KOLKATA - It has been billed as India's "Aramco moment".

In December 2019, Saudi Arabia pulled off its biggest initial public offering (IPO), raising as much as US$25.6 billion (S$34.4 billion) by selling shares in the state-owned oil behemoth.

Now, the leader in India's insurance sector - the government-owned Life Insurance Corporation of India (LIC), which commands a 66 per cent market share in new business premiums in the country - hopes to mop up more than US$8 billion by selling 5 per cent of its shares next month.

India's largest insurer will be offloading 316.25 million shares, according to the draft prospectus filed on Sunday (Feb 13). The move to divest could set a record for the biggest IPO in India, exceeding digital wallet Paytm's US$2.46 billion worth of shares that were sold in November last year.

If successful, the IPO will boost the Narendra Modi-led government's flagging disinvestment drive. The government cut its disinvestment target for the current financial year in its latest budget even as it tries to replenish its coffers drained by public spending during the Covid-19 pandemic.

The government revised its disinvestment estimate for the current financial year to 780 billion rupees (S$14 billion) in its recent budget, far lower than the 1.75 trillion it had expected. It has so far generated only 120.3 billion rupees of disinvestment proceeds, which include earnings from the recent sale of its debt-ridden airline Air India to the Tata Group.

Finance Minister Nirmala Sitharaman, while presenting the budget on Feb 1, had announced that the government intends to complete disinvestment of a number of public enterprises in the ongoing financial year, which ends on March 31. The list includes Shipping Corporation of India, IDBI Bank and helicopter services firm Pawan Hans.

She added that the government proposes to take up disinvestment of two other unnamed public sector banks and a general insurance company in 2021-2022. Niti Aayog, a government think-tank, has also been asked to create a list of additional government-owned enterprises that can be divested.

For the 2022-2023 financial year, the government has set a modest disinvestment target of 650 billion rupees. According to Mr Suvodeep Rakshit, a senior economist with Kotak Institutional Equities, the target assigned is not high because the government does not have any "rapid and sharp fiscal consolidation" plans.

The government's fiscal deficit stands at 6.9 per cent, which it wants to cut down to 6.4 next year.

"If you consider this target and factor in revenue estimates, which are conservative, and the possibility of tax receipts increasing, then you automatically have a certain amount of compression in the fiscal deficit," he said.

"But yes, over the following years... let's say by 2026, when the government wants to bring down the fiscal deficit to below 4½ per cent, you would definitely need more help from divestment," he added, with these additional proceeds shoring up revenue beyond tax receipts and allowing a margin for higher expenditure.

This long-term fiscal consolidation, together with challenges unique to disinvesting each public sector enterprise, requires the government to adopt a focused approach. There is no one-solution-fits-all tactic for disinvestment, pointed out Mr Rakshit, with some requiring legislative changes and others extensive discussions with stakeholders.

"The government needs to be much more focused from the very start of the year, so that divestment targets, if aggressive, can be adhered to," he told The Straits Times.

The Modi-led government has often billed itself as a reformist one, with statements claiming that the government has "no business to be in business", including one from the Prime Minister last week. But progress on disinvestment has been erratic with successive governments in India.

Dr Amol Agrawal, an assistant professor of economics at Ahmedabad University, pointed out in a recent article that disinvestment receipts had exceeded government estimates only eight times in the last 30 years. Moreover, the number of public enterprises owned by the central government, he added, had gone up from 244 in 1990 to 366 in 2019-2020, with investment per enterprise rising more than 147 times.

He told ST that India lacks a long-term disinvestment strategy, with no institutionalisation of this process to allow it to withstand political changes.

"Thirty years is a long time relatively to reflect on what we did and what we did not, but a lot of things are still out of place and there is no consistency," he said.

"One understands there are strategic sectors that will not be disinvested but anything else, we should really get a move on," added Dr Agrawal, suggesting that the government first target smaller inefficient firms that are easier to privatise and calling for disinvestment rules that are respected by successive governments.

The LIC IPO also comes at a time of challenging global financial conditions, raising concerns if the market will have the ability to absorb this big offering.

"I just hope the markets are kind," Dr Agrawal said.