The collective gaze of Indian economic commentators, seeking to decode the fallout from Russia’s invasion of Ukraine, has predictably converged on the Brent oil index as heightened energy prices and a future inflationary spiral become reality. But the finance ministry in Delhi has another index in its sights: the Vix or volatility index. Market uncertainty caused by the conflict has prompted the government to rethink the launch schedule for the initial public offering (IPO) of public-sector Life Insurance Corp (LIC), India’s largest life insurer by market share. A delay in this IPO—the regulator’s approval is valid only till mid-May—will upset the Centre’s fiscal math. There are myriad hopes riding on the IPO: a significant revenue bonanza for the Centre, a substantial reduction in its fiscal deficit, a triumph against all odds in dragging LIC to the market, and above all, keeping the flame of disinvestment burning. The Centre’s repeated lapses in meeting ambitious asset-offloading targets had sowed cynicism and despair. A smooth LIC sale would have helped allay some of that. Whatever the final outcome, uncertainty over the IPO holds out two big lessons.
The first stems from the fact that despite a long window of opportunity available, the IPO schedule has tacked too close to the wire. It need not have been so finely timed just before the close of 2021-22, since the ministry had two full years to finalize a strategy, fine-tune its legal defence and make the necessary changes to LIC’s corporate structure to prepare it for a market outing. While the reasons for this slow approach are mystifying, it would appear that attempts were made to time the market. This seems to be the current game, too. If so, then this is a flawed premise fraught with multiple risks. Financial counsellors often advise retail investors to stop trying to spot market take-off points and ride bull runs. It should surprise us if the Center has succumbed to such advice. In the past, politics has often tripped up the timing of public-sector disinvestment moves; For example, the offshore listing of the first while VSNL had to be pulled back because a coalition government was apprehensive that a low sale price would invite Parliamentary opposition. But that is history and we have hopefully moved away from such political configurations. Frequent flip-flops also send mixed signals about the share offer’s intended price range, forcing confused investors to use different discounting rates in the cash market for an imagined future price.
The other lesson is broader and lies in the government’s over-reliance on disinvestment to set its fisc right. What was once essentially an emergency measure—sells a minority stakes in state-run firms to help make up for revenue shortfalls in downturns—has now become a regular feature, institutionalized with its own ministry and line item in the Union budget. Unfortunately, selling small stakes has neither helped reduce the Center’s fiscal gaps over prolonged periods, nor has exposure to market discipline led to visible improvements in India’s public-sector efficiency. The whole exercise has become an end in itself with a self-justifying narrative around filling state coffers. But this is self-defeating when the seller fails to meet its own sell-off targets year after year. Disinvestment can be effective as a utilitarian exercise, but it is vulnerable to failure as part of a grand transformation story.
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