Divestment plans will boost the economy, says Anil Agarwal

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A motorcyclist wears a protective mask while sitting by the roadside on the Sabarmati Riverside in Ahmedabad, India on Thursday, October 22, 2020.

Sumit Dayal | Bloomberg | Getty Images

SINGAPORE – India’s efforts to privatize state-owned companies will bring the country closer to a $ 5 trillion economy, a leading Indian business leader told CNBC on Wednesday.

The government has a divestment target of rupees 1.75 trillion (about $ 24 billion) for the next fiscal year, which begins April 1, Treasury Secretary Nirmala Sitharaman said during her budget announcement this week.

This means that the government is exiting itself by selling state-owned assets to the private sector or by listing it on the stock exchange.

This includes completing the privatization of state-owned companies such as Air India, Container Corporation of India and Shipping Corporation of India. It would also include a government proposal to take two public sector banks and a general insurance company private.

“This is a very good move,” said Anil Agarwal, chairman of the board of diversified natural resources company Vedanta Resources, on CNBC’s “Street Signs Asia”.

He said the government’s effort to sell shares would “provide a great opportunity for people around the world to step in and invest”. This would also increase the productivity of state-owned companies, he added.

Agarwal has set up a $ 10 billion fund with UK-based investment firm Centricus last year, which aims to invest in government companies for sale. Local media quoted him as saying that 5% of the fund is his own money while the rest will come from investors.

Strong competition expected

Agarwal told CNBC on Wednesday that its mutual fund has received “tremendous response” from investors and that it plans to acquire approximately 15% to 20% of the public companies for sale.

Companies he is allegedly considering include state-owned oil and gas giant Bharat Petroleum Corporation, Shipping Corporation, Container Corporation, and Hindustan Copper.

Agarwal said the fund will evaluate the companies for sale, do the necessary due diligence and see where it can add value before buying. He added that he expects a lot of competition to acquire these companies. “This will definitely lead to a $ 5 trillion economy for the country,” he said.

India has set a deficit target of 6.8% of its gross domestic product for the next fiscal year – more than double what it was aiming for before the pandemic. Economists said this underscores the government’s change in strategy from survival to revitalizing growth.

“Prudent Strategy”

According to Kaushik Das, chief economist at Deutsche Bank, the Indian government’s forecasts for total revenue estimates and growth forecasts for gross tax revenues appear credible and most likely will be met.

The divestment target of around 0.8% of GDP was below market expectations, Das said in a recent statement. “This is a prudent strategy,” he added.

He explained that a major lack of divestments, as was the case in the current financial year, “could easily jeopardize budgetary arithmetic and lead to the markets permanently pricing in an unhealthy uncertainty premium.”

Experts noted that with limited changes to the tax structure, the government will need better tax compliance and higher divestment proceeds.

The government’s ability to meet its divestment target would also depend on the successful IPO of the state insurer Life Insurance Corporation of India, according to Das.