The 63-year-old premier has made a decisive start by naming a streamlined cabinet, approving a slew of infrastructure projects and embarking on what promises to be a whirlwind first year of trade diplomacy.
But his government has been plagued too by the economic ills that brought down its predecessor: weak growth and high inflation caused by spending too much and investing too little.
Despite the market reforms of 1991 that brought down the curtain on decades of socialist isolation, tracts of Asia’s third-largest economy remain off limits to outside investors.
Modi wants to open up industries like defence, but selling controlling stakes in bloated state enterprises is out of the question. They are not competitive and any job cuts ordered by a foreign owner would cause an outcry.
Instead, he will whittle down state stakes in firms that have already been partly sold, likeSteel Authority of India Ltd , without surrendering overall control, said the official and other sources familiar with the plans.
Indian stocks have enjoyed a Modi boom, rallying 23 percent this year. Listed state firms have outperformed on hopes that wider ownership would discipline managers and that their bottom line would benefit from a loosening of price controls.
Leading the pack is Indian OilBSE 1.94 %, which has gained 62 percent in 2014. ONGCBSE 0.88 %, another oil firm, is up 46 percent. Coal IndiaBSE -0.57 % has risen 36 percent.
TAX, SUBSIDY REFORMS
In setting an ambitious asset-sale target, the government will face inevitable scepticism from investors who are used to seeing its predecessors miss their privatisation goals.
The Modi government will also have limited scope to put its stamp on this first budget, which has been delayed by the election and will be delivered three months into the budget year to March 2015. The deficit is already near half the annual goal inherited from the last government: 4.1 percent of GDP.
Finance Minister Arun Jaitley is expected to roll out other revenue measures in addition to the asset sales, including a General Sales Tax that would unite India’s 29 federal states into a common market.
The measure would make it easier to do business and, over time, broaden the tiny tax base, which last year was a mere 8.9 percent of India’s $1.9 trillion gross domestic product – about a quarter of the average for the OECD club of developed nations.
Some of the “bitter medicine” that Modi has warned Indians to expect would come, the senior government official said, in the form of reductions to subsidies on fuel, fertiliser and food that cost 2.3 percent of GDP.
Jaitley in turn has warned against “mindless populism”, heeding the advice of officials at the Reserve Bank of India (RBI) who have warned him that fiscal laxity would complicate their task of curbing inflation, now in the high single digits.
Fiscal consolidation, predictable taxes and low inflation are key anchors that India needs for economic and financial stability, Governor Raghuram Rajan wrote in the RBI’s recent financial stability report, underlining that message.
The government has signalled its willingness to trim its stakes in listed companies by backing a regulatory move to gradually increase the minimum free-float requirement for stocks included in India’s benchmark indexes, to 25 percent from 10 percent now. State-controlled firms currently have a 16 percent weighting in the indexes.
“It is the right time to sell stakes in public sector companies as the stock market is booming,” said the official, who requested anonymity as the budget process is confidential.
Jaitley plans to front-load share sales, with a 5 percent stake in Steel Authority of India, worth $340 million, on the docket for late July, say sources familiar with the deal.
That is likely to be followed by a 10 percent stake in Coal India, the world’s largest coal miner that is now 90 percent state owned. A deal would, based on current market pricing, be worth around $4 billion.
A senior oil ministry official said some of India’s leading oil companies were contenders for the share-sale programme, but did not name any names. A final decision would be taken by the finance ministry.
Deutsche Bank Securities forecasts proceeds of 600-800 billion rupees ($10-$13 billion) from asset sales in this fiscal year. That would enable the government to avoid borrowing more even if it raises its deficit target to 4.3-4.4 percent of GDP.