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India's divestment plans hostage to politics

Surojit Gupta in New Delhi

Differences within India's coalition government over the sale of equity of two large state-run refiners look like stalling the privatisation drive, which had shown signs of leaping ahead earlier this year.

Divestment ministry officials, who did not wish to be named, said on Friday there was "strong opposition" from the petroleum ministry to the proposed strategic sale of Hindustan Petroleum Corp and Bharat Petroleum Corp.

BPCL and HPCL are two of the four refiners, which dominate India's oil products market and the two firms each hold about 20 per cent of the $15 billion domestic retail oil market.

The latest spat comes despite the government's decision in February to sell stakes in the two refiners three months after controls were lifted in the oil and gas sector.

That deadline has lapsed and the Cabinet panel on privatisation is now due to discuss the issue on September 7.

"I don't think the decision in the meeting will be in our favour. In fact we expect it to be against us," said a senior divestment ministry official.

SLOW PROGRESS

Divestment Minister Arun Shourie declined to comment on the possible outcome of the meeting, but told Reuters "if the HPCL and BPCL issue is not decided we will be left giving an explanation." He, however, did not elaborate.

India's more than decade-long privatisation programme has made painfully slow progress and has often been derailed by opposition from political parties, labour and the bureaucracy.

The government plans to raise Rs 12,000 crore (Rs120 billion) through sales in state firms in the financial year ending next March and has made almost Rs 5,000 crore (Rs 50 billion) so far.

India has about 232 state companies, almost half losing money, producing everything from condoms to steel with a collective net worth of about $33 billion.

Under Shourie, a former World Bank economist and newspaper editor, the divestment ministry launched a determined privatisation drive earlier this year, notching up a string of successful sales.

These included controlling stakes in telecoms giant Videsh Sanchar Nigam Ltd, oil marketing company IBP Co and carmaker Maruti Udyog Limited.

The government felt assured the privatisation process had at last gained acceptance among political parties when most of the sales this year failed to draw any strong criticism.

NOT SURPRISED

But analysts are not surprised by the latest turn of events.

"As elections draw near, we may once again see the stalling of the whole process," said Confederation of Indian Industry economist T K Bhaumik. "There is political resistance."

At least 10 states are expected to face elections by the end of 2003 and national elections are due in 2004. Analysts expect the government to soft-peddle on tough economic reforms such as privatisation and labour-law reforms in the meantime.

"The slowing down of the process is not a good sign for the capital market particularly at a time when public sector undertakings stocks were doing very well. The government should take into account market sentiment," Bhaumik said.

Some analysts hope the issue will be resolved soon, saying the government has no choice but to pursue privatisation aggressively because of its fiscal problems.

"It is a matter of compulsion and not choice because of the fiscal problems confronting the government," said Sanjeet Singh, analyst with ICICI Securities and Finance.

India aims to rein in the deficit at 5.3 per cent of GDP in 2002-03 (April-March) but analysts say the country's worst drought in 15 years could widen the fiscal gap as the government will be forced to spend on drought relief schemes.

The International Monetary Fund has expressed concern about India's large fiscal deficit and debt and has urged the government to implement reforms to achieve economic goals.

Global rating agencies say India's yawning fiscal deficit is a huge obstacle to raising its sovereign rating, which is at junk bond levels.

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