The government faces financial risks if demand for LIC IPOs declines

India’s decision to proceed with a significantly lower objective for its lauded life insurer’s initial public offering, as nervous investors continue to withdraw funds from the South Asian country, is adding to the dangers threatening the country’s financial deficit target.

The board of the Life Insurance Corporation of India approved the sale of a 3.5 percent share for 210 billion rupees ($2.8 billion) on Saturday, significantly less than the 500 billion rupees predicted before Russia attacked Ukraine. According to persons familiar with the situation, anchor investors were hesitant to commit as the war undermined demand for shares, with foreign funds withdrawing more than $16 billion from Indian stocks this year.

Because crude oil prices, one of India’s main imports, have risen, Prime Minister Narendra Modi needs inflows. Costs have escalated to the point where the administration can no longer charge fuel taxes, which have been critical in bridging the budget gap. Maintaining high pump prices risks fueling inflation and potential social unrest in surrounding countries as the area recovers from the virus.

“I am indebted to the people of India,” says the author “In a recent interview in Washington, Finance Minister Nirmala Sitharaman outlined some of her government’s social measures. “It’s not going to be simple unless the people stand up and say, ‘OK, we have to survive this.”

Officials from the state-run LIC informed reporters that the company is seeking a valuation of 6 trillion rupees and that the offer could open in the first week of May, citing laws against communicating with the media. They noted that, pending regulatory approvals, details such as the offering price and timing will be available around Wednesday.

Targets that aren’t hitting

After monetization plans, including LIC’s listing, were delayed, the finance ministry missed Modi’s big asset-sale objective of 1.75 trillion rupees for the previous financial year by a large margin. For the current financial year, the target is 650 billion rupees, which will help keep the entire budget deficit at 6.4 percent of GDP.

“Given that the IPO size is now considerably smaller, meeting the government’s deficit targets will be challenging.” “WealthMills Securities Pvt., situated in Mumbai, has a strategist named Kranthi Bathini. “The conflict in Ukraine has impacted the mentality of foreign investors, who are now hesitant to invest.” The LIC IPO has previously been postponed, first owing to Covid, and now due to the conflict. It will be impossible for the government to postpone it any longer.”

The government’s primary difficulty is that, although reducing the amount of the LIC IPO, it will still be the largest in India, exceeding the offering of One 97 Communications Ltd. in November, which raised approximately 183 billion rupees. In the current economic climate, finding clients for such a substantial offering could be difficult.

In 2022, India’s benchmark index, which was one of the strongest performers in the globe last year, has lost 1.8 percent. The country’s inflation rate has exceeded the central bank’s tolerance band for three months in a row, and swap markets are pricing in the region’s most aggressive monetary tightening. The rupee is also on its way to a new low.

The finance minister, on the other hand, is optimistic that the deal will be completed. The Indian markets are in a “good mood,” and the LIC share sale should move smoothly, Sitharaman said last week, prior to the board’s approval.