India lifts taxes, pushes privatization

Survivors carry goods through a collapsed shopping mall in Bhuj

NEW DELHI, India -- India will raise taxes and undertake government sell-offs to pay for rebuilding earthquake-ravaged Gujarat state.

The cabinet, which met on Thursday to review the situation in Gujarat, decided to impose a 2 percent surcharge on income and corporate taxes.

The move is expected to raise $275 million (13 billion rupees) to enable the cash-strapped government to foot the massive reconstruction bill.

To cushion the impact of the tax burden, the government announced major privatization initiatives, saying it would sell 25 percent of its 52.97 percent stake in the state-owned monopoly Videsh Sanchar Nigam Ltd, an overseas telephone service provider, to a strategic partner and 1.9. percent to employees.

It will keep a 26 percent stake in the company.

"The tax surcharge proposal is not likely to dampen (market) sentiment, since people were expecting it," said S.N. Raja, chief investment officer, Kotak Mahindra Asset Management Co.

"This is very positive since the government has lowered its stake to 26 percent, the declared minimum, in one stroke, rather than in phases," Raja said.

"It inspires confidence among investors and people will now start speculating about the next privatization candidate."

The government also said it would accept a strategic partner for state-owned computer software and hardware maintenance firm CMC Ltd and sharply reduce its holding to 26 percent from 83 percent.

The government also said that it would invite price bids for the sale of a 51 percent stake in Bharat Aluminium Co (Balco) and expects to complete the sale process within the current fiscal year.

Concerns on economy

Indian financial markets have mostly shrugged off the impact of the earthquake as major industries in the state escaped unscathed, though some economists and analysts have said it would hamper economic growth.

Even before the quake, independent economic think-tanks had lowered their growth forecasts for fiscal 2001 ending in March, largely due to an industrial slowdown.

Analysts say the impact of the quake may widen the country's gaping fiscal deficit, which jumped to 5.6 percent of gross domestic product in fiscal 2000 from 4.5 percent in the previous year.

Cabinet spokesman and Information technology minister Pramod Mahajan said the government had decided to introduce an ordinance to implement its decision ahead of the federal budget due on February 28.

"The urgency with which the additional tax was introduced shows the seriousness of the calamity," said Arun Kejriwal, director at KRIS, a Mumbai-based independent research firm.

The earthquake has killed an estimated 30,000 people.

Focus on budget

The quake's reverberations also jolted the country's flagging economy and the government asked the World Bank and the Asian Development Bank for $1.5 billion in assistance to rebuild the state of 41.3 million people.

The state government has estimated that the total cost of the earthquake would be $2.15 billion.

Attention now is focused on the budget, which finance minister Yashwant Sinha will unveil in parliament in the shadow of prime minister Atal Behari Vajpayee's comments that the people should be ready for harsh measures.

"In all probability, the provisions in the budget for the rehabilitation of Gujarat will be huge," Kejriwal said.

"This will set back infrastructure expenditures planned by the government."

Reuters contributed to this report.

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