India's Disinvestment Target: A Reality Check for FY25

As the Indian government gears up for the financial year 2024-25, it has revised its disinvestment target to Rs 50,000 crore, a significant reduction from the initial target of Rs 1 lakh crore. The Economic Times reported that the government is likely to cut its disinvestment goal by 40% for FY25, reflecting a more realistic assessment of the disinvestment potential. Let's delve into the factors contributing to this reduction and its potential impact on the government's fiscal deficit and economic growth projections.

Factors Contributing to the Reduction in Disinvestment Target

1. Missed targets in previous years: The government has historically missed its disinvestment targets, with the exception of FY2018-19 and FY2017-18. In the current fiscal year (2023-24), the revised estimate for disinvestment mop-up has been pegged at Rs 30,000 crore, which is lower than the Rs 51,000 crore budgeted at the time of presenting the Budget last year.
2. Setbacks in planned sales of state-run firms: The government has faced a host of setbacks in its planned sales of state-run firms, leading to a revision in the disinvestment target. For instance, the stake sale of Bharat Petroleum Corporation Ltd (BPCL) was canceled due to a lack of buyers, and the demerger of Bharat Earth Movers Ltd (BEML) and the land entities of the Shipping Corporation of India (SCI) has spanned nearly two years, causing a delay in the stake sale process.
3. Regulatory hurdles, complex decision-making, political considerations, and valuation issues: These factors have contributed to the slow progress of disinvestment plans, making it challenging for the government to meet its targets.
4. Revised target for FY24: The government revised its disinvestment target for the current financial year (2023-24) to Rs 30,000 crore, down from the initial target of Rs 51,000 crore. This revision indicates a more realistic assessment of the disinvestment potential for the year.



Impact on Fiscal Deficit and Economic Growth Projections

The revised disinvestment target for the financial year 2024-25 is expected to have an impact on the government's fiscal deficit and economic growth projections. Here's how:

1. Fiscal Deficit: The government's fiscal deficit is the difference between its total revenue and total expenditure. Disinvestment proceeds are considered as revenue for the government. Therefore, a higher disinvestment target would help reduce the fiscal deficit. According to the Interim Budget 2024-25, the government has pegged the fiscal deficit at 5.9% of GDP for the current financial year. The revised disinvestment target could help bring this down, as disinvestment proceeds can be used to reduce borrowings or fund expenditure without increasing the deficit.
2. Economic Growth Projections: Disinvestment proceeds can be used to fund infrastructure projects and capital goods sectors, which are major growth drivers. Increased spending in these areas can boost economic growth. For instance, the Finance Ministry's Monthly Economic Review (MER) for November 2024 noted that government capital expenditure is a major growth driver, with increased spending boosting infrastructure projects and capital goods sectors. The report added that there are signs of capital formation growth rebounding early in H2 FY25, indicating a pent-up investment impulse that will play out in the quarters ahead. Therefore, the revised disinvestment target could help sustain economic growth, as the proceeds can be used to fund these growth drivers.

Conclusion

The revised disinvestment target of Rs 50,000 crore for the financial year 2024-25 is expected to help reduce the government's fiscal deficit and sustain economic growth by funding infrastructure projects and capital goods sectors. However, the reduction in the target reflects a more realistic assessment of the disinvestment potential, given the missed targets in previous years and setbacks in planned sales of state-run firms. As the government moves forward with its disinvestment plans, it is crucial to address the regulatory hurdles, complex decision-making, political considerations, and valuation issues to ensure the successful execution of these plans.