Hits and misses: India's disinvestment strategy needs to mind markets

It is rare for the government to sell assets when prices and sentiment are high

India’s first major disinvestment decision came in the liberalisation budget of 1991, when Manmohan Singh, as finance minister, set a target of Rs 2,500 crore.

The government exceeded the target by raising Rs 3,038 crore—a rare achievement, shows data from bsepsu.com, a tracker by Prime Database and the BSE. In the last 28 years, there have only been six occasions when the target was achieved or exceeded.

An analysis of data suggests that governments have often failed to make the full use of favourable market conditions. The seven best years for the stock market, when valuations were high and sentiment robust, have not always translated into the government meeting its disinvestment targets. In the liberalisation year, the S&P BSE Sensex was surging. Other years with high returns have seen patchy gains for the government. The disinvestment target was met in 2003-04, but there was a shortfall every other year. Three years saw less than 20 per cent of the target achieved.

Some of the best years for the market between 2005 and 2009 saw limited disinvestment. The analysis also considered the seven worst years for market returns. The government sold the equivalent of at least around 20 per cent of disinvestment targets or more even during these years of poor sentiment. The year 1994-95 saw the government meeting 121.1 per cent of its target as the markets fell 13.7 per cent (chart 2).

There is weak correlation between market returns and the government selling its assets. In other words, the government does not seek to maximise its returns by selling when prices and sentiment are high.

The gap between targets set and achieved have been rising. One reason for this is targets exceeding Rs 1 trillion in each of the last three years. The government has garnered less than half the target it set for itself in these three years (chart 3).

The latest budget gap may narrow the gap, for it has a realistic disinvestment target of Rs 51,000 crore for 2023-24. A selling strategy that heeds market conditions may help meet its objectives.