Thursday November 5, 09:20 PM

Govt pushes stake sales, tax reforms to cut deficit

By C.J. Kuncheria and Rajkumar Ray

NEW DELHI (Reuters) - The government on Thursday mandated more sales of shares by state-run firms and changed the rules on how it can use the proceeds, as it seeks to boost revenues and rein in a widening budget deficit.

The government also said it was looking at tax changes as it tried to cut a budget shortfall forecast to hit a 16-year of 6.8 percent of gross domestic product in 2009/10 (April/March).

Analysts said there was a risk a rush of public offerings could drain cash from the market, and raising funds by selling assets was not a durable solution to the fiscal problems.

The government said all profitable, listed state-run firms must have at least 10 percent of their shares in public hands, and unlisted firms that had a positive net worth, no accumulated losses and a net profit over the past three years should list.

The news lifted shares from their day's low to close about 1 percent higher.

"Market sentiment should be positive. Foreign institutional investors are interested in these stocks," said R.K. Gupta, managing director of Taurus Mutual Fund.

"The only worry is that liquidity might be sucked from the secondary market to the primary market. The appetite depends on the pricing. It should not be an aggressive pricing, there should be a 10-15 percent discount."

The government said the funds from the listings would be spent on social schemes for three years. Currently, proceeds are put in a National Investment Fund and only its dividends are used for funding social security schemes.

"In view of the tight fiscal situation and the need to fund social security programmes, special dispensation is being made for a three-year period: 2009 to 2012," Home Minister Palaniappan Chidambaram said.

Since August, the government has raised $1.8 billion by selling shares in NHPC and Oil India, and last month it approved share sales of NTPC, Satluj Jal Vidyut Nigam and Rural Electrification Corp.

Ministers and officials have also named firms such as Steel Authority (SAIL.NS : 191.25 -0.85) of India, NMDC, Shipping Corp and Coal India as potential candidates for stake sales.

REVIVING REFORMS

The government also said it was debating the need for changes in tax laws including on saving schemes, capital gains for non-residents and tax pacts with other nations, as part of reforms to boost revenues.

After the Congress-led coalition was re-elected with a stronger majority, the government pledged speedy reforms and stake sales to lower the budget deficit and lift growth in Asia's third-largest economy.

But they took a back seat as the policy focus shifted to taming food prices and nurturing an economic recovery after the weakest monsoon in nearly 40 years.

On Thursday, data showed food inflation remained firm at 13.39 percent for the 12 months to Oct 24.

D.K. Joshi, principal economist at rating agency Crisil, said the tax reforms would take time to implement but stake sales would raise funds from this fiscal year.

"It will temporarily help because the situation is very tight, but it is not a solution to the fiscal problem," Joshi said.

The government has said it will maintain fiscal stimulus until the recovery is secure. The high deficit has seen it forecast record gross market borrowing of 4.51 trillion rupees ($96 billion) in 2009/10.

($1=47 rupees)

(Editing by John Mair/Victoria Main)

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