, and power sectors

The Bharatiya Janata Party (BJP) government increased its divestment target for its fiscal year (FY) 2014/15 budget, announced on 10 July, to INR630 billion (USD10.5 billion) from the interim budget's target of USD8 billion. The target is nearly four times larger than total government divestments in the past four years and is particularly vital given the new 4.1% fiscal-deficit goal (see India: 11 July 2014: Budget 2014: India's new BJP government focuses on growth but stops short of bold reforms). Over the last 15 years, the government's target has only been achieved once.

This partly explains why, even after three decades of privatisation, the Indian government continues to own 260 enterprises at the central level and thousands more at the state level. Barring successful enterprises categorised as "jewels", such as Oil and National Gas Corporation (ONGC), Steel Authority of India (SAIL), and Bharat Heavy Electricals (BHEL), returns from the rest are lower than the quantum of investments in them. Accumulated losses over the last decade are close to USD23 billion. In 2012, there were 64 loss-making central government-owned enterprises, including the national carrier, Air India.

Cautious optimism

The previous National Congress Party-led United Progressive Alliance (UPA) government, despite framing an explicit policy of selling government stakes, failed to achieve its targets for various reasons, including poor market conditions, internal pressure from coalition partners, opposition from trade unions, and disagreement within the government over valuations. The BJP-led government is likely to follow a similar pattern for privatisation as the previous government in that it will make strategic sales in public sector undertakings (PSUs) in non-core areas, such as steel, fertilisers, transport equipment, cement, and petrochemicals, where the government's participation is not required to protect the long-term economic needs of the company. The government will also be prepared to sell smaller stakes and retain majority ownerships in companies operating in sectors the government wants to be involved in.

Importantly, the BJP's majority in the Lok Sabha (lower house of parliament) following this year's election means that the new government will not face internal coalition opposition. The BJP's programme has been given a boost by the Securities and Exchange Board of India (SEBI). The capital market regulator has asked the government to make it mandatory for all 36 PSUs listed on the two domestic stock exchanges, including nine public sector banks, to float 25%, instead of the currently required 10%, of their equity in the next three years. This has the potential to raise an estimated USD10 billion for the government. Revived investor sentiment will also help the central government in achieving the estimated revenues through different stake sales of profitable entities.

However, the government will continue to face difficulties in selling its loss-making enterprises, such as Hindustan Photo Films and Scooters India. In anticipation of being forced to sell at below valuation, the government will have to allow loss-making PSUs to sell their land assets (spread over 20,000 hectares) and then restructure them before strategic sales.

Energy, minerals, and mining

The government has decided this month to begin the process of diluting its stakes in the energy, metals and minerals, and power sectors. The disinvestment department is set to sell a 5% stake in SAIL by September, which is estimated to fetch around USD330 million. In the crucial energy sector, the government has initiated the process of selling a 5% stake in ONGC by inviting bids for the appointment of a merchant banker to manage the sale process. This sale alone is expected to generate USD3 billion in revenues and is awaiting cabinet approval.

In the metals and mineral sector, the pending residual stakes sale in Bharat Aluminium (Balco) and Hindustan Zinc (HZL) are being expedited. The government is finalising the valuation advisers for the process. These would raise an additional USD2 billion for the government. The government is also likely to sell its stakes in the National Hydropower Corporation (NHPC), Power Finance Corporation (PFC), and Rural Electrification Corporation (REC). Furthermore, the government has a reasonable chance of raising further revenue through sales of power sector shares that have been performing well in the Indian stock markets. Lastly, the government will probably also sell its shares in various state-owned banks to the public in line with a Reserve Bank of India (RBI) panel recommendation.

Outlook and implications

India's disinvestments are likely to be comparatively successful this fiscal year. Despite the ambitious target, there is optimism domestically that it can be reached. Importantly, inter-ministerial disputes and delays are likely to be less of a problem under Prime Minister Modi. However, worker opposition will hamper some sales.

For example, in the case of Visakhapatnam Steel Plant (or Vizag Steel), workers have steadfastly opposed any reduction in government ownership. As such, labour unrest is highly likely at the plant, probably leading to disruption in production. Unions are also likely to oppose stake sales in HZL as the workers' relationship with management has been soured over the last year. Also, the long-pending 10% stake sale in Coal India will not be easy due to persistent opposition from trade unions. In January, the company had to pay USD3 billion as a special dividend to the government as the disinvestment process failed. Currently, it is not clear whether the government would restructure the entity to improve production before proceeding with an equity sale.

Although disinvesting Neyveli Lignite Corporation (NLC) is not immediately on the agenda, it has to be divested in accordance with SEBI norms over the next three years. The likelihood of industrial action at NLC is very high. In this case, Tamil Nadu political parties including the ruling All India Anna Dravida Munnetra Kazhagam (AIADMK), would back NLC unions as they have done in the past as they are affiliated to local parties including caste-affiliated ones. Government divestment in National Aluminum Company (Nalco), which is again mandatory over the next three years due to SEBI rules, is also at risk of facing resistance from workers as it did in 2012. Similar to the case in Tamil Nadu, the ruling Biju Janata Dal party in Odisha has a history of supporting workers' unions. Sales of state-owned banks may be opposed by the All India Bank Employees Federation but industrial action is likely to be limited. Senior managers at ONGC insist that issues surrounding sharing of fuel subsidy with retail oil companies and the delayed increase in natural gas prices must be addressed before ONGC's equity can be properly valued.

However, there are sectors where industrial action is unlikely. Sale of shares in Air India will probably face limited challenges. The pilots' association has written to the prime minister saying that they would not oppose any type of privatisation. Opposition to the divestment in SAIL is very likely to be muted as workers were granted a 17% hike in their basic salaries in June. Moreover, the fact that the government will retain a 75% stake will further assuage the unions. Opposition is also likely to be minimal in the power sector. The government will find itself easy to sell stakes in National Hydropower Corporation (NHPC), Power Finance Corporation (PFC), and Rural Electrification Corporation (REC).