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Govt's stake sales delay may hamper reforms

India's decision to defer the privatisation of two large oil companies will hamper the country's reforms process and may lead to a downgrading of the country's economic outlook, a leading think-tank said on Friday.

Last week the government put off a much awaited decision on the sell-off in refiners Hindustan Petroleum Corp and Bharat Petroleum Corp by three months.

Officials in the divestment ministry said there was strong opposition from the petroleum ministry and other ministries to the strategic sale of HPCL and BPCL.

"The government's decision of shelving the divestment process of public sector (state-run) oil companies would hamper the reforms process," IEG said in its monthly economic report.

India undertook economic reforms way back in 1991 but the process has lost much of its momentum because of opposition from political parties, trade unions and bureaucratic hurdles.

"Whether they do it or not but the psychological impact of the decision will be there," said B B Bhattacharya, director of the Institute of Economic Growth, referring to any possible downgrade in India's sovereign rating outlook which is already at junk bond levels.

"The fact that policies are dictated by politics rather than economics will weigh," added Bhattacharya, who wrote the leading government-backed economic think-tank's monthly report.

He said the government would be unable to meet its target of raising Rs 12,000 crore (Rs 120 billion) through stake sales in the year to March 2003. The government has also said it would fall short of the target.

The IEG report said a bailout package announced for the country's largest mutual fund manager, Unit Trust of India, and similar plans for some other financial institutions would result in a higher fiscal deficit, above the targeted level of 5.3 per cent of GDP.

Last month, the government announced a comprehensive bailout package for UTI, covering a massive shortfall in its ability to repay investors in assured return schemes.

UTI, which manages half of the Indian mutual fund industry's assets of $20 billion, stunned investors last year when it froze redemptions from its flagship fund, US-64, for the rest of 2001. It also faces liquidity problems in several assured return funds that were hit by bad debt and plunging stock markets.

The report also said an expected increase in foreign exchange reserves may keep short-term interest rates at their current low levels.

"But the expected increase in credit demand and the inflation rate would restrict any fall in the interest rates in the economy," said the IEG report.

India's key bank rate was last cut in October 2001 to a three-decade low of 6.5 per cent.

But real interest rates -- nominal rates minus inflation -- for companies are upwards of six per cent, which economists say are still too high to boost investment.

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