India is planning to allow foreign direct investment (FDI) in the healthcare and education sectors, continue with reforms in the financial sector, and dilute government equity in public sector enterprises through the Initial Public Sector Offering (IPO) route. Revealing these policy thoughts, Planning Commission Deputy Chairman Montek Singh Ahluwalia was addressing concerns expressed at the 22nd India Economic Summit organized by the World Economic Forum and Confederation of Indian Industry (CII).
However, Ahluwalia was guarded at what he said about disinvestment as it was a politically sensitive and inconvenient matter. Reiterating that “government equity” in “profit-making PSUs (Public Sector Utilities) would not be divested,” Ahluwalia said that there was “abundant scope for bringing down government stake by issuing fresh equity through the IPO route.” In other words, the government is trying to get around the political problem of divesting by accepting new capital into these PSUs through the issuance of new shares. However, it is not clear how this could address the main issue before the government of raising money for itself to bridge the yawning fiscal deficit. Disinvestment will allow the Government to raise money through the divestment of its holdings for a profit but raising new capital for the PSU will only dilute the value of the company unless there is a solid business plan to expand revenues to offset the influx of capital. Although, PSUs are generally valued lower than their private sector peers and hence there is some head room to grow.
Ahluwalia also acknowledged that there is political opposition to raising insurance FDI limits from 26% to 49% and that it is unlikely that this would change in the short run even though other financial reforms will carry on such as increasing the size of corporate debt market. He reiterated that a growth target for the 11th financial plan of 9% is not possible without financial sector reform.