An IDC Analysis


New Delhi, 11 October 2002

We have repeatedly suggested that the Defence PSU's –– Shipyards , Ordnance Factories and DRDO production units need better management, collaborations and release from the clutches of the MOD (except in the case of Strategic industries). This means privatisation. In this regard Mohan Guruswamy has written what we consider to be one of the most well argued treatises on privatisation of PSUs, with statistics and a clear explanation of how they have become a burden on the Government/people. The common man pays for their inefficiencies but they are worth gold if they are handed over for running by the private sector. We have always been of the view that at the time of Independence Panditji did offer the gauntlet to the private sector to take on large scale Industries but it was just a few like the house of Tatas and Walchand Hirachand  who had the courage. Hence he looked to the Russian model and the commanding heights of the economy were taken over by the Government –– but times have changed. Indians unlike the Chinese are not gamblers in business and the only day they gamble with abandon is on DEEPAVALI when they say, to lose is good to appease Laxmi –– the Goddess of Wealth.

In the article that follows, Mohan Guruswamy has explained the need to urgently privatise PSUs. We hope you enjoy this very relevant piece and we look to your inputs, how India’s defence sector can also follow suit so that the armed forces get a better bang for their buck –– now that the budget is $14 billion.


A Pox Unto Both Your Houses!

By Mohan Guruswamy

The Sangh Parivar government is in the throes of a fierce internecine slugfest with the two factions ranged against each other on every major issue, save one and that is on how to deal with the minorities. As issues come to the fore and the debates on them intensify the divisions become more acrimonious, and as potential political vacancies become more apparent, the personal ambitions add bite to the bark. It is hardly surprising that these debates are more notable for their invective than intellect. The larders from which the two factions draw their intellectual sustenance are empty but the corporate coffers from which they derive their motivations keep them going for each other.

Typical of these is the ongoing debate on what has come to be known as Disinvestment, a word that does not exist in the dictionary. In this latest exchange the muscle heads and wooly heads have battled themselves into an embarrassing stalemate. Since a stalemate itself would be a victory to one faction and way out is being sought that will be better than a stalemate but less than a solution to the vexing problem of huge and unproductive investments in the Public Sector.

Despite this, this is not a debate without significance. The total capital employed in the 230 PSU’s is a huge Rs. 330,649 crores and this investment generates a turnover of Rs. 458,227 crores. Twenty years ago in 1980-81 these figures were Rs. 18,207 crores and Rs. 28,635 crores respectively testifying to the enormous growth of this sector. The turnover of PSU’s account for almost a quarter of the national income, which in 2000-01 was Rs. 1,765,238 crores. The combined turnover of the Central Governments PSU’s puts it a little ahead of the total output of the agricultural sector, which amounts to Rs. 422,703 crores.

In relation to the combined turnover of the 864 top companies in the private and public sectors analyzed by the Business Standard is Rs. 689,210 crores. These numbers only underscore the important and dominant role of the Public Sector in the national economy whose turnover has been bounding at a vibrant 14.61% during the last decade. In 2000-01 these 230 PSU’s had a cumulative value addition of Rs. 105,133 crores, which in other words is its contribution to the economy. Lastly these PSU’s employ 17.42 lakh persons at an average wage of Rs. 2.20 lakhs. This average registered a growth of over 50% in just the last two years making a joke of all the much-hyped schemes to reduce PSU payrolls by VRS and employment freezes.

But these figures mask an essential reality. While the 864 top companies together generated a profit after tax of Rs. 253,351 crores the 230 PSU’s of the Central Government together generated a profit of a measly Rs. 15,653 crores. This in turn masks another reality. No less than 66 industrial PSU’s are sick having a negative net worth and registered with the BIFR. Incidentally 34 of these units were taken over from the private sector “to safeguard the interests of the workers.” With the exception of the Oil and Power companies all Central Government PSU’s in various manufacturing sectors run at a loss. Even in terms of turnover the Petroleum sector PSU’s have a combined turnover of Rs. 249,913 crores or 54.5% of PSU turnover. The Petroleum and Power sector PSU’s generate Rs. 11,727 crores and Rs. 5120 crores as profits while other manufacturing sector PSU’s together log up losses amounting to Rs. 6982 crores. Among the Petroleum PSU’s, ONGC alone accounts for almost half the profits earning Rs. 5229 crores last year against the Fortune 500 Indian Oil’s Rs. 2720 crores.

The only PSU’s that are profitable are those that have a dominant if not near monopolistic share of the business like ONGC, NTPC, Indian Oil, Power Grid, GAIL, and MTNL. The lesson is quite clear; PSU’s can only thrive as oligopolies and monopolies that is only possible in a rigidly controlled centrally planned economic greenhouse, something that is impossible now unless we turn the clock back to take us to the early days of socialist innocence and economic nonsense.

VSNL which last year earned Rs. 1779 crores will be hard put to repeat its past performance now that its monopolistic hold on international telephony has been breached. We know that in the past VSNL gouged its customers with arbitrary rates for its services. Like Internet connectivity charges ISD rates have begun nose-diving once opened to competition. Wherever and whenever there is competition consumers benefit and we will soon see this in domestic telephony as well. Wherever private sector companies have entered the basic telephone services business, both MTNL and BSNL have begun to gear up their services, even if it were by just a bit. We have seen how Indian Airlines has become better, but the lesson of Air India is that even in the face of total competition government owned and managed companies can get just only so much better, and often that is not enough to survive without the dole.

But the Petroleum business is something else. Here the state is in monopolistic control of the sector and we naturally pay a huge extra price for it. Not only that, with this control, the state is able to play favorites benefiting one section of the consumers at the cost of another. The unearthing of the recent scam in the allocation of distribution outlets favoring the near and dear of BJP and RSS bigwigs is another dimension arising out of this monopolistic control. All this is enough reason for Ram Naik to wage a determined rearguard action to prevent his money making and favor dispensing monopoly from being breached. We will discuss this another time for the issue at hand is much more important than Ram Naik’s recent shenanigans.

Very clearly most of the central governments PSU’s are unprofitable. Many of them such as HEC or Scooters India or IDPL are just kept going to pay long idle employees’ salaries. Selling these, and there are almost eighty like them, would be a Herculean task even if they be sold to asset strippers. But with the conditions like those protecting the tenures of employees added in it would be next to impossible to rid the state of all these albatrosses around its neck.

The government is hemorrhaging badly because of these companies. The ten top red inkers themselves account for Rs. 7943 crores. But these include many with great value like SAIL and Konkan Railway, which also make vital contributions to the economy. The immediate task here is to identify the zero value companies and get rid of them as fast as possible. Employees of these should be VRSed off immediately and residual assets sold to the highest bidder. We must not get bleary eyed over this as the cost of sustaining these industries is always at the cost of the poorest sections of our society who still have little voice to back their demands for more from the state, particularly after being denied everything even after all these years of redeeming our tryst with destiny.

Arun Shourie in his characteristic single-minded manner has devoted himself to achieving the disinvestment targets set for him by the planners, more to show himself as a go-getter and achiever to put him on the inside track when the succession sweepstakes open up in the post-Advani period. Yes, post-Advani period for if Vajpayee were to depart into any retirement tomorrow, it would undoubtedly be the Sardar who would take his place. But he is of the same vintage as Vajpayee and cannot be more than a Chernyenko after the long dissolute Brezhnev era. Typically, Shourie is focused on the numbers. He has given himself the task of getting Rs. 80,000 crores for the next plan. But there is a paradox here. Since his only mantra is “sell, sell and sell”, Shourie has targeted only the very profitable and hence easily saleable PSU’s for his frenzied distress sales. The more profitable PSU’s you sell the greater will be the cumulative PSU losses. This should be easy to figure out, but then Shourie is a single-minded man in a hurry to keep his tryst with what he believes is his manifest destiny!

It makes utterly no economic sense to sell the PSU’s to bridge the ever-widening revenue deficits. To do so would be akin to selling the family silver to support a bad habit. But this is not what motivates Murli Manohar Joshi when he objects to the sale of PSU’s. He firstly wants to reckon with Shourie’s vaulting ambitions while simultaneously wishing to expose Advani’s characteristic pusillanimity when confronted with choices. And as for George Fernandes, he is a creature of habit and is being his usual pyromaniac self. He doesn’t really care which political house he is burning down as long as there is a good fire. Remember his famous speech in the Lok Sabha in mid 1979 defending the Morarji Desai government. Thus, both, Joshi and Fernandes, offer no solutions except to keep chanting, “don’t sell, don’t sell!”

But solutions are possible that will enable what is now the Public Sector to become a profitable, productive and contributing sector of our economy. The critical first step would be to take all the PSU’s from out of their administrative ministries and bring them under one administrative ministry whose mandate would be to make the PSU’s cumulatively profitable, not as they presently are but in a real sense giving the nation a proper rate of return on its stupendous investment. Then by a process that selectively uses liquidation, outright sale, restructuring and amalgamations new, viable and profitable entities could be created whose ownership could then be progressively diluted to broad base it and liberate these companies from bureaucratic and ministerial control.

While this internecine battle is raging the elected opposition has been silent, as it has been on most issues. It seems that the Congress Party’s policies are more guided by the biblical beatitude: “Blessed are the meek for they shall inherit the earth.” Very unlikely! And since the present debate within the Sangh Parivar is not about how to make the Public Sector assets productive, but essentially one on how to turn the ownership issue into a stick to beat each other to political death, all one can say to them is: A Pox unto both your houses!

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