Budget 2024: The Indian government is set to revamp over 200 state-run firms, signaling a strategic shift from its earlier privatization plan, which has struggled to gain momentum. This initiative, part of the Union Budget slated for July 23, aims to enhance the profitability and intrinsic value of these companies.
Key Measures and Financial Goals
A Reuters report indicates that the new plan will involve selling large parcels of underutilized land owned by these companies and monetizing other assets. The goal is to raise $24 billion in the current fiscal year (April-March) and reinvest the funds into the companies. Additionally, the government will set five-year performance and production targets for these firms.
Focus on Value Enhancement
The government’s approach is shifting from indiscriminate asset sales to enhancing the intrinsic value of state-owned companies. Proposed measures include succession planning in majority-owned companies, training 230,000 managers for senior roles, professional recruitment to company boards, and performance incentives. These measures are expected to roll out in the 2025/26 fiscal year.
Background and Challenges
The privatization plan announced in 2021 included the sale of two banks, one insurance company, and firms in the steel, energy, and pharmaceutical sectors, alongside the closure of loss-making companies. However, progress has been limited. Notable achievements include the sale of debt-ridden Air India to the Tata Group and partial stakes sold in other companies, including a 3.5% stake in LIC.
Recently, Oil Minister Hardeep Puri stated that the plan to sell Bharat Petroleum Corp (BPCL.NS) was no longer viable due to the company’s substantial annual profits. Privatization efforts have faced criticism as “selling family silver” at low prices, and Prime Minister Modi’s reduced majority in parliament has made these sales more challenging.
Market Reaction and Outlook
Despite these hurdles, the market valuation of state-run firms has more than doubled in the past year, driven by hopes of sector reforms. The BSE PSU index, which tracks state-owned companies, has surged over 100%, outperforming the benchmark BSE Index’s 22% rise. However, analysts caution that the valuations of many PSU stocks appear unrealistic given their fundamentals, and substantial operational improvements would be necessary to justify current market caps.
The government’s shift from privatization to a focus on enhancing the value of state-run firms marks a significant policy change. The success of this strategy will depend on effective implementation of the proposed measures and achieving the set financial goals. The upcoming Union Budget will provide further details and set the stage for this ambitious plan.
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