India plans to borrow as much as 500 billion rupees ($9.5 billion) using land and shares as collateral in an effort to narrow a budget deficit, two government officials with direct knowledge of the matter said.
The South Asian nation will set up a fund manager by Jan. 15 that will pledge stocks it holds in non-state companies including ITC Ltd. (ITC), Axis Bank Ltd. (AXSB) and Larsen & Toubro Ltd. (LT), the officials said declining to be identified before a public announcement. The company will use the proceeds to buy the government’s stakes in state-run firms, the officials said.
Finance Minister Pranab Mukherjee is exploring options to bridge a widening budget deficit after raising just 3 percent of a 400 billion rupee asset-sale target for the year ending March 31. The decision may help the government utilize assets the officials said are valued at 1 trillion rupees and narrow the gap that’s fanned inflation and driven the rupee to a record low.
“The government is doing this to raise funds as the market isn’t conducive for asset sales, while they are hard pressed to meet deficit targets,” said Alex Mathews, head of research at Geojit BNP Paribas Financial Services Ltd.
Share Slump
A 23 percent drop in the benchmark Sensitive Index (SENSEX) this year prompted Mukherjee to delay selling shares of Oil & Natural Gas Corp. (ONGC), Steel Authority of India Ltd. (SAIL) and Indian Oil Corp. (IOCL) He has raised 11.44 billion rupees from asset sales this fiscal year compared with 227.63 billion rupees in the 12 months through March, 2011, according to data provided by the Department of Disinvestment.
Mukherjee said in October that it would be a “challenge” to meet his aim of narrowing the budget gap to a four-year low of 4.6 percent of gross domestic product as slowing growth reduce tax collections. Moody’s Investors Service yesterday said the deficit will widen to 7.6 percent this year.
The yield on 10-year government bonds fell as much as 2 basis points at 3:26 p.m. in Mumbai, while the Sensex reversed losses and gained 0.8 percent. The rupee pared losses and traded at 52.66 a dollar, 0.3 percent weaker than yesterday’s close.
“There’s no doubt that this surprise move by India will help in meeting the deficit target and have a benign impact on sentiments,” said Gopal Agrawal, chief investment officer at a local unit of South Korea’s Mirae Asset Financial Group in Mumbai. “Everybody will be keenly watching how quickly and effectively the government works out the modalities.”
Transfer Assets
The new holding company will pledge the stakes and real- estate properties transferred to it from the Specified Undertaking of the Unit Trust of India, to state-run banks, the officials said. Specified Undertaking, formed in 2003, will be wound up within three weeks, the officials said.
Moody’s said yesterday that India’s public debt at 70 percent of gross domestic product is a constraint on the nation’s ratings, which are at the lowest investment grade. India’s $1.7 trillion economy expanded 6.9 percent in the three months through September, the slowest pace in more than two years.
The Reserve Bank of India has raised interest rates 13 times since the start of 2010 to lower the inflation rate that has stayed above 9 percent all of this year. In October Governor Duvvuri Subbarao has partly blamed the fiscal deficit for contributing to inflation.
To contact the reporter on this story: Anto Antony in New Delhi at aantony1@bloomberg.net
To contact the editor responsible for this story: Chitra Somayaji at csomayaji@bloomberg.net
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