India’s Modi eyes privatization windfall, but risks energy crisis by Geoffrey Smith @FortuneMagazine September 12, 2014, 6:27 AM EDT E-mail Tweet Facebook Google Plus Linkedin Share icons Indian Prime Minister Narendra Modi is aiming to raise up to $7 billion through the sale of stakes in some of the country’s lumbering energy giants, cashing in on record stock-market valuations in an effort to keep the country’s budget deficit under control. But the sale risks upheaval in the country’s already-strained electricity sector, which is on the verge of blackouts as a legal dispute paralyses many of the country’s private energy groups. The sales, agreed by the government earlier in the week, will include a 10% stake in Coal India, worth just under $4 billion at current prices, as well as chunks of Oil and Natural Gas Corp. and the hydropower producer NHPC. Two main factors have combined to make the government sell off more of the state’s holdings than it initially planned: the decision to keep the previous government’s aim of capping this year’s deficit at 4.1% of gross domestic product, and the failure, so far, of a recovering economy to generate more in tax revenue. GDP rose by 5.7% year-0n-year in the second quarter, its fastest rate for two years. In addition, analysts say, Modi has been anxious to restore his image as a reformer by reducing the state’s influence on business, after criticism for being too timid in his first three months in power. The Coal India sale is much the most controversial of the measures being prepared. Few companies are more important to India’s economy: two-thirds of India’s electricity comes from coal and Coal India, which is still 90% government-owned and which employs over 350,000 miners, provides around 80% of total output. The government’s decision to sell down comes at a critical moment for the energy sector in a country that has been plagued by irregular electricity supplies, spectacularly embodied in a 2012 blackout that cut off over 500 million people. The Supreme Court ruled in August that some 218 coal-mining licenses had been awarded illegally to private companies over the last 20 years, largely the result of lucrative deposits being carved out of Coal India and sold to private companies, mainly power generators. The total loss to the taxpayer has been estimated at around $33 billion. The Court will meet again on Tuesday to decide what action to take next. The actions mooted range from fines to license revocation. The uncertainty has badly hit production, and coal stocks at power stations have fallen to only six days’ cover. In that precarious position, the government is open to being held to ransom by both the power companies, which want to keep their licenses, and by Coal India’s unions, which want the licenses restored to the national champion.