Waning demand for LIC public offering may deepen India's fiscal challenges

Foreign funds have withdrawn more than $16bn from Indian stocks this year

An advertisement for the Life Insurance Corporation of India, at a metro station in Mumbai. The insurer on Saturday approved selling a 3.5 per cent stake for about 210 billion rupees ($2.8bn). Reuters

India’s decision to go ahead with a much-reduced target for its vaunted life insurer’s initial public offering, as skittish investors continue to pull money from the South Asian nation, is adding to the risks threatening the nation’s fiscal deficit target.

Life Insurance Corporation of India’s board on Saturday approved selling a 3.5 per cent stake for about 210 billion rupees ($2.8bn), far lower than the 500bn rupees estimated before Russia's war in Ukraine began. Anchor investors had been reluctant to commit as the war eroded demand for equities, sources said, with foreign funds withdrawing more than $16bn from Indian stocks this year.

Prime Minister Narendra Modi needs inflows because prices of crude oil — one of India’s largest imports — have surged. Costs have risen so much that it’s becoming unsustainable for the administration to keep charging taxes on fuel that have been key to bridging a budget deficit.

Leaving pump prices high risks stoking inflation and potential social unrest, which is already roiling neighbouring nations as the region emerges from the pandemic.

“I am absolutely grateful to the people of India,” Finance Minister Nirmala Sitharaman said in an interview in Washington last week, while outlining some of her government’s welfare programmes. “Unless the people are going to stand up and say ‘right, we have to survive this,’ it’s not going to be easy.”

State-run LIC is seeking a 6 trillion rupee valuation and could open the offer in the first week of May, officials told reporters. Details such as issue price and dates will be known around Wednesday, pending regulatory clearances, they added.

The finance ministry had missed Mr Modi’s huge asset-sale target of 1.75tn rupees for the previous financial year by a wide margin after monetisation plans, including LIC’s listing, got delayed. The goal is 650bn rupees for the current year, which will feed into containing the overall budget deficit at 6.4 per cent of gross domestic product.

“It will be difficult for the government to meet its deficit targets given that the IPO size is now much smaller,” said Kranthi Bathini, a strategist at Mumbai-based WealthMills Securities. “The war in Ukraine has completely changed the mood of foreign investors who are now skittish to invest. The LIC IPO has already been delayed, first due to Covid, then this war. It’s difficult for the government to delay it further.”

The government’s main challenge is that while it has pared down the size of LIC's listing, the sale will still be India’s biggest, surpassing the IPO of One 97 Communications, which raised about 183bn rupees in November. Finding buyers for such a large offering could be a challenge in the current economic environment.

India’s benchmark index, one of the world’s best performers last year, has lost 1.8 per cent in 2022. The nation’s inflation rate has breached the central bank’s tolerance band for three straight months, and swap markets are pricing in the most aggressive monetary tightening among major central banks in the region. The rupee is approaching a fresh record low too.