Disinvestments slow, but govt keeps earning dividends from state-run firms

It has never happened that the budget estimate for dividends from such companies has failed

There has hardly been any disinvestment of state-run companies in Financial Year 2023-34 (FY24), but dividends from such firms more than made up for government receipts.

FY24 will probably have the lowest collection in disinvestment in a decade. In the same year, receipts from dividends soared to a record high.

Compared to the Rs 8858.55 crore of disinvestment as capital receipts, the Finance Ministry has got Rs 43,692 crore as dividends from companies it holds stakes in. The Reserve Bank of India’s (RBI) share of Rs 87,416 crore is excluded here.

Of course, there are differences in the accounting for the two receipts. Disinvestment of any sort is a non-debt capital receipt. Dividends and profits qualify as non-tax receipts and are therefore revenue items. However, these differences are a matter of government homework and both arrive at the same place: the consolidated fund of India.

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The rise in dividends has been flagged internally by the Finance Ministry’s department of disinvestment and asset management as a welcome development. But there is a catch. The rise in dividends is determined by the companies’ internal policies in which the government plays no role. Selling shares in these companies is a Finance Ministry decision.

Companies like NTPC, IOC or State Bank of India pay dividends based on the profits they make – the result of business plans executed through the year. In each Budget, the government makes an annual assessment of the dividends it will receive from state-owned companies. It has never happened that the estimate for dividends fell through. The estimates held even in the two years of Covid-19, FY21 and FY22. Assuming that the companies do not change their business policies allows for a steady growth in the government’s dividend purse, year after year.

Disinvestment has a wider mandate: It can only happen if there is healthy demand for a company’s shares like that of Life Insurance Corporation. There have been cases where the disinvestment failed as the property while sound was not appealing to the public – BPCL is an example. The state-run refiner has been on the shelf for years but is unlikely to yield results.

Dividends increased in FY24 as the economy is pegged to grow at more than 7 per cent, according to government and central bank estimates. This is reflected in the balance sheet of the companies in terms of rise in profits. As the recent circular from RBI asking banks to exercise prudence before announcing dividends shows, the incentive to announce inflated numbers is a risk.