July 2, 2014

INDIA: India's New Prime Minister Modi To Push State Firms (Government Operated) To Become Profitable or Privatize

The Wall Street Journal
written by Prasanta Sahu
Wednesday June 4, 2014

India’s new prime minister Narendra Modi plans to do more with state-controlled companies than use them as piggy banks to break into whenever the government needs a revenue boost. He plans to sell off the hopeless firms and try to fix the struggling few with potential.

In one of its first interactions with the finance ministry, the prime minister’s office said the government plans to privatize state-run firms have no hope of becoming profitable and professionally-run as public-sector companies, a senior finance ministry official told The Wall Street Journal. Meanwhile, Mr. Modi’s team is ready to invest in the state-controlled companies that have a chance of getting back on their feet, the official said.

“The government will be making some kind of distinction as to which are the sectors (in which) the state-run companies should stay,” and which ones the government should exit, the finance ministry official.

The last government tended to only pay attention to public-sector units when it needed money and otherwise usually failed to privatize or revitalize loss-making companies during its ten years in power.

“In the previous government, most of the divestments were lined up at the end of the year,” as the government tried to deal with its regular revenue shortfall, said Jagannadham Thunuguntla, head of research at SMC Global Securities Ltd.

As chief minister of the state of Gujarat for 13 years, Mr. Modi used professional managers and even state capital to create success stories out of many firms controlled by the western state.

During its last time running the country, Mr. Modi’s Bharatiya Janata Party showed that it would not shy away from privatization. It offloaded majority stakes in state-owned companies to private companies such as its sale of controlling stakes in Bharat Aluminium Co. Ltd. and Hindustan Zinc Ltd.500188.BY +0.78% to UK-based Vedanta Resources PLC.VED.LN +0.27%

This time in power, the BJP is likely to start with minority stake sales in companies such as Coal India 533278.BY +0.90%, Rashtriya Ispat Nigam Ltd., Tehri Hydro Development Ltd. and defense firm Hindustan Aeronautics Ltd., the official said.

While the previous government attempted similar sales, it was repeatedly blocked by opposition from the companies and bureaucrats not willing to give up control. Mr. Modi– thanks in part to his party’s majority control of Parliament–is expected to be better able to force these sales through.

The sick firms which could be sold off include Scooters India Ltd., Tyre Corporation of India Ltd., HMT Bearings Ltd., HMT Ltd. and Richardson & Cruddas Ltd., said the finance ministry official.

As the stock market has been rallying on optimism that Mr. Modi will be able to revive the Indian economy, there should be more than enough investor demand to soak up stakes in any state-run companies he wants to put on the market.

“The more conducive market environment is also positive for valuation purposes,” said Radhika Rao, an economist with Singapore-based DBS Bank.

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