Search the Internet          Tips  Sites: Finance, Investment

Privatisation gains speed after lost decade

India took two generations to double its rate of growth to nearly six per cent in the early 1980s and another decade to liberalise its economy.

Small wonder, economists and foreign investors say, that India's privatisation programme has taken 10 years to gather speed.

Feisty politicians, rickety coalitions, stubborn labour unions and archaic laws have often combined to derail ambitious plans to privatise India's state-owned firms.

"There have been a lot of privatisation programmes but actual pace has been very, very slow," said Takahira Ogawa, Standard and Poor's Asia-Pacific director of sovereign ratings.

Manmohan Singh, architect of the country's economic reforms when he was finance minister, flagged off the programme in 1991 but the first big ticket sales grossing some $533 million were only completed last month.

Cheap valuations, massive market shares and growth potential have lured many global asset allocators to take another look at the shares of India's state-owned companies in recent weeks.

"There's a lot of value locked up in these public sector units. With privatisation this value will be released," said Devan Kaloo, investment manager at Singapore-based Aberdeen Asset Management, which manages some $400 million of funds in India.

The price to earnings (P/E) ratios of most Indian state firms is less than five times, way below the average of their private sector peers and regional counterparts, making them potentially attractive buys.

Prime Minister Atal Bihari Vajpayee's government surprised investors last month by selling controlling stakes in overseas telephone monopoly, Videsh Sanchar Nigam Ltd and oil retailing firm, IBP Co.

This marked a radical turnaround in the speed of privatisation of state-owned companies.

Between fiscal 1991-92 (April-March) and 2000-01, the government pledged to raise $11 billion through the sale of shares in state-owned firms.

It managed to sell shares worth only $4.2 billion, less than half its target.

But the last round of asset sales have reignited foreign investor interest and fuelled a rally in shares of state-owned firms even as the government rolled out an ambitious policy in its 2002-3 Union Budget to raise Rs 120 billion ($2.5 billion) through share sell-offs.

"The two privatisation plans announced a few weeks ago were encouraging and we welcome it. But we would like to wait and see whether the government goes ahead with its strong commitment on privatisation," Ogawa said.

And rightly so. Even after the asset sale in February, India raised only Rs 60 billion, half the target of Rs 120 billion set for 2001-02.

Most analysts say the government faces a daunting task of meeting the 2002-03 divestment target.

"The government did push through privatisation in February. The question is whether the pace can be sustained," said Pieter van der Schaft, associate director of economic research at Barclays Capital Asia Ltd.

India has some 232 state-owned companies, almost half of them loss-making, producing everything from condoms to steel with a collective net worth of $33 billion.

Only China beats India in terms of massive state participation in manufacturing and services.

STUMBLING BLOCKS

"Privatisation is a political issue in India. It is made more difficult by rigid legislation on say things like labour issues," said van der Schaft.

Vajpayee's cabinet last month approved a change to its 55-year-old labour laws which will make it easier for firms to fire workers. But even before the government could implement the change, a key partner of the prime minister's ruling coalition bitterly opposed the proposed labour reforms.

In contrast, neighbouring communist China has laid off millions of workers to trim its bloated workforce at financially troubled state-owned enterprises.

"China has a centralised government. It is easier to implement. The nature of the coalition government in India makes it difficult," van der Schaft said.

Failure to deliver on its promises will make life difficult for the government as it struggles to curb its soaring fiscal deficit. The combined fiscal deficit of the federal and state governments is estimated at 10 per cent of gross domestic product, the highest in emerging Asia.

Privatisation will help free unproductive resources locked in the loss-making state firms and release funds for the government to reduce its burgeoning public debt, a move which could lower interest rates and spur higher investment.

INVESTORS EYE OIL FIRMS

Investors are looking forward to the privatisation of state-controlled oil majors Bharat Petroleum Corp and Hindustan Petroleum Corp later this year.

The government has said it would sell stakes in the two oil refining and retailing firms after it removed controls on the oil and gas sector in April.

"They are very cheap compared to their global peers. There is an opportunity to extract more value out of these companies," Aberdeen's Kaloo said.

BPCL and HPCL currently trade at a P/E of eight to nine times compared with a regional industry average of 14 to 15 times.

Kaloo said the recent government decision to end more than two decades of state monopoly on retailing petrol and diesel would lure more foreign investors to buy shares of state-oil companies ahead of privatisation.

ALSO READ:
The Divestment Development
The Rediff Budget Special
Money

Tell us what you think of this report