Modi Lead Brightens Asset Sales in BJP Redux: Corporate India

Narendra Modi, who is poised to win India’s elections, has vowed to spend billions on high-speed rail networks, ports and health care. Accelerating sales of state companies may help him foot the bill.

Opinion polls put Modi’s Bharatiya Janata Party as the frontrunner in elections to conclude next month. In its manifesto released April 7, the party said the nation must also expand its gas and telecommunications networks, and create new cities. In addition, as much as $230 billion of stalled public works projects may be kick-started by a BJP win.

“We expect a BJP-led government to fast track asset sales, given its previous record,” said Rakesh Arora, head of research at Macquarie Capital Securities (India) Pvt. “It’ll have to divest loss-making entities as fast as possible.”

The need for hundreds of billions of dollars for building infrastructure and reviving India’s growth indicates the BJP will speed up strategic sales of state-owned entities, say economists such as Madan Sabnavis. That’s the model it used when the party was last in power a decade ago. Modi said in March last year “the government has no business to do a business.”

Strategic sale denotes private management and ownership, total or partial.

The BJP didn’t give specifics on spending or how it will fund its plans in its manifesto. The party has yet to finalize any plan or policy for state-run companies, BJP spokesman Prakash Javadekar said April 7. A clearer picture may emerge when the budget for the year to March 31 is presented, Arora said.

Selling Spree

Between 1999-2004, a BJP-led coalition sold government stakes and control in more than 35 companies for $2 billion, catapulting buyers such as Anil Agarwal, owner of Vedanta Resources Plc, into the ranks of India’s mega-rich. Agarwal expanded from refining copper to making zinc and aluminum after he bought controlling stakes in state-owned Bharat Aluminium Co. in 2001 and Hindustan Zinc Ltd. a year later. Today, Hindustan Zinc controls more than 95 percent of India’s production of the metal.

In addition, the BJP government raised $2.4 billion from selling minor stakes in companies, including crude explorer Oil and Natural Gas Corp. and gas-supplier GAIL India Ltd.

It also planned to sell stakes and transfer control in profitable companies such as Bharat Petroleum Co., Hindustan Petroleum Co., National Aluminium Co., Shipping Corp. of India, State Trading Corp. and MMTC of India Ltd., according to the then disinvestment ministry’s annual report for the year ended March 31, 2003. The six companies currently have a combined market capitalization of $10 billion.

Stalled Sales

The plans for strategic sales could not be completed following opposition from workers and a court ruling. Stake sales in refiners Bharat Petroleum and Hindustan Petroleum was stalled in 2003 after the top court ruled that parliamentary approval was needed for the divestment.

Elections in May the following year brought a Congress-led coalition to power, which said it wouldn’t sell profitable state-run companies.

The new government will have to balance building infrastructure and growth with curbing the fiscal deficit and inflation, said Sabnavis, chief economist at rating company Credit Analysis & Research Ltd. or CARE. The BJP also proposes to construct 100 new cities, double education spending, build high-speed railway lines and a national fiber-optic network.

“These are ambitious targets and funding, therefore, is an issue,” said Sonal Varma, an economist at Nomura Holdings Inc. in Mumbai. “I believe asset sales will continue to be a form of funding the deficit.”

Slowest Pace

At 4.9 percent, India’s economy is growing near the slowest pace in a decade as the central bank keeps interest rates elevated to bring down consumer-price inflation, which has averaged about 10 percent over the past year. The new government’s challenges will include curbing inflation, subsidies and the fiscal deficit, Soumya Kanti Ghosh, a Mumbai-based economist at State Bank of India, the country’s biggest lender, said last month.

About 265 projects worth $230 billion are awaiting clearances by states and the federal government, according to the Cabinet Committee on Investment. Decision-making in Prime Minister Manmohan Singh’s government stalled following environmental-approval delays and graft probes.

Opinion Polls

In the past 10 years, the Congress government raised $17 billion selling minority stakes in state-owned companies. The BJP-led government sold a controlling stake in Maruti Suzuki India Ltd., India’s biggest carmaker, to Japan’s Suzuki Motor Corp., and management control in Indian Petrochemicals Corp. to billionaire Mukesh Ambani’s Reliance group.

A BJP-led alliance may win 259 out of the 543 seats in the elections that started April 7, according to a poll by channel NDTV 24x7 and Hansa Research Group. Another poll by the CNN-IBN TV channel projected the BJP coalition winning 234 to 246 seats.

The new government’s asset sale plans may be spurred by recent stock market gains, said CARE’s Sabnavis. The benchmark S&P BSE Sensex has advanced 23 percent in the past year and surged to a record today.

“Sales of state-owned companies have to happen and this is probably the right time,” he said. “The economy should revive and the new government should be able to spend on infrastruture and attract foreign investments.”

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