India to wait two years for sell-off benefits

Region India's new privatisation programme has prompted a wave of buying on stock markets.

NEW DELHI // India's new privatisation programme has prompted a wave of buying on stock markets, but economists expect it to take at least two years for the proceeds to significantly improve the country's budget deficit. Manmohan Singh, the prime minister, last week called for all profitable public sector enterprises to sell off at least 10 per cent of equity while outlining a radical financial reform agenda.

The sales are expected to raise more than US$5.5 billion (Dh20.2bn), with an emphasis on retail investors and low reserve prices for the new shares. India's stock markets have rallied every day since the announcement, bringing this year's gains to more than 70 per cent compared with last year's 50 per cent decline. But with more than 240 companies qualifying under the privatisation bill, the sales will have to be staggered to avoid flooding the market.

"It will take much longer than everyone contemplates to do this," said Professor NR Bhanamurthy of the National Institute of Public Finance and Policy. "But India is going in the right direction if you compare us with other countries. Given the fast recovery, we do expect to come back within three or four years well ahead of where we were." Mr Singh was responsible for opening India up to global financial markets when he was finance minister in 1991, but a tenuous governing coalition in the past five years has stopped him taking it further.

But last May's election cleared the reform path of most political interference, and now the stage is set for continuation of a prior, rapid privatisation of successful state enterprises. The cabinet committee on economic affairs has already given approval to two public sector sales: a 10 per cent initial public offering in the power company Satluj Jal Vidyut Nigam; and further divestments in National Thermal Power.

Other public companies mooted for a public share sale include: NMDC, the country's largest producer of iron ore; Steel Authority of India; BHEL; Coal India; Shipping Corporation of India; and Rural Electrification. All funds raised from the share sales will go into the Consolidated Fund of India, which is used to pay for social welfare commitments until 2013. This will take the pressure off the fiscal deficit, which has been forecast to widen to a 16-year high of 6.8 per cent of GDP in the financial year ending next March.

But ratings agencies have warned that the cash influx would not trigger any change in India's credit ratings, now hovering just above junk status. "Unless we see some hope for signs of improvement in government finance, India's rating won't be raised," Tom Byrne, the senior vice president of Moody's, told Bloomberg on Tuesday. "We don't see that yet." Domestic currency debt, a high debt-to-GDP ratio and a structural deficit has made Indian bonds the worst performers this year in Asia, excluding Japan, with a loss of nearly 6 per cent, HSBC says.

India has a relatively undeveloped bond market and its borrowing needs are approaching a record $100bn this year alone, thanks to an aggressive stimulus and growth package. This may be why Mr Singh has opted for public sector share sales as a way of raising funds, rather than turning to the bond market. But inflation is starting to become a problem. Last week, the government reported that food prices were up more than 13 per cent on the year, adding to imported inflation from high oil prices.

Delhi has responded by becoming the first nation in the Group of 20 (G20) leading and developing economies to reverse its fiscal stimulus, moving to a tighter monetary stance last week. @Email:[e-mail]