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Monday, 3 September, 2001, 13:47 GMT 14:47 UK
India privatisation plans near 'collapse'
Indian parliament buildings
India's commitment to privatisation is now in question
India's ambitious plans to raise more money through privatisation look set to be close to collapse.

Singapore Airlines' decision to pull out of a joint bid with Tata group to take over Air India is seen as a severe blow to the Indian Government.

The Delhi government had hoped to rid itself of loss-making state-owned industries, in an attempt to make the country's industrial base more efficient and capable of competing globally.

With 27 state-run firms slated for privatisation in the past year, the government's plans were ambitious, but so far none of these companies have actually been sold.

Political opposition to privatisation, bureaucracy and the global slowdown - which makes companies less willing to part with their cash - are all thought to have conspired against the privatisation process.

Willing to privatise?

The sale of the Air India stake was seen as a litmus test of the government's ability and willingness to privatise.

"It was hoping to raise $2.5bn in this process and...give confidence to its industrial base and this Air India decision by Singapore Airlines has been little short of a disaster," the BBC's Adam Mynott in Delhi told the World Business Report.

Air India should in theory be an attractive buy and in the past, Lufthansa, Delta and Air France have all been touted as potential buyers.

Air  India plane
Air India uses few of the routes it has at its disposal

As a national carrier, it has the rights to about 90 routes, but with only 27 aircraft, it doesn't take full advantage of them.

"On the face of it, it is an attractive proposition, [however] it carries six years of losses and a debt burden of $70m," Adam Mynott added.

Telecoms delay

Air India isn't the only high-profile privatisation to have run into problems.

The government also hopes to profit from the sale of VSNL, the state-run telecoms giant.

The government was to cut its 52.9% stake to 26% by selling a 25% controlling stake to a strategic partner.

VSNL is considered one of the government's 'crown jewels', but the firm has seen its shares slide amid uncertainty about private sector competition.

The telecoms company gets about 90% of its revenues from its overseas calls business. Competition in this sector could eat a large hole in its revenues.

Until these rules of engagement are made clear, it is difficult to judge the true value of the company, analysts have said.

Many potential foreign investors may view the Indian market with suspicion, given an ongoing dispute between an Enron subsidiary and one of India's states over a $2.9bn power project that could be India's largest foreign investment to date.

Pressure for reform

Pressure is growing for India to reform.

Ten years since India introduced ground-breaking liberalisation measures after a balance of payments crisis, there is now fresh pressure for reforms.

Many say the failure to implement reform reflects Prime Minister Vajpayee's failure to force the 19-party coalition in power to push through change.

India's privatisation minister Arun Shourie has voiced his concerns about the country's finances and the slow pace of reform.

But he has stressed that the groundwork for privatisation is there, with sales expected to take place over the next five to 10 years.

However, policy experts say that unless growth picks up, India will face a further deterioration in its public finances.

US credit rating agency Standard and Poor's cited the country's high level of domestic debt as one reason for the downgrade of its credit rating.

The BBC's Adam Mynott
"This Air India decision...has been little short of a disaster"
See also:

03 Sep 01 | Business
Tata still eyeing Air India
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