India should step up privatisation

LONDON: India's surprise rise in its borrowing target provides the perfect excuse to push harder on selling stakes in state companies.

Market conditions aren't great but, given the benefits to the economy of less state ownership, New Delhi should sell at almost any price.

The current government has never quite embraced the idea of privatisation, preferring to call it disinvestment.

It has attempted to limit it to a cash-raising exercise and has vowed not to reduce the government's stake below 50 percent in any state-owned firms.

Despite this half-heartedness, state-run juggernauts such as State Bank of India (which is now only 58 percent government-owned) have become more profitable, better-run businesses.

This year the government set itself an $8.2 billion target for disinvestment. But in the past six months the finance ministry has only raised $250 million.

This is down to a reluctance to sell shares at a time of low valuations. But this misses the point. The real benefits will come from the greater productivity that has tended to follow increased private ownership.

As long as this is achieved, the magnitude of the proceeds is of secondary importance.

News that the borrowing target has had to be increased should offer the advocates of reform a chance to build a renewed case to push forward.

The finance ministry has hinted that cash-rich public sector companies might be asked either to buy back some of the government's shares in themselves or even buy shares in other state enterprises. Coal India, for example, has over $9 billion of cash on its balance sheet.

Buybacks would have the benefit of diluting the government's stakes at a time when the firms may feel that their share prices are undervalued without raising the ire of those who think the family silver is being sold on the cheap.

Crossholdings, on the other hand, would entangle these behemoths in a cat's cradle that insulates them from market discipline. New Delhi should move ahead with the former idea but avoid the latter one.

India will borrow $44.9 billion in the six months from Oct. 1, $10.8 billion higher than budgeted in February, the government said. Investors had been expecting additional borrowing, if any, to be around $4 billion to $6 billion.

Slowing growth and rising interest rates to fight high inflation have put pressure on government finances. New Delhi is far behind target on its plans to sell holdings in state-controlled companies.

In the first six months of the fiscal year (which runs from April to March), disinvestment raised just $250 million. The budget called for $8.2 billion in the full year. A $2.5 billion share sale in Oil and Natural Gas Corp was recently put on hold.

R. Gopalan, economic affairs secretary, on Sept. 28 hinted that cash-rich public sector companies might be asked either to buy back some of the government's shares in themselves or even buy shares in other state enterprises.

Copyright Reuters, 2011