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Decoding The Failing Health Of Indian PSUs

Most of the economists suggest that yes, it is really an important step to disinvest at the right time as it will allow to lower down the national fiscal deficit and foster better utilization of funds

Photo Credit : Bivash Banerjee


Niti Aayog is heavily tasked to look at viable options of divesting in sick public sector undertakings. It recently, submitted two lists of sick and loss-making PSUs - one comprising names of those which can be shut and other included names of companies in which the government can divest strategically or privatize.

The government prepares to collect Rs 69,500 crore through disinvestment in PSUs this fiscal year (2016-17). Of the total target, the government has raised R1,610 crore after parting with 5 per cent stake in Rural Electrification Corp (REC) in the first week of April 2016.

Everybody is discussing how the PSUs have been bleeding but it is important to understand why? Here are the major factors that turned state owned power generation companies and banks into loss-making entities:

Public Sector Banks

What do the Indian Banks require?
They require stability, efficiency on delivery, inclusion and monetary policy transmission but all four areas have been a matter of concern and the issues haven't been resolved for long now. Constrained by capital, public sector banks could see a lower loan growth between 2016-17 and 2018-19, clocking about 9 per cent, India Ratings, a local arm of United States headquartered credit ratings firm Fitch, pointed out in a research.

Unfinished agendas or policy reforms, lack of supervision, Ill-planning for future prospects and mismanagement of existing funds. Several secondary reasons also play a part - lack of fresh capital injunction, the need for technology makeover, Selection of top management (Bank Bureau)

The reduced credit availability could restrict fund supply needed for a pickup in economic growth. Not only public banks are in a bad shape, most of the private banks are also facing difficulties. The size of the hole in today's banking crisis appears to be roughly 10 per cent of GDP, which is roughly, the cost of building comprehensive metro systems in 10 cities. And tax-payers have been footing the bill for this for long now.

It can be noticed with the frequency of private players entering the sector, 2 in one decade, which is inadequate. However, smaller financing institutions like "payments banks" or "small finance banks" are coming but that will not help in the long-term.

No other industry in India faces competition so stifled. In mature financial systems, big companies go to the bond market, and bank credit is largely geared towards smaller firms who do not have bond market access.

Among banks, Central Bank, United Bank and Indian Bank seem to be prime choices for disinvestment. For all the banks that the government sells sale of every 1 % will give it ?4,299 crore to the government.

Power Generation Companies

Despite the ever growing demand for electricity, the Indian Power sector hasn't been able to cater the required capacity.

The key challenges that the power companies have been fighting are: Fuel security concerns, thin financial health of state Discoms, under-procurement of power by states, inimical financing environment and last but not the least policy paralysis.

Issue like these have not been resolved and get reflected in the financial statements of the power companies. Significant gas capacity of 20,000 MW is idle due to non-availability of gas, coal supplies by CIL is restricted to around 65% of actual coal requirement by coal based thermal plants all this leading to increased dependence on imported coal.

The power generation costs have also seen a cascading escalating effect due to years of populist tariff schemes, high-leading rates and participation of private sector in coal production, generate an optimal mix of a variety of fuels- conventional and non-conventional.

The FY 2016 Line-Up: Includes micro-divestment in companies like Oil and Natural Gas Corporation (ONGC), National Thermal Power Corporation (NTPC), Bharat Heavy Electricals Limited (BHEL) and the Centre also intends to sell residual stake in ITC, Axis Bank and L&T held by the SUUTI as well as conduct strategic sale of Hindustan Zinc and Balco.

Is it a really good idea to divest at such a big scale for long term?
Most of the economists suggest that yes, it is really an important step to disinvest at the right time as it will allow to lower down the national fiscal deficit and foster better utilization of funds.

Funds will be available for infrastructural development, it will also in turn encourage spending for social programs like health and education. At this point, disinvestment has assumed prevalence in India due to an increasingly competitive environment which makes it difficult for many PSUs to operate. A rapid erosion of the value of the public assets has made it critical to disinvest early in order to realize a high value.

However, the "under-recognition" of a stressed asset of the Indian public sector utility by any private body, may further hurt their asset quality by next financial year. The government should revise its capital infusion estimate in order to support its utilities or else they are bound to face negative pressure on credit profile.

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