June 4 (Bloomberg) -- India may allow greater overseas investment, sell stakes in state-run companies and inject more capital into lenders to stoke economic growth, President Pratibha Devisingh Patil said.

“Foreign direct investment needs to be encouraged through an appropriate policy regime,” Patil said in New Delhi today as she unveiled Prime Minister Manmohan Singh’s plans to a joint session of parliament. “There is also a need to augment resources in the banking and the insurance sector. Towards this end, my government will recapitalize the public-sector banks to strengthen their financial position.”

Singh’s government will also develop a roadmap for selling stakes in state-run companies, she said.

Indian shares have jumped 23 percent since the May 16 election result, which returned Singh to power without the need to rely on Communist parties that blocked reforms during his first term. The central bank has cut interest rates six times since October and the government has pared taxes to spur growth.

“The current financial year is expected to see a slowing down of growth on account of the global recession,” Patil said. “Our immediate priority must be to focus on management of the economy that will counter the effect of the global slowdown by a combination of sectoral and macro-level policies.”

Indian stocks rebounded, erasing earlier losses for the benchmark index. The Bombay Stock Exchange’s Sensitive Index, or Sensex, rose 0.9 percent to 15,008.68 at 3:30 p.m. in Mumbai today. That was the highest since September, 2008.

Stimulus Measures

The central bank, which estimates that rate cuts and the government’s measures together provide a stimulus worth 7 percent of gross domestic product, forecasts the economy will grow 6 percent in the year that started April 1. That compares with average growth of 8.5 percent in the previous five years.

NHPC Ltd., India’s largest producer of electricity from water, Oil India Ltd. and RITES Ltd. are likely to sell shares this fiscal year as the government has already approved proposals to reduce the government’s stakes.

“The government will rely on selling stakes in state-run companies to get funds as it cannot keep borrowing from the market to fund higher spending,” said D.H. Pai Panandiker, president at RPG Foundation, an economic policy group in New Delhi.

India may also revive plans to sell stakes in companies including Bharat Heavy Electricals Ltd., the nation’s biggest maker of power equipment, National Aluminium Co., and Neyveli Lignite Corp., Panandiker said. Prime Minister Singh in his previous term had to put on hold a plan to sell stakes in these companies after his allies opposed the plan.

Outperforming China

It’s a “matter of satisfaction that the Indian economy has not suffered the kind of slowdown that has been witnessed in almost every other country of the world,” Patil said.

India may outperform China and other countries in the Asia- Pacific region in terms of economic growth, Stephen Roach, chairman of Morgan Stanley Asia, said yesterday in Mumbai.

The Indian economy stabilized in the first quarter, maintaining the 5.8 percent pace of expansion recorded in the preceding three months. Growth in China’s GDP slowed to 6.1 percent from 6.8 percent in the same period.

“My government will focus attention on sectors that are adversely affected, especially small companies, exports, textiles, commercial vehicles, infrastructure and housing,” the president said. India is “firmly committed to maintaining high growth with low inflation particularly in relation to prices of essential agricultural and industrial commodities.”

Patil also expressed concern over India’s widening budget deficit and spoke of the need to return to fiscal prudence.

The government will “steadfastly observe fiscal responsibility” so that its ability to invest in essential social and economic infrastructure is “continuously enhanced,” she said. “This will require that all subsidies reach only the truly needy and poor sections of our society.”

India’s fiscal deficit widened to a seven-year high of 6.2 percent of GDP in the 12 months ended March 31 as the government borrowed more to fund its stimulus packages.

To contact the reporter on this story: Kartik Goyal in New Delhi at kgoyal@bloomberg.net; Bibhudatta Pradhan in New Delhi at bpradhan@bloomberg.net

Last Updated: June 4, 2009 07:31 EDT