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Last Updated: Thursday, 27 May, 2004, 11:54 GMT 12:54 UK
India goes cool on privatisation
Sonia Gandhi and Manmohan Singh
Mrs Gandhi heads the alliance; Mr Singh is the prime minister
India's new government has scrapped key elements of its predecessor's privatisation programme.

The communist-backed coalition, led by the Congress party, said in a policy statement that it would not sell off profitable state-run firms.

Privatisations of loss-making firms would be decided "case-by-case".

Last week, Indian share prices posted a near-record slump amid fears that the new coalition would reverse the BJP government's economic reforms.

The prospect of slower progress on reform has also spooked foreign investors, who have sold some $800m worth of Indian shares so far this month.

Privatising some of India's profitable state enterprises in the energy and heavy engineering industries formed a central plank of the BJP government's economic agenda.

Fiscal pressure

The new government's policy document pledged to raise spending on education to 6% of gross domestic product, and to encourage more foreign investment in the oil and energy sector.

How will the increased spending on education be funded?
Kishlaya Pathak, Standard Chartered
It also set a target for annual growth of between 7 and 8%.

Economists said the new coalition's economic blueprint could put India's already overstretched public finances under added pressure.

"How will the increased spending on education be funded?" said Kishlaya Pathak, economist at Standard Chartered Bank.

"This is crucial because our fiscal situation is a matter of concern."

India's central government deficit stands at about 5% of gross domestic product, prompting warnings that the country must do more to balance its books.

There are fears that without the proceeds of further privatisations, or deep public spending cuts, the budget black hole could widen sharply.

Cutting public spending - much of it in the form of politically sensitive subsidies and non-negotiable interest payments on public debt - has proved an unpalatable option for most Indian governments.

Markets calm

Bombay's leading share index closed half a percentage point lower on Thursday shortly before the new policy agenda was unveiled, but analysts said the market would take the news in its stride when it reopened on Friday.

"The market has already reacted to the likely slowdown in reforms," said K K Mittal, fund manager at Escorts Mutual Fund in New Delhi.

The economic policy agenda was thrashed out in talks between the Congress party, the senior partner in the new coalition, and its allies, which include two communist parties.

The new coalition, entitled the United Progressive Alliance, won a surprise election victory two weeks ago over the BJP government.

Led by Manmohan Singh, a former Indian finance minister, the United Progressive Alliance won the contest thanks to the support of poor rural voters.

They felt the BJP's economic reforms had enriched an urban elite without delivering tangible improvements to the broad mass of the Indian people.

Analysts said the acid test for the new government's economic policies would come later this year, when it unveils detailed tax and spending plans in its first budget.

But the appointment of Mr Singh - the architect of a highly successful economic overhaul during the mid-1990s - as prime minister has helped soothe investors' nerves.

Mr Singh was named prime minister last week after Congress party leader, Sonia Gandhi, declined to take on the role.

India votes 2004: Full in-depth coverage here

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