Rs.100,000 Crore Kitty Cuts Urgency for LIC IPO
When the LIC IPO announcement was made in the Budget 2021, there was a sense of urgency to it. Clearly, the Rs.175,000 crore target for disinvestments was not going to happen unless the LIC IPO was completed during the year. Despite the best efforts of the government, it now looks like the IPO would get postponed to the next financial year i.e. FY23.
For starters, the actuarial valuation of the complex LIC business model has taken much longer than anticipated. Most of the legislative wrangles are already addressed but the government still needs to hard sell the issue to investors. India has no precedent for a Rs.75,000 crore IPO and the largest IPO till data of Paytm was less than one-fourth that size. In the midst of this situation the government may not be overly worried by the delay.
What has changed? The government has a cash kitty of Rs.1 trillion in the form of unused funds. There are several project outlays for which the government is yet to commit funds. These allocations had been kept on hold pending greater clarity on the LIC IPO front. With Rs.1 trillion of unused funds and direct and indirect tax inflows likely to be robust in the Mar-22 quarter, the government may not really have to worry about the LIC IPO.
Of course, the LIC IPO will happen, but this current situation gives the government a lot more of breathing space. It also means that the government does not have to exert itself on how to bridge the deficit. With a robust kitty of Rs.1 trillion and with the kitty likely to expand in the last quarter, the net impact of the government falling short of its disinvestment target may not really be material.
The key question is about the eventual fiscal deficit. Estimates vary for the fiscal deficit from 6% on the lower side to 6.8% on the upper side for FY23. However, 6.5% looks more like an acceptable scenario and the net impact, even if the LIC IPO does not go through in this fiscal, would only be around 10 basis points. This could have two implications.
Firstly, there were concerns that the borrowing pressure in FY23 may be huge, but with the LIC IPO likely to happen in FY23, that risk is mitigated. If the actual borrowings in FY23 hovers below the Rs.12 trillion level, the bond markets will have reasons to celebrate. For now it looks like the comfortable finances of the government and the cash kitty would mean that the government can afford to put off LIC IPO to the next fiscal year.
Also Read:-