The union government is confident it will meet its target of raising Rs 400 billion this fiscal year by selling shares in state-run firms, a senior finance ministry official with direct knowledge of the matter said.

The government is working on a plan to raise funds by pledging stakes held in tobacco-to-hotels group ITC, industrial conglomerate Larsen & Toubro and Axis Bank, the senior official said on Tuesday.

These funds would be placed with a new investment vehicle that would buy back the government's stake in state-run firms, said the official, who spoke on the condition of anonymity.

The shares in ITC, Larsen & Toubro and Axis Bank are held through the Specified Undertaking of the Unit Trust of India.

"The whole impression that SUUTI (route) will not materialize is wrong. We are still working on the modalities," the official said.

"We are going to meet the disinvestment target."

So far this fiscal year, New Delhi has managed to raise only about $250 million through the sale of a stake in Power Finance Corp in May.

With the stake-sale programme failing to take off and tax revenue under pressure from slowing economic growth, worries about India's public finances are growing.

On Monday, the government announced to sell Rs 150 billion of bonds on December 30 in an unscheduled auction to fund an "emerging cash requirement".

The official said the unscheduled auction is part of the borrowing for the second half of the fiscal year that ends in March 2012, which has been advanced.

Extra Market Borrowing On Cards?

In September, the government increased its borrowing target for the second half of the fiscal year to Rs 2.2 trillion from the budgeted 1.67 trillion, but said this was unlikely to affect the fiscal deficit target of 4.6 per cent of gross domestic product.

The financial markets are not so sure.

A Reuters poll last month showed that the fiscal deficit for the current fiscal year is widely expected to reach 5.5 per cent of GDP, which would force the government to borrow an extra Rs 353 billion.

"No doubt, there is pressure on the fiscal deficit front. But we are still to decide about our borrowing requirements," the official said. "Once we work that out, we will notify it."

However, New Delhi could go for higher borrowing as the budgeted fiscal deficit target will be missed, Press Trust of India reported on Tuesday, quoting an anonymous government official.

"Growth slowdown is a big challenge. We may miss the direct tax target ... meeting 4.6 per cent fiscal deficit target is out of the question," PTI quoted the official as saying.

"There has to be extra (market) borrowing to bridge (the revenue) deficit. If deficit increases then the government will have to borrow."

Bond dealers are already fretting that the government could announce additional bond auctions, pushing up bond yields.

The benchmark federal bond yield shot up on Tuesday after Monday's unscheduled debt sale announcement. The 10-year benchmark bond yield ended at 8.48 per cent, after rising as much as 8.59 per cent on the day. On Monday, it gained 12 basis points to close at 8.49 per cent.

The official sought to allay the markets concerns.

"Growth in advance tax numbers has slowed down. It is an open secret now," the official said. "However, there will not be a huge shortfall in revenue receipts."

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