NEW DELHI: India’s new government will seek to raise up to a record $11.7bn in asset sales in its maiden budget this week, a senior government source said, bolstering state finances and buying time for structural reforms to revive a weak economy.
The privatisation target could reach Rs700bn, almost equal to all proceeds over the last four years, in a budget Prime Minister Narendra Modi hopes will launch the growth and jobs agenda that in May won him India’s biggest election mandate in three decades. The budget is due on Thursday.
“The finance ministry has approached different ministries to increase the divestment target,” said the senior official with direct knowledge of the budget process. The previous government had pencilled in sell-off proceeds of Rs569bn ($9.5bn).
The 63-year-old premier has made a decisive start by naming a streamlined cabinet, approving a slew of infrastructure projects and embarking on what promises to be a whirlwind first year of trade diplomacy. But his government has been plagued too by the economic ills that brought down its predecessor: weak growth and high inflation caused by spending too much and investing too little.
Despite the market reforms of 1991 that brought down the curtain on decades of socialist isolation, tracts of Asia’s third-largest economy remain off limits to outside investors. Modi wants to open up industries like defence, but selling controlling stakes in bloated state enterprises is out of the question. They are not competitive and any job cuts ordered by a foreign owner would cause an outcry.
Instead, he will whittle down state stakes in firms that have already been partly sold, like Steel Authority of India Ltd , without surrendering overall control, said the official and other sources familiar with the plans.
Indian stocks have enjoyed a Modi boom, rallying 23 percent this year. Listed state firms have outperformed on hopes that wider ownership would discipline managers and that their bottom line would benefit from a loosening of price controls. Leading the pack is Indian Oil, which has gained 62 percent in 2014. ONGC, another oil firm, is up 46 percent. Coal India has risen 36 percent. In setting an ambitious asset-sale target, the government will face inevitable scepticism from investors who are used to seeing its predecessors miss their privatisation goals.
The Modi government will also have limited scope to put its stamp on this first budget, which has been delayed by the election and will be delivered three months into the budget year to March 2015. The deficit is already near half the annual goal inherited from the last government: 4.1 percent of GDP.
Finance Minister Arun Jaitley is expected to roll out other revenue measures in addition to the asset sales, including a General Sales Tax that would unite India’s 29 federal states into a common market. The measure would make it easier to do business and, over time, broaden the tiny tax base, which last year was a mere 8.9 percent of India’s $1.9 trillion gross domestic product — about a quarter of the average for the OECD club of developed nations.
Some of the “bitter medicine” that Modi has warned Indians to expect would come, the senior government official said, in the form of reductions to subsidies on fuel, fertiliser and food that cost 2.3 percent of GDP.
Jaitley plans to front-load share sales, with a 5 percent stake in Steel Authority of India, worth $340m, on the docket for late July, say sources familiar with the deal.
That is likely to be followed by a 10 percent stake in Coal India, the world’s largest coal miner that is now 90 percent state owned. A deal would, based on current market pricing, be worth around $4bn. A senior oil ministry official said some of India’s leading oil companies were contenders for the share-sale programme, but did not name any names. A final decision would be taken by the finance ministry.
Deutsche Bank Securities forecasts proceeds of Rs600bn-800bn ($10bn-$13bn) from asset sales in this fiscal year. That would enable the government to avoid borrowing more even if it raises its deficit target to 4.3-4.4 percent of GDP.