New Delhi, Sep 12 — Strong government divestments could expand Indian equity market’s investable universe, ease valuation pressures and support fiscal consolidation as mounting fiscal risks threaten targets, a report said on Saturday.
The report from Axis Capital said the government’s holdings in listed companies have risen to Rs 44 trillion, roughly four times pre‑pandemic levels and that a sustained divestment programme could generate substantial receipts, deepen market free float, support fiscal consolidation, and strengthen capital flows.
A 15 per cent reduction in government ownership over the next three years could raise nearly Rs 6.6 trillion, expand market free float and help reduce the risk of capital outflows.
The government’s listed holdings have a significant concentration in banks and NBFCs.
“Accelerated divestments could help narrow the demand-supply imbalance, reduce pressure for foreign investor exits, and address the market’s underlying plumbing problem of excess demand for equities,” according to the report.
India’s capital outflows over the past 2 years and the EM benchmark index outperformed the US over the past 18 months.
Moreover, Taiwan and South Korea, the principal beneficiaries of the AI theme, have seen large outflows recently.
The report said that expensive valuations and prolonged earnings disappointment were the primary drivers of foreign selling in India.
Strong domestic inflows also provided FPIs an exit by absorbing secondary market selling at high valuations.
As fiscal strains are likely to persist in FY28 with the implementation of the 8th Pay Commission, divestment offers a more durable solution, the report said.
"Assuming a 12 per cent growth rate for income tax compared to the implied rate of 18 per cent leads to a shortfall of Rs 762 billion. Meanwhile, higher subsidy spending adds to fiscal pressures,” the report added.
The government has already achieved 70 per cent of its FY27 divestment target in five months, largely through the LIC OFS, with more stake sales in the pipeline (IDBI).