Dusk To Dusk

Officially, it was only a deferment of the disinvestment process. But it could easily turn out to be a huge setback to the Indian economy. For, PM Atal Behari Vajpayee's decision last week to put the privatisation of two blue-chip oil PSUs on hold for three months has depressed stockmarket sentiment, put a question mark on the reforms process itself and probably scared off the already-shy foreign investors. There couldn't be worse news for Indian industry which was just about struggling to revive itself from last year's slowdown.

"The government's decision may lead to downgrading of India's economic outlook..." screams the latest report from the Institute of Economic Growth. Adds an apprehensive Asit Kotecha, managing director, ask Raymond James, a Mumbai-based investment banking firm, "It is a major negative as it questions the credibility of the government." But senior nda politicians like defence minister George Fernandes, oil minister Ram Naik and several others who were opposing the privatisation process have failed to comprehend the gravity of the situation.

For instance, they didn't realise that the bourses, which have been in a bear hug for many months now, were banking on big-ticket PSU sales to provide the trigger for the bulls to stampede into the ring. In fact, the prices of several PSU stocks had gone up in anticipation in the recent past. But Vajpayee's September 7 decision resulted in an immediate meltdown. On that black Monday, PSU stocks lost Rs 11,700 crore in market cap on the BSE. The zing seems to have gone, although the prices of some of the PSUs seem to be inching up a little.

Listen to some market analysts who feel the same way about the affair. Jigar Shah, head of research at Mumbai-based brokerage Kisan Ratilal Choksi: "It will affect both the perception and the confidence of investors. The markets today needed a momentum driver, which the PSU privatisation was expected to provide. Now it's gone." Navin Agarwal, director (research and institutional broking) at Mumbai's Motilal Oswal Securities: "The market is now unlikely to believe the government over the next three months even if it makes (positive) disinvestment announcements."

A lacklustre market implies that businessmen will need to delay their investment plans further. Most were waiting for positive signals to float fresh public issues but that does not look possible now for some months at least. The derailment of the disinvestment process also hurts the fiis, which had purchased huge volumes of PSU stocks. One was Singapore's Alliance Capital Mutual Fund. The fund's head for Asian emerging markets, Samir Arora, admits that "with the stock prices of BPCL and HPCL (the two oil giants whose sale was deferred) down more than 30 per cent from their recent levels, the loss to investors and institutions has been severe".

There has also been a loss of faith among the foreign companies who were waiting to bid for some of the PSUs. In the oil sector itself, global giants like Shell had already joined the race to take over HPCL or BPCL. Then there were others who had decided to bid for other PSUs like Nalco. But a sarcastic Surjit S. Bhalla, director, Oxus Research, thinks foreign investors had tentatively given up after the Gujarat riots. "This (the delay) will only strengthen their conviction. Anyway, India is not on anyone's radar, so it won't affect us too badly."

Probably not. However, the disinvestment blues have given a boost to everyone who was against the entire reforms process. Sangh parivar members have recently criticised other reforms being initiated by the Vajpayee regime. For example, the rss has openly asked for a dilution of labour reforms that would have given corporates partial hire-and-fire freedom.Even some nda ministers have come out openly to criticise reforms in their respective areas, apart from opposing the sale of PSUs in their fiefs. If this catches on, one can say goodbye to second-generation reforms, especially with elections scheduled for 2004.

But what does this specifically mean for the disinvestment process which had gathered considerable momentum in the recent past? Some involved with the process still believe the impact will be marginal. Says an official in the disinvestment ministry, "One murder doesn't result in serial killing. We hope we can go ahead with the privatisation of other PSUs like Shipping Corporation and Nalco." CII's Tarun Das agrees: "It is a sensitive issue but why should it derail the entire process? The methodology concerning the oil PSUs has been questioned, their divestment has not been."

The critical thing would be to watch the progress of other sell-offs. For instance, Nalco's global issue to dispose of a part of the government's stake is on the cards, so is the proposed issue of Maruti Udyog Ltd (MUL). In addition, the bidders for National Fertilisers Ltd (NFL) have been shortlisted and the final okay is awaited from the disinvestment ministry. Says a senior manager in the merchant banking firm that has the mandate for nfl, "We are only waiting for the fertilisers ministry and the disinvestment ministry to sort out their problems."

Both Nalco and MUL issues should also go through. But Nalco's second phase, which envisages the government selling a 26 per cent stake to a strategic partner, may hit roadblocks. The reason: Uma Bharati, minister for mining, is opposing a strategic sale. MUL's issue too should sail through since Suzuki has a majority stake in the company.

Apart from these, the disinvestment ministry will probably focus on smaller companies until there's a change in the government's outlook in the next few months. That's because the already strong—and growing—anti-disinvestment lobby may not allow disinvestment minister Arun Shourie to take the process to its logical end. Explains Jairam Ramesh, head of the Congress' economic cell: "Oil PSUs' disinvestment is practically off. Today, the scenario is that of political jockeying where ministers are preparing for a post-Vajpayee scenario. Who cares for disinvestment in this situation?"

Understandably, things will not get normal overnight and it will take months to reach the fever pitch that Shourie and his men had reached. Says a senior official in the disinvestment ministry, "I'm not sure if we have the energy to get back there."

As it stands, the disinvestment exercise will have to take a backseat for now. What that means is that the government will find it impossible to reach its disinvestment target of Rs 12,000 crore this year.

What about economic growth? The less said the better. For, between May and August this year, GDP growth projections for the year have already been scaled down twice. But then, when elections are on the horizon, economics, not politics, will have to take a beating.