LIC Saves Coal India Disinvestment?

Besides instituting a change in the calculation of GDP, disinvestment is the tool the NDA government will employ to meet its ambitious fiscal deficit target. Coal India is thus a major target, but its stakes’ sale wouldn’t impress if the buyers are public sector units

There are only two months left for the fiscal year to end, and not even a month until the presentation of the Union Budget. The government is increasingly facing the heat of successfully achieving the fiscal deficit target of 4.1 per cent, which was too good to be trusted in the first place.

For one, this was the target set by Finance Minister Arun Jaitley’s predecessor P Chidambaram in the interim budget. Jaitley did not have to stick to it, particularly given the fact that a substantial amount of oil subsidies were going to be carried forward from the past financial year to this year. The government breached the 4.1 per cent target (or Rs 5.31 lakh crore) in December itself. But there is still hope to get the fiscal situation in order — as long as the government chooses to resort to superfluous, last minute fixes.

Recently, the government instituted a change in the calculation of gross domestic product (GDP). It switched the base year from 2004-05 to 2011-12. Also, instead of using factor costs, it will now use more relevant market prices to compute GDP. This was reflected in the fact that the growth rate of the economy in 2013-14, if calculated using the new method, rises from an earlier 4.7 per cent to 6.9 per cent. That’s a staggering 2.2 per cent increase (again, too-good-to-be-trusted!) merely on account of a change in the computational method.

To be sure, this change is in accordance with international standards and is much welcome. Its timing, however, is dubious given that this revision of growth figures is expected to help the government move closer to meeting the fiscal deficit target. Just why the change was made one month before the Union Budget can be anybody’s guess!

A tool that the government increasingly seems to rely on — a month before the Budget — to control the deficit problem is disinvestment. The government holds significant stake in most public sector companies. Selling a small percentage of its holdings in the financial market is expected to help it generate significant, one-off revenues.

Of course, whether the stake sale succeeds depends on a host of factors, the most decisive of which is the fundamental strength of the company’s future. State-owned companies, not surprisingly, are have bleak prospects – thanks to their inherently inefficient business models – and therefore fail to attract many investoRs

This is evident in the fact that in 2013-14, the United Progressive Alliance (UPA) government set an ambitious target of receiving Rs 40,000 crore through disinvestments; it barely received Rs 15,820 crore. In 2012-13, it set a target of Rs 30,000 crore but only garnered Rs 23,957 crore. In this fiscal year, the government once again set an ambitious target of Rs 43,425 crore. Only time can tell whether the plan will succeed.

Let’s say it does. The government, obviously, will be very elated at its achievement. The justification proffered to explain its success in disinvestments, which UPA failed to achieve, would be the usual market-participants-are-very-optimistic-about-economic-prospects kind of statements — not just from the government but also from several ‘experts’, who should know better.

By the way, that’s exactly what happened during last week’s stake sale in government-owned Coal India. Statements like “this was a vote of confidence in the state of the economy” and “the new government is absolutely committed to reforms” filled the content of the news updates on Coal India disinvestment. That is partly true. Modi government has undoubtedly performed relatively better so far compared to previous governments.

But the success of its stake sale in Coal India is scarcely because investors are upbeat about the future prospects of the economy. Instead, it has to do with shrewd accounting and financial trickery. Sure, many domestic institutions such as mutual funds and banks, foreign institutions, as well as domestic retail investors invested in the offer-for-sale. But a majority of the stake, more than 40 per cent, was bought by the government’s perpetual face-saver insurer, Life Insurance Corporation of India (LIC).

It bailed out the disinvestment programme of Steel Authority of India in December 2014, ONGC’s stake sale in March 2012, and of many other companies such as Rashtriya Chemicals and Fertilizers, India Tourism Development Corp, and Metals and Minerals Trading Corporation of India in 2013. To be sure, these may well have been genuine, well-researched, and value-based investments, but the sheer frequency of its occurrence combined with the fact that in most of these cases, the issues would not have been fully subscribed without the insurer’s “rescue acts” should be sufficient in raising our eyebrows.

In the Coal India case, LIC invested as much as Rs 10,000 crore of the total of about Rs 22,600 garnered by the government. That is more than a staggering 40 per cent of the total offer-for-sale proceeds. It is thus obvious that without the insurer’s investment, the issue would have failed to be fully subscribed. Given this, one is left to wonder what the hoopla surrounding Coal India’s disinvestment ‘success’ in the media was all about.

Retail investors, domestic and foreign institutions could not have possibly invested huge sums in a government-owned company, which is laden with operational inefficiencies as well as poor management. Yet, the future prospects of Coal India, from an investment point of view, are not bad.

Most analysts expect its stock price to cross Rs 400 in the medium term, thanks to the rising domestic demand for coal combined with the monopoly power Coal India presently enjoys. All this does nothing, however, to help the ordinary man – the policyholder of LIC – whose savings stand to be jeopardized owing to the insurance major’s perpetual rescue acts.