India’s new government will seek to raise up to a record 700 billion rupees (US$11.7 billion) 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 privatization target of 700 billion rupees is equal to almost all proceeds from the last four years, in a budget Indian 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 a senior official with direct knowledge of the budget process.
The previous government had penciled in sell-off proceeds of 569 billion rupees.
The prime minister, 63, 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.
Modi wants to open up industries like defense, 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.
In setting an ambitious asset-sale target, the government will face inevitable skepticism from investors who are used to seeing its predecessors miss their privatization 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 of next year.
The deficit is already near half the annual goal inherited from the last government — 4.1 percent of GDP.
Indian 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 US$1.9 trillion GDP — about a quarter of the average for the Organisation for Economic Co-operation and Development (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, fertilizer and food that cost 2.3 percent of GDP.
The government has signaled its willingness to trim its stakes in listed companies, by backing a regulatory move to gradually increase the minimum free-float requirement for stocks included in India’s benchmark indexes, to 25 percent from 10 percent now.
State-controlled firms currently have a 16 percent weighting in the indexes.
“It is the right time to sell stakes in public sector companies as the stock market is booming,” said the official, who requested anonymity as the budget process is confidential.
Jaitley plans to front-load share sales, with a 5 percent stake in Steel Authority of India, worth US$340 million, on the docket for later this month, 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 US$4 billion.
Deutsche Bank Securities forecasts proceeds of 600 billion to 800 billion rupees 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 to 4.4 percent of GDP.
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