Disinvestment Is Biggest Modi Success In 2017-18; We Now Need A Big-Bang Listing Of LIC Next Fiscal

Given two realities, that tax revenues are looking iffy right now and infrastructure and social spending will need large dollops of cash from the exchequer in the run-up to the 2019 general elections, there is only one way the Narendra Modi government can find the resources to manage a volatile political economy: big bang public sector listings in 2018. Legislation to privatise some banks, Air India and Bharat Sanchar Nigam Limited (BSNL) could help, but one can’t count on it.

Disinvestment has been one of the big revenue gushers for the government in this fiscal, with Rs 52,500 crore already in the bag, thanks to the Bharat 22 ETF, which raised Rs 14,500 crore, and two big listings of General Insurance Corporation (GIC) and New India Assurance, which raised over Rs 16,000 crore between them. With Oil and Natural Gas Corporation (ONGC) set to buy Hindustan Petroleum for around Rs 32,000 crore, the year’s ambitious target of Rs 72,500 crore will be exceeded. A Financial Express report suggested that the year could well raise Rs 1 lakh crore – a fantastic figure – if a few more offers for sale (Indian Oil, Oil India and NHPC), and listings of smaller public sector companies materialise.

Clearly, disinvestment has been the Modi’s government’s biggest achievement in terms of cash generation, but a caveat is needed: not all of this is genuine disinvestment, as the large offers from GIC and New India needed the Life Insurance Corporation (LIC) to bail out the issues. Thus, a big chunk of the money has merely gone from one pocket of the government (LIC) to another (the exchequer). This is the kind of budgetary fudge the United Progressive Alliance (UPA) government was famous for, and it is a pity that the National Democratic Alliance (NDA) government has also had to resort to the same tactic to show it is sticking to the fiscal reduction path.

Next year (2018-19) may also see tax revenues under pressure, since the goods and services tax (GST) is yet to settle, and non-tax revenues from spectrum auctions will be below par. Reason: with the telecom industry consolidating very fast, most of the additional spectrum needs of the survivors (largely Airtel, Vodafone-Idea and Reliance Jio) may come from spectrum already sold to the players exiting the business. Example: Airtel got spectrum from Videocon, Tata Teleservices and Telenor; and Jio is paying Rs 23,000 crore for Reliance Communications assets, which include spectrum.

This is why big revenues cannot be expected from the sale of spectrum in 2018-19. While GST may well begin to deliver higher revenues once the dust settles around it by mid-2018, no one is expecting a big revenue uptick anytime soon.

This means the NDA, which has clearly been more successful in disinvestment than the UPA ever was, needs to crank up big-ticket disinvestments in the first half of 2018 – and there is no bigger disinvestment possible than the LIC.

Right now, the LIC is sitting pretty, with a 76 per cent market share in terms of policies sold, and 71 per cent in terms of first year premiums raised in 2016-17. In terms of new business premium income, LIC accounted for 71 per cent of the total pie of Rs 1.75 lakh crore, with other insurers accounting for Rs 50,625 crore.

However, this dominance hides huge vulnerabilities that could surface in future. As things stand, in fiscal 2017 (ended March), over 60 per cent of the premium income came from just one policy – Jeevan Akshay, a single-premium pension-cum-annuity product. LIC is over-dependent on this product for dominance. The real strength of a life insurer comes from broad-basing its premium income over millions of policies sold to individuals, and which will keep paying premiums over the long term.

Another vulnerability is the growing market clout of private insurers, including State Bank of India (SBI) subsidiary SBI Life, which is strictly not a private insurer. Between HDFC Standard Life, ICICI Prudential, SBI Life and Reliance Nippon, the market capitalisation of these four listed players is a whopping Rs 220,000 crore – and this clout is growing.

Market cap is nothing but currency available for acquisitions and higher investments in gaining market share.

So, in less than five years, it is quite conceivable that these private players, and others who are yet to list, will grow to a collective size that rivals LIC. If that happens, LIC’s potential market valuations will start dropping dramatically, as the IPO bailouts of GIC and New India Assurance issues show. GIC and New India would not have needed bailouts if they had been listed before the big private players entered the picture.

The point is simple: LIC has big value only in the short to medium term. If the government does not encash it now, it will be left with another GIC or New India Assurance, or, worse, an Air India or BSNL, with no LIC left to bail them out.

A big bang listing of LIC in the first half of the next fiscal will fetch the government nothing less than Rs 50,000 crore in one shot for a share sale of upto 25 per cent, depending on market conditions. Waiting will mean losing a lot of the value.

It is worth recalling one simple fact: when the UPA considered listing BSNL in its first term – a plan nixed by the Left which was giving it outside support – the valuations being talked about were around $10 billion (Rs 64,000 crore at current exchange rates). Now, BSNL may find it tough to fetch a third of that value if listed, given that players with equivalent market share are exiting the business with zero net valuations.

It is also worth noting that the Air India disinvestment, even if it happens in the next fiscal, will yield negative returns, since the disinvestment value realised for the airline and its assets will be overshadowed by the shift of large amounts of Air India’s debts to the government’s books.

The NDA must flog LIC for what it is worth in 2018, or it will miss the chance of a lifetime.