Waning demand for LIC IPO highlights fiscal challenges for PM Modi

Life Insurance Corporation of India's board on Saturday approved selling a 3.5% stake for about Rs 210 billion ($2.8 billion), far lower than the Rs 500 billion estimated before Russia invaded Ukraine

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% stake for about 210 billion rupees ($2.8 billion), far lower than the 500 billion rupees estimated before Russia invaded Ukraine. Anchor investors had been reluctant to commit as the war eroded demand for equities, according to people with knowledge of the matter, with foreign funds withdrawing more than $16 billion from Indian stocks this year.

Prime Minister Narendra Modi needs inflows because crude oil prices -- 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 that is already roiling neighboring 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 programs. “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, asking not to be identified, citing rules on speaking with the media. Details such as issue price and dates will be known around Wednesday, pending regulatory clearances, they added.

Missing Targets

The finance ministry had missed Modi’s huge asset-sale target of 1.75 trillion rupees for the previous financial year by a wide margin after monetization plans, including LIC’s listing, got delayed. The goal is 650 billion rupees for the current year, which will feed into containing the overall budget deficit at 6.4% 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 Pvt. “The war in Ukraine has completely changed the mood of foreign investors who are now skittish to invest. 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 IPO, the sale will still be India’s biggest, surpassing the listing of One 97 Communications Ltd., which raised about 183 billion 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% 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.

However, the finance minister remains confident about completing the sale. The markets in India are maintaining a “positive spirit,” and LIC share sale should go through comfortably, Sitharaman had said last week, before the board’s clearance.