Israel-Hamas war: Here’s how the ongoing geopolitical crisis in Middle East is impacting India’s divestment plans

Geopolitical tension has emerged as the top threat for the major financial markets across the globe. Investors turned thrifty as the capital market is likely to remain on a knife edge due to the ongoing Israel-Hamas war coupled with higher interest yield in the 10-year US treasury bond, strength in the US Dollar, and volatility in crude oil prices. It has created an uncertain environment. Its potential impact on financial markets is the key concern because this poses the downside risk to global growth. However, the US treasury yields, which surged 5 per cent for the first time in 16 years, dipped, lowest in five weeks, below 4.5 per cent in the last week.

In case of India as well, these factors have together impacted investor sentiments and triggered foreign institutional investors (FIIs) to pull out their money from the Indian market. They have withdrawn Rs 4196 crore so far in the month and they are net sellers of Rs 80566 crore since August. The Indian stock market encountered a dramatic plunge on October 23 as both benchmark indices–NSE Nifty and BSE Sensex dipped by over 1.25 per cent.

Notably, both Nifty and Sensex have gained nearly 3 per cent since October 26, as domestic institutional investors (DIIs) are giving a cushion to the market and have put in Rs 74128 crore since August. However, at the same time the volatility index of NSE increased 2 per cent to 11.11 per cent indicating options investors have higher risks to the market in the near future.

The volatility in the market is impacting the 2023-24 disinvestment plans of India. The government has put financial bids off for NMDC steel for next fiscal. The government is facing hassles in divesting its stakes in CONCOR and shipping corporations. The proposed sale of stake in IDBI Bank is unlikely to take place in the current fiscal. The government has collected only Rs 8000 crore or 15.7 per cent of annual budget estimate of Rs 0.51 trillion so far from disinvestment of eight CPSEs through an offer for sale. The government has realised Rs 4186 crore from Coal India, Rs 1050 crore from Housing and Urban Development Corporation, Rs 1366 crore from Rail Vikas Nigam and Rs 1349 crore from SJVN. Chasing the target will be difficult for the government as the market is changing and investors are likely to adopt a more cautious approach.

The disinvestment proceeds are as usual less than the dividend which has been collected by the government of Rs 19390 crore off the scale so far from state-owned enterprises. The government is hopeful that the robust dividends will offset disinvestment shortfalls and it will give some relief amid these challenges. However, the government is likely to miss its target for the fifth consecutive fiscal year.

Therefore, to keep the ball rolling, the government should put its best foot forward on ongoing transactions. The government will likely stick to privatisation of already identified CPSEs – the shipping corporation of India, Hindustan Zinc, Rashtriya Chemical and Fertilizers BEML, HLL among others.

Notably, during 1991-2014, where different governments have been able to hit annual targets only six times, the BJP led NDA-2 and NDA-3 government has met the target twice (2017-18 and 2018-19). In the last 9 years, the government has realised Rs 4.20 trillion or 46.8 per cent of the revised estimate of Rs 5.07 trillion and 82.8 per cent of the budget estimate of Rs 8.97 trillion.

Aside from the above-mentioned challenges, legislative assembly elections in 5 states are to be held this month and most of the opinion poll figures are not in favour of the ruling party. Apart from this Lok Sabha elections are also to be held next year. Therefore, if the results in the assembly elections are not in favour of the ruling party, then the government will hardly add new names of CPSEs to the list of strategic sale to be divested. The opposition parties are already giving their both barrels to the government for selling the state’s assets. The DIPAM secretary stated clearly in an interview with the Business Today that the role of DIPAM is not about meeting disinvestment targets; this strikes a good balance between a sound divestment strategy and a consistent dividend policy and ensuring efficiency and accountability of CPSEs. The government is likely to pit its wits against the situation and is likely to adopt a ‘prudent selloff’ strategy. The government is conscious of the right price and interest of investors. Hence, the government set out its stall that it will not go for divestment for the sake of disinvestment.

This could affect the fiscal deficit and the government’s ambitious capital expenditure programme. Though the government is committed to meet its fiscal deficit target pegged at 5.9 per cent of GDP, a tight rein on revenue expenditure in the last two months and buoyant tax revenue in both direct and indirect taxes has restrained a rise in fiscal deficit. The fiscal deficit has touched Rs 7.02 trillion or 39.3 per cent of the annual target of Rs 17.87 trillion during the first half of 2023-24.

Although the market is not favourable, the government still has about five months left. If the government succeeds in making even one strategic sale and reduces its stake through an offer for sale in other CPSEs, then the government can discover hidden gems and 35-45 per cent of the target could be achieved.

Vinay K Srivastava, an author, columnist and Associate Professor at ITS Ghaziabad, penned this piece for Business Today.

Views are personal and do not represent the stand of this publication.