India needs to get real on budget expectations

In last week’s budget announcement, Indian finance minister Arun Jaitley renewed his commitment to ensuring state-owned firms will be listed in a “timely manner”, naming subsidiaries of the Indian Railways as potential IPO candidates in the next financial year.

India will also give a fillip to its treasury by listing five government-owned insurance companies. But what raised eyebrows was this: the pledge by Jaitley that the administration wants to raise Rp725bn in state divestments for the year ending March 2018.

That comprises Rp465bn in minority stake sales via IPOs or secondary sell-downs, Rp150bn in strategic sales and Rp110bn from the insurance IPOs. The 2017-2018 target compares to Rp565bn sought in the previous budget — a number that was later revised down to Rp455bn. At the time of writing, the government had raised about 70% of this so far.

The government’s strategy when it comes to divestments is setting the wrong kind of expectations. It has become a fact of life for market participants that India will set lofty targets, only to sheepishly admit later that those figures will not be met and then move the goalposts closer to actual performance.

But just because it is the norm does not mean it has to stay that way. The government needs to realise there is no wisdom in setting ever higher objectives that it can never hope to satisfy. And there is certainly no virtue in setting itself up for failure constantly.

The Rp725bn objective seems a tad out of touch with reality for a number of reasons. For one, the vagaries of the equity capital market and the slow pace of government action have often meant delays for sales of state-owned assets. Investor appetite has also been poor at times given the legacy and governance issues at SOEs.

Government sell downs are also often riddled with unrealistic expectations for valuations as well as the oft-cited case of the token Rp1 fee to banks for handling share sales. These are reflective of larger structural issues and will take time to fix, but setting a realistic divestment target will be a good start.

Understandably, given the glacial pace of India’s bureaucracy, there is some merit to aiming higher to get the government machinery moving. But this has been the approach for years, and yet the country has unfailingly fallen short of its targets. It should instead aim for some capital market sophistication as India, already a favourite of investors, will be even more attractive if it can make consistency a central pillar of its administration.

Resetting expectations will be advantageous for both the government’s precarious public finances and the country’s capital markets. Maybe it is time for India to under promise and over deliver.