Disinvestment of LIC: Is India short-selling the family silver?

Indian Economy

Topic: General Studies 3:

• Indian Economy and issues relating to planning, mobilization, of resources, growth, development and employment

• Government Budgeting.

Disinvestment of LIC: Is India short-selling the family silver?

The public sector in India is a picture of contradictions. 

• It elicits derision and ridicule in market circles. The government is apologetic about it with analysts are demanding for its dismantlement citing its irrelevance 
• At the same time, when markets are on a free fall, investors look at public sector entities like LIC to bail them out

Despite the privatisation wave across the world, the reach and influence of state-owned 

enterprises (SOEs) keeps growing.

• According to OECD, there are about 40 countries in the developed and developing world (excluding China) having SOEs valued at $2.5 trillion and employing nearly 10 million people

• In addition, governments hold minority shareholdings valued at $912 billion, employing 2.8 million people. 
• Finance (26 per cent), electricity and gas (21) and transport (18) are the major sectors in which SOEs have a significant presence in value terms.

China’s SOEs

• China’s financial SOEs together hold $34 trillion of assets compared to non-financial SOEs’ $26 trillion. 
• They employ millions and form a large part of global GDP
• China SOEs are categorised into various industries for garnering revenues for the government to maintain economic stability.
  • Key industries (defence, electricity, oil, aviation, rail, shipping, etc)
  • Pillar industries (autos, chemicals, construction, electronics) and 
  • Normal industries (tourism, pharma, investment) 

Divestment of public sector is not something unusual in emerging markets.

• A host of big SOEs with large IPOs like Agriculture Bank of China ($22 billion), ICBC ($22 billion), Bank of China ($11 billion), Rosneft ($11 billion) are inspirations for many emerging economies.
• China has listed all its four major insurance companies. China Life, the country’s biggest insurer raised $3 billion in 2003 when the market was down; Ping An made $5 billion in 2007 at its peak; China Pacific garnered $3.1 billion in 2009.
• Even General Motors of the US, which pulled off the biggest IPO in 2010 at $23 billion, was 61% owned by the US government then; this fell to 33% after the share issue
• Large IPOs of SOEs in India such as Coal India ($3.3 billion), ONGC (2.2 billion) and GIC (1.6 billion) may look suboptimal compared to companies of similar stature and significance in other countries

Concern about Disinvestment

• The question over disinvestment is about how and when — selling them for meeting immediate needs or after making them strong enough to attract global interest.
• The concern thus is whether India is able to realise the full value these companies hold or is it too hasty in cashing out.

The case of LIC

• On the net premiums written, LIC, with $48.9 billion (December 2018), is placed 17 among the 25 top global insurers and 21st on the basis of non-banking assets (Global Insurance Market Trends, OECD 2019).
• On premiums written, LIC’s is $100 billion less than top ranked UnitedHealth Group of the US ($156 billion), and about $50 billion less than Ping An of China (4th rank).
• Premium written by Ping An is double of LIC’s
• In terms of non-banking assets, LIC’s $438 billion is less than half of Allianz’s $1 trillion.
• On the other hand, gross claims paid by India’s insurance sector at 17.2% in life and 15.9% in non-life are on the higher side when compared with those in the US (2.8/4.6 per cent) and Korea (6.9/12.3 per cent).

Doubts over Utility of Listing

• Many public sector banks with great listing history two decades back been merged to save the banking industry
• Growth and stability in the regions of Africa, Latin America and Eastern Europe after rampant privatisation are not substantively better when compared to Asia, which largely thrives on growth driven by a large public sector
• It is the active support of the state that enabled Chinese financial firms to mop up most of the new capital issuance in the world. 

Conclusion

A sell-off to raise quick cash won’t be such an effective way in the long run for an economy in pursuit of global leadership. Selling family silver is easy, but creating heirlooms that a family can take pride in is difficult.

Connecting the dots

• Air India disinvestment
• BSNL and MTNL performance
• Need for Public Broadcaster in form of AIR/Doordarshan