India should stop pussyfooting and start selling shares

The Indian government has fallen well short of its divestment target for the past five years, and this fiscal year looked to be no different. By the end of January it had only raised an eighth of its Rs400bn ($6.4bn) goal for the fiscal year, which ends on March 31.

Then suddenly, a host of approvals for sales came through and the market buzzed with talk of the divestment pipeline, all of which was scheduled for February or March. Analysts and bankers began to say they thought a success story might be possible at last.

For once it was not all talk, and a small Rs4.97bn sell-down in Engineers India on February 13 priced at the top of the range, with books almost three times covered.

So it came as a surprise when, four days later, the government announced it would slash the target by more than half, to Rs160bn, and push most of the planned deals into the next fiscal year.

Finance minister Palaniappan Chidambaram cheerfully told press that he hoped the next government would have more success. But this seems crazy given market conditions now, compared with what they are likely to be next year.

After months of turbulence due to the US Federal Reserve’s threat of tightening monetary policy, India’s equity market is enjoying what is likely to be only a brief period of stability. All the planned divestments have been given the go-ahead, so there is little paperwork to slow the process.

Investors are receptive, as proven by a $1.2bn State Bank of India block and Engineers India. Furthermore, the $5bn needed to reach the original target is not that much in relation to the size of India’s economy.

It is well known that the government fears criticism over mistiming the market or pricing deals wider than expected. But the repercussions of not committing to goals could be far more negative in the long-term than a couple of deals that price at the bottom of the range.

The finance ministry said on Monday it would delay its sale of a 29.5% stake in Hindustan Zinc and a 49% share in Bharat Aluminum (Balco), which would together have raised around Rs200bn – or half of the original target.

But there seems to be no reason for the delay. Hindustan Zinc has a natural buyer in parent company Sesa Sterlite, according to analysts, and Balco will be sold through an exchange traded fund managed by Goldman Sachs Asset Management.

The government had previously suggested several other means to help meet its target. Share sales have been approved in almost ten more companies. In addition, companies such as Coal India have said they will pay a huge one-off dividend to the state. The funds raised from this can legally be put towards the divestment total.

With a little more commitment and a little less fear, the target might have been reached. Instead, the mismatch between this year’s new target and next year’s draft target is laughable – Rs16bn versus Rs51.9bn for FY14-15.

Furthermore, next fiscal year is an election year, which means there is infinite potential for market disruption. In addition, the US is winding down its tapering programme, which will hurt both the rupee and capital flows onshore.

Cutting targets and announcing that it will postpone deals now is very unhelpful, not least because it demonstrates the government is unable to stick to its word. Worse, it may mean India will not meet its fiscal deficit target of 4.8% of GDP for 2013 to 2014.

If the government had stuck to its original plan, the market might not have been able to take all the supply. But it will never know unless it tries – and in future it must try. India will never solve the problem of its underdeveloped markets unless it begins tackling the root of its problems, rather than cutting corners and shying away from them.