LIC IPO: What does the launch of India’s biggest public offering hold for the economy?

The Central Government is planning to launch the Initial Public Offering (IPO) of Life Insurance Corporation of India (LIC) early in May this year. According to the draft red herring prospectus, the central government is planning to sell 31 crore equity shares in the LIC IPO i.e., roughly 5% of its stake. As reported by Bloomberg, the central government is hoping to raise funds worth INR 50,000 crores ($6.6 billion) through this IPO. If the central government forges ahead with the planned sale, then it would be the biggest IPO in the context of the Indian stock market.

The main discussion point with the LIC IPO is whether the objective of the government is to make the state-owned entity market oriented, and market disciplined, or is it to raise money to fund the government expenditures. All facts and figures point to the latter; and if such is the case, the question is whether the funds raised by the government through the LIC IPO will be sufficient to fund a part of its massive INR 7.5 trillion capital expenditure in fiscal 2023, or for that matter attain the estimated disinvestment figure of INR 78,000 crore, and in all this would it be able to bring down the fiscal deficit numbers to a tolerable level. With the estimated fiscal deficit of 6.9%, which is above the budgeted 6.8%; and the expectation to bring it down to 6.4% in the next fiscal, which is still more than double the Fiscal Responsibility and Budget Management (FRBM) level of 3%, the LIC IPO may be inadequate.

Although the government has setup the National Monetisation Pipeline, wherein existing public assets worth INR 6 trillion will be monetised by leasing them out to private operators for fixed terms, and the proceeds will be used for new infrastructure investment. The plan has two significant impediments: first being the uncertain revenue potential because of the numerous uncertainties associated with pricing, bill collection, asset quality, regulatory framework, and frequent policy reversals; and second being the expected efficiency gains by leasing it out to domestic private operators.

All in all, it seems that the government may have to sell a stake of more than 5% in the LIC IPO if it wants to walk the path of fiscal consolidation. A beneficial side effect of selling a larger stake by the government in LIC is that it will reduce the fiscal dominance on monetary policy. Based on the Report of the Comptroller and Auditor General of India on Recapitalisation of Public Sector Banks, the government holds a significant stake of 10 – 11% in almost all the public sector banks through LIC. A reduction of the government’s stake in LIC will indirectly result in added market discipline and regulatory adherence for PSBs. The positive effect of this will be felt in the banking sector in the form of reduction and timely resolution of NPAs.

The article is written by Dr. Sudipta Sen, Associate Professor and Associate Dean (Academic Affairs), Jindal School of Banking & Finance.

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