Deals

Andy Mukherjee is a Bloomberg Gadfly columnist covering industrial companies and financial services. He previously was a columnist for Reuters Breakingviews. He has also worked for the Straits Times, ET NOW and Bloomberg News.

(Updated )

State-owned companies in India, an economist once quipped, are like old bicycles: The government is more than willing to sell them, provided it can still ride them on Sundays.

That desire for ``control'' is not irrational. It supplies some ministries and departments with their very reason for existence. For investors though, it's meant more fits than starts for the country's two-decade-long privatization program.

All that could be about to change with Monday's federal government budget. The urgency to find monetary resources has reached a point where the finance ministry is toying with the idea of using a part of the central bank's capital to shore up state-run lenders. That may be a tad too desperate, but the financing imperative might lead to a garage sale of all kinds of assets that were created with taxpayer money.

In the past quarter century or so, New Delhi has exceeded its target for asset sales in only nine years, according to brokerage Religare. So far in the present financial year, the government has raised $2.67 billion by selling small chunks of refiner Indian Oil, power generation and financing firms NTPC, Power Finance Corp. and Rural Electrification Corp., and project developer Engineers India on the stock market. The goal was $10 billion.

Even this underwhelming record wouldn't be possible without state-owned Life Insurance Corp. of India doing the patriotic thing by picking up the government's stake:

Life Insurance to the Rescue
The state-run insurer has boost its public-sector shareholdings just as the Indian government has cut back
Source: Bloomberg

It might sound strange, but this chronic underperformance in selling state assets is now untenable because of China's wobbly growth.

There's considerable anxiety among Indian policy makers about the collapse in commodity prices brought on by fading demand in the People's Republic. If this proves to be a permanent deflationary drag on the world economy, corporate profitability and wage growth in India, too, may remain muted, and tax collections may not rise fast enough to stabilize the overall government debt-to-GDP ratio at its elevated level of about 67 percent.

On the other hand, if crude oil prices start rising again, India might be forced to cut levies on refined petroleum products in order to shield consumers. Enthusiastic taxation of cheap energy is playing a major role in helping the government meet its budget-deficit targets, and any slippages are bound to open new financing gaps.

Whichever way the cookie crumbles, India will need to raise fresh resources. In his budget, Finance Minister Arun Jaitley set an ambitious $8.25 billion target for asset sales in the coming financial year. To avoid missing that goal yet again, the government needs to privatize state assets that are either already productive, or can be turned into cash cows with minimal effort. Volatile stock markets are diminishing the attractiveness of trying to sell parts of them. 

The way out is asset disposals at three levels. One, monetize the $6.6 billion of private-sector financial assets that are still stranded on the balance sheet of a government investment vehicle following a 2001 bailout of the Unit Trust of India.

Low-Hanging Fruit Left to Rot
Taxpayers would have gained if India sold its chunky stakes in these non-state companies earlier
Source: Bloomberg

It's low-hanging fruit that's been left to rot for too long. Prime Minister Narendra Modi's government could have reduced the debt burden on taxpayers by selling its 11-plus percent stakes in cigarette maker ITC and private-sector bank Axis, and its 8.2 percent interest in engineering and construction company Larsen & Toubro a year ago when stock markets were still gung-ho about Modinomics. Now it would probably be difficult without losing more value.

Still, there could be other ways. Some assets could be injected as the government's equity into a new investment firm, for example, that borrows from the market to buy state-owned toll roads. The more existing roads the government can sell, the more new ones it can build.

The second plank of India's privatization strategy should be to coax state-controlled companies, including banks, railways and tourism group ITDC, to offload their real estate to an investment trust, whose managers would either lease the land back to current owners, or find new tenants. Jaitley hinted at such a plan in his budget speech when he said that state-run companies would be encouraged to ``divest individual assets like land, manufacturing units et cetera.'' Such a REIT could be publicly traded and if the companies selling the assets are cash rich, that would give the government a special dividend on its windfall gain. 

Banks might retain the proceeds to shore up their own shaky finances, following which authorities can begin paring their stakes. Until then, the government could park its majority stakes in a holding company to create a much-needed layer of separation between ownership and management control. Hopefully such a plan will find a place in the road map for ``consolidation'' that Jaitley has promised to present. 

However the approach that investors would reward most favorably also happens to be the toughest to execute politically. Industries like aviation and telecommunications have enough private-sector competition now. There's no reason for the government to continue to own Air India, and telecom carriers like BSNL and MTNL. All three are unprofitable, and should be sold -- alongside many others -- to strategic investors. That will mean giving up control, and the power to dispense state patronage that comes with it.

Taking on employee unions will prove challenging. But if the government wants to create room in its garage, the old bicycles need to make way, even if the final destination for some is the scrapyard.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

(Adds detail from federal government budget throughout.)

To contact the author of this story:
Andy Mukherjee in Singapore at amukherjee@bloomberg.net

To contact the editor responsible for this story:
Katrina Nicholas at knicholas2@bloomberg.net