Business Today

Narendra Modi govt steps up economic reforms with disinvestment post oil reforms

"In the first year, when people expect lot of reforms and there is lot of popular support behind the reform process, it is more easily possible," FM Arun Jaitley said.

Manoj Kumar and Krishna N Das    New Delhi     Last Updated: October 21, 2014  | 10:54 IST
Prime Minister Narendra Modi
Prime Minister Narendra Modi (Photo: Reuters)

The government promised on Monday to open up the coal industry to private players and moved closer to selling a stake in state-owned Oil and Natural Gas Corp (ONGC), as Prime Minister Narendra Modi picked up the pace on economic reform days after relaxing fuel price controls.

Using an executive order, the Cabinet agreed to allow private companies to mine and sell coal at an unspecified future date, Finance Minister Arun Jaitley said. That sets the stage for the biggest liberalisation of the domestic industry in more than 40 years.

The succes of Bharatiya Janata Party (BJP) in the Maharashtra and Haryana Assembly elections last week capped several days of action on the economic front and has given PM Modi more room to cut through a thicket of regulations and state controls he says holds back Asia's third-largest economy.

"Reform is the art of the possible," Jaitley earlier told TV network ET Now, hinting that more was to come. "In the first year, when people expect lot of reforms and there is lot of popular support behind the reform process, it is more easily possible," the Finance Minister said.

The Prime Minister was elected in May on promises he would create jobs and rejuvenate the domestic economy, but investors and economists were disappointed by his first budget and a lack of early progress on fixing structural economic problems.

In the last week, Modi has gone some way towards quelling those concerns, putting in a reform-minded team at the Finance Ministry that includes prominent US-based economist Arvind Subramanian to help formulate the budget and policy as the Chief Economic Adviser (CEA).

The economy is showing some signs of revival and inflation has plummeted, aided largely by a drop in global oil prices.

On Saturday, the Cabinet deregulated diesel pricing and raised the price the government pays producers of natural gas by a third to US $5.61 per million British thermal units (mmBtu).

Modi also began an overhaul of creaky labour rules, cutting the power of labour inspectors and slashing the red tape for small companies that makes the country one of the toughest places in the world to do business.

The domestic stock market, bonds and rupee currency all performed strongly on Monday in response to the new economic policies and the victories by the BJP in Maharashtra and Haryana.

UNDOING INDIRA

Former Prime Minister Indira Gandhi nationalised the coal industry in 1972, creating one of the world's largest mining companies, state-owned Coal India (CIL).

The system was intended to provide steady supplies of fuel and help industrialisation, but CIL is now deeply dysfunctional. Most of the country's electricity is generated by coal, but long power cuts are the norm in major parts of the nation. Despite having the world's fifth-largest coal reserves, India is the world's third largest importer of the resource.

As of last Wednesday, 64 out of 103 power stations had coal for less than a week, mainly due to a shortfall in supplies from Coal India, according to the power ministry.

Private companies are already allowed to mine supplies for their own power plants and other industrial projects, and CIL hires some private firms to operate mines. But until now private companies have not been permitted to sell coal.

"This would lead to an optimum utilization of the national resource," the Finance Minister told reporters, adding that there was no move to fully privatise CIL.

However, the government does plan to sell 10 per cent of its majority holding in the inefficient behemoth, which is plagued by corruption. Unions oppose the sale.

The Supreme Court last month scrapped the licences for 214 coal fields that supplied power, cement and other companies over allegations of graft. Monday's decision to liberalise the coal industry was tacked onto an executive order to allow the auction of the scrapped coal fields.

The executive order, known as an ordinance, takes immediate effect but must be approved by parliament within a few months. Modi's government will have to win cross-party support for its plan, since it does not have a majority in Rajya Sabha.

SELLING STAKES TO PAY THE BILLS

The reforms in diesel and gas pricing make ONGC, the public sector oil producer, more attractive to investors by reducing the hefty discount on crude oil sales that it must give to fuel retailers.

On Monday, the administration's top privatisation official met bankers in Mumbai, to discuss the sale of a 5 per cent stake ONGC, a top Finance Ministry official said.

Shares in ONGC, the second-largest listed firm in India by market value, gained 5.6 per cent on Monday. The government has a stake of 68.94 per cent in the company, which has shares of in oil and gas fields across the globe.

The Finance Ministry hopes to raise up to $3 billion from the ONGC sale, almost a quarter of its target for asset sales for the current financial year.

Citigroup and HSBC are among five banks chosen to manage the planned sale of a stake in ONGC, sources told Reuters in August.

The ONGC share sale was likely to be held in the first half of November, two people directly involved with the transaction said on Monday. The pre-sale marketing roadshows for the offering are expected to be completed by the first week of the month, they said.

A top finance ministry official, who spoke on conditions of anonymity because of the sensitivity of the topic, also told reporters the government wanted to pass a bill in parliament's next session to free up foreign investment in the insurance industry.

Jaitley, in his maiden budget in July, set a target of Rs 58,425 crore to be raised by the sale of shares in public sector undertakings (PSUs) and minority stakes in private companies. Another major planned sale is of a 10 per cent stake in giant CIL.

The income is key to meeting a challenging goal of a fiscal deficit of 4.1 per cent of gross domestic product for the year ending March 31, 2015. Tax revenue has been less than budgeted this year, and government finances have been stung by a large bill for tax rebates.

One restraint on PM Modi's government is his small bench of ministers, many holding multiple portfolios. Jaitley, for example, doubles as defence minister. The Information and Broadcasting Minister Prakash Javadekar, who also acts as environment minister, last week suggested that an expansion of the cabinet was imminent.

(Reuters)

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