India Stops Privatization, Casting Doubt on Reforms
By Saritha Rai
New York Times
July 11, 2006

BANGALORE, India — A decision by the Indian government to halt all sales of stakes in state-owned companies could crush investors’ interest as it raises fear that a larger program of economic change will be bogged down in politics.

Last week, Prime Minister Manmohan Singh said in a statement that privatization plans would be stopped, pending further review, after a coalition party whose support is crucial for the survival of Mr. Singh’s government threatened to withdraw that support.

Amid rumors that the prime minister had resigned over the halting of the privatization program, the country’s bellwether stock market index fell 258 points, a 2.4 percent slide. The prime minister’s office later denied the rumors.

“This is not good news,” said Chetan Ahya, the executive director and India economist of JM Morgan Stanley in Mumbai, formerly Bombay, referring to the halting of the stake sales. Global investors will view this as a “reaffirmation of the government’s inaction over privatization,” Mr. Ahya said.

Two 10 percent stakes were lined up for sale in two concerns, the National Aluminum Company and a power-generating business, Neyveli Lignite. But these were relatively insignificant compared with the portion owned by the government in each case, currently more than three-quarters of the total equity.

The Neyveli sale of a 10 percent stake, for example, would have raised about $500 million. During 14 years of economic change, the process of privatization has raised nearly $12 billion for the government, according to figures from Morgan Stanley.

But investors fear that this stoppage may signal a larger setback, one that impedes not only the privatization of hundreds of state-owned companies, but also the entire process of economic restructuring. Those sales also have helped the government trim its budget deficits.

Foreign institutional investors have been bullish about the Indian economy and its soaring 8 percent growth rates, pouring more than $10 billion into Indian equities in 2005 and $8.4 billion in 2004.

But in the last two months, the mood has soured as the stock market tumbled, with the benchmark Sensex index falling more than 15 percent from its high on May 10. Now, analysts say that the move to stop sales of stakes in state-owned companies could further discourage investors.

Privatization had come virtually to a standstill, as opposition rose from regional allies and workers’ unions.

The Dravida Munnetra Kazhagam party, an important regional ally in the 19-party coalition led by Mr. Singh’s Congress Party, threatened to pull out of the coalition government if it proceeded to sell the 10 percent stake in Neyveli Lignite.

The party governs Tamil Nadu, the southern state where Neyveli is based. Thousands of its workers, who had been striking against the stake sale and possible job losses, resumed work after the government said it would call off the sale.

“It is not a complete disaster that the privatizations have been shelved,” said Shankar Narayanan, a managing director who leads capital investment growth in India for the Carlyle Group, the American-based private investment firm. “But after frenetic sell-offs, this is a retrograde step.” Mr. Narayanan manages part of Carlyle’s $668 million Asia fund.

In the 1950’s, under a socialist-based plan seeking self-sufficiency for the newly independent India, the Congress Party government of Prime Minister Jawaharlal Nehru set out to establish a variety of companies. Over the decades, the government became pervasive in the Indian economy, managing companies that made cars, baked bread, wrote software, ran hotels, prospected for gold and even manufactured condoms.

But the Congress Party’s hold on political power loosened over the years, and, under a program accelerated by the previous government, officials in New Delhi sold majority stakes in a variety of companies.

The funds raised were expected to finance a social-equity agenda by helping build roads, power projects, schools and hospitals, and by providing jobs in poor rural regions.

“The reforms process is much larger than just the sale of stake in a few companies,” said Mahesh Vyas, chief executive of the Center for Monitoring the Indian Economy in Mumbai. “We are moving in the general direction of economic reforms.”

But the larger process of economic reallocation has been mired in politics. For instance, the government has been unable to move forward on the politically sensitive revision of labor laws. Currently, hiring or firing employees by companies is still dictated by convoluted rules.

Similarly, politically explosive proposals like selling stakes in Indian banks have been repeatedly discussed and shelved. And while global retailers like Wal-Mart or Tesco knock on India’s doors, the government has chosen not to allow direct foreign investment in retailing.

Even in sectors where reform is relatively uncontroversial, like infrastructure and finance, the pace has been slow. About the only recent change of any significance has been the recent privatization of India’s busiest airports in Mumbai and New Delhi.

Still, some investors say that the country’s fundamental growth factors are in place. “We remain positive and unambiguous about India,” Mr. Narayanan said.

But underlying the current economic growth rates, Mr. Ahya, the economist, said, the slowing of change could lead investors, to “go through some pain.”

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