The pathetic state of India's public sector enterprises

PSUs may not be financially sound enough to plug deficit or revive investment, notes A K Bhattacharya.  

Public sector enterprises may not be financially sound enough to plug deficit or revive investment. 

India's public-sector enterprises are receiving the kind of close attention that they had become quite unused to for several years.

Since 1991, for much of the post-reform period, public-sector enterprises or PSEs were largely seen as inefficient, a drain on national resources and, therefore, worthy of either divestment, privatisation or closure. Little else was contemplated for them. 

The mood has changed quite unexpectedly in the last few weeks.

First came the mid-year economic review by the government that underlined the need for increased public investment to revive the economy - since the private sector was woefully short of funds, the banking sector was already overstretched and the governance structure for the much-hyped public-private partnership projects exposed them to several kinds of financial risks and weaknesses.

The central exchequer, too, faced a resource crunch that did not allow the government to spend more money on new projects for fear of widening the fiscal deficit. 

So what was the way out? The government, therefore, started looking at the 229-odd operational public sector companies to check if they could be encouraged to step up investment by using their reserves.

The total cash reserves with these companies at the end of March 2013 were estimated at Rs 2.66 lakh crore. 

Could all of it be used to kick-start some of the stalled projects? This appeared a tall task since not all of them were operating in areas where new projects needed to be set up or existing projects were stuck.

Most importantly, the cash reserves with the PSEs were already deployed in financial instruments, and withdrawing them from those for re-deployment in new projects might be qualitatively different - but their net incremental impact on the system would be debatable. 

An alternative option, therefore, was to gently persuade some of these public sector undertakings to declare special dividends, so that the government could get those resources and channel them for projects that needed to be set up.

Remember that this was one of the preferred options of finance ministers during the United Progressive Alliance regime. In the current financial year also, dividends from PSEs will constitute a significant chunk of revenues, and will likely far outstrip the proceeds the government will book from the sale of its equity in some of these enterprises. 

All this was perhaps fine. But the big dilemma the government will face now is in allocating the required resources to public sector enterprises next year, without having made any progress in their financial restructuring. 

Consider some numbers. In the current year, the government provided Rs 39,663 crore by way of equity to a total of 146 PSEs, up marginally from Rs 36,976 crore (Rs 369. 76 billion) in 2013-14. But there is a catch.

The bulk of these equity investments - almost 82 per cent of the total equity outlay - was cornered by Air India, the National Highways Authority of India and public sector banks needing recapitalisation.

Last year, their share in the equity provided by the government to PSEs was even higher, at 87 per cent of the total government contribution towards equity at Rs 36,976 crore (Rs 369.76 billion). 

Note that, in spite of such equity infusion, these PSEs continue to rely primarily on their internal generation of resources to fund their fresh investments and expansion plans.

Apart from the equity contribution, all that the government offers them are loans estimated at Rs 6,637 crore (Rs 66.37 billion) in 2014-15, compared to Rs 5,514 crore (Rs 55.14 billion) last year. 

The sorry state of affairs in the PSEs is evident from the fact that they could generate only Rs 1.42 lakh crore from internal resources this year, a drop of about 13 per cent over Rs 1.63 lakh crore they generated from internal resources last year.

The decline in internal resource generation has been compensated by a rise in equity contribution from the government and an increase in their mobilisation of resources from the markets through bonds and other financial instruments. 

But the sobering thought that must be dawning on government officials is that tapping the public sector to improve the investment rate can become a fashionable idea, but the figures tell a different story - of financial problems and shareholders' negligence made worse by opportunistic use of their available resources and political interference.