This has seriously impacted performance of PSUs

Jan 14, 2012

In this issue:
» Mr Ahluwalia's take on petroleum subsidy
» Chinese forex reserves decline
» S&P downgrades some European countries
» More lows for the rupee could be in store
» ...and more!
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It has always been well known that one of the reasons why performance of PSUs (Public Sector Undertakings) has lagged that of privately owned companies is that the former have ineffective managements. That then raises the next question. Why has the top management in the former not really been able to ramp up performance? In this regard, a top government-appointed panel has stated that a mix of stringent vigilance norms, excessive regulation and accountability measures has created a 'fear psychosis' in state-run companies, thereby cramping the effectiveness of their managements.

The study has found out that these companies are beset by problems of over governance and cumbersome bureaucracy of the government. This in turn has fuelled a cautious, conservative and risk-averse culture. All of which hardly does much in enhancing the growth trajectories of these companies in an environment where privately owned companies are nimble footed and are adapting and growing fast.

What is more, if recent developments are anything to go by, the government is using these PSUs as tools to meet its objective of reducing the fiscal deficit. Readers would do well to recall that the government had set an ambitious target of Rs 400 bn to be earned this fiscal through the divestment of its stake in a slew of PSUs. This would have also become beneficial to PSUs because privatisation brings in greater efficiencies in the working of the companies and helps them in growing more strongly and becoming more profitable in the future. But with the market conditions going awry, most of these plans have been put on the back burner. The government on its part is not doing much to cut down on costs. But, given that PSU companies sit on huge piles of cash, it is banking on the former to dole out higher dividends.

The PSU divestment program if and when it happens will certainly provide the government the much needed financial relief that it is craving for. But it needs to realise that one of the ways that it can benefit from PSUs is by not interfering too much in the way those companies are run and giving more independence to the managements. Only then, will they be able to compete effectively with private players and unleash their growth potential. And if in the process they become leaner and well run organizations, surely it will be to the government's benefit in the longer run.

Do you think that the government is responsible for the ineffective way in which PSU companies are run? Share your comments with us or post your views on our Facebook page / Google+ page.

 Chart of the day
The Economist's misery index combines two powerful indicators of economic gloom namely unemployment and inflation. Today's chart of the day shows, that while unemployment has loomed as a big problem in Eurozone, emerging countries such as India and Russia are grappling with problems of inflation. For Europe, which has consisted of funadamentally rich economies, it is indeed ironic that unemployment now has reached levels than can be compared to some of the poorer nations of the world.

*2011 estimate
Data Source: The Economist

Although the union budget is a good couple of months away, the media seems to have already started gathering sound bites on the same. And it is none other than the deputy chairman of planning commission, Mr Montek Singh Ahluwalia who has given a hint as to the kind of budget he would like to see. Right up on wish list is the issue of subsidies. He opined that the forthcoming budget ought to send out a clear signal on fiscal consolidation and that too by striking right at its heart i.e. the petroleum subsidy. Although the Indian Government does dole out various subsidies, it is the petroleum subsidy that is acting as the elephant in the room. Besides unlike say food subsidy, the petroleum subsidy is largely uncapped and this makes matters even worse as per Mr Ahluwalia.

"The markets have to know that the government is not unconcerned about the fiscal deficit, and I am sure the finance minister will be aware that the credibility of our macro-stance next year depends upon both the extent and the quality of the fiscal correction," Ahluwalia is believed to have said. So, will the coming budget see some serious steps being taken to tame the petroleum subsidy bill? Our heart does say yes but our brain lets out a huge no. We think it will take a crisis of much greater proportion to wake the Government out of its slumber on this issue.

The party seems to have finally ended. Chinese capital markets that were for many years attracting foreign investors in droves seem to have lost some appeal. As a result the country's burgeoning stockpile of foreign-exchange reserves is also losing some sheen. The Chinese forex reserve showed its first quarterly decline in more than a decade at the end of last year. Global economic uncertainties and worries over slowing Chinese growth rate contributed to investor anxiety. Moreover, the Chinese currency also lost favour. While the Chinese central bank has continued to push the yuan higher through its intermediation, the currency was hit by unprecedented selloffs in late 2011. As foreign investors rushed back to safe-haven purchases of the US dollar, the yuan was left with very little room to strengthen. In 2012 as well, we do not see too many reasons for China to add to its stockpile of forex reserves. As the country reels under its own debt burden and lack of transparency in operations, investors are unlikely to appreciate the potential of China's long term future.

While the first half of 2011 for Reserve Bank of India (RBI) was mainly a fight against inflation, the second half was dominated by worries of a depreciating rupee. To give you the exact numbers, the USD-INR exchange rate rose from the comforts of about 44 in August 2011 to a high of 54.3 around mid-December 2011. That was a whopping 23.4% decline for the rupee. The exchange rate has moderated a bit now to about 51.53. This has been mainly due to some measures initiated by the RBI and the finance ministry.

One measure was, of course, RBI's direct intervention in the market to curb the rupee decline. The RBI has also started a new swap line with the Bank of Japan which has helped prop up dollar liquidity to a certain extent. Moreover, the finance ministry announced certain small measures to attract dollars. One was allowing private foreign investors to invest directly in the Indian stock markets. In addition, interest rates on non-resident Indians (NRE) have also been freed. However, all these measures have their own limits and cannot drastically change the fundamentals of our currency which suffers due to a high current account deficit. The looming slowdown in growth will only make things more challenging. So it is quite likely that the rupee will continue to remain under pressure and may even see new lows in the coming times.

First it was the US which saw its credit rating getting downgraded for the first time in history. Now, it is raining downgrades in Europe. S&P, a global credit rating agency, downgraded France and Austria, two AAA rated countries. Plus, it slashed the ratings of seven other countries, among them Italy and Spain. If this wasn't bad enough, the agency also gave 14 out of 16 countries a negative outlook. This means that a further downgrade is possible within the next two years. Germany, Netherlands, Finland and Luxembourg, on the other hand managed to hold onto their ratings. This mass downgrade confirms our fears that the Eurozone crisis is far from being resolved. Not surprisingly the euro slumped more than 1% to a 17-month low against the dollar. The future of the European Union definitely looks bleak.

After witnessing steady gains in the first week of 2012, global stock markets continued their north bound journey in the second week as well. Except for UK, all other markets closed the week on a positive note. Disappointing earnings performance from JP Morgan Chase and expectations of a credit downgrade for several Eurozone countries restricted the gains for the US markets to just about 0.5% for the week.

The Indian stock markets were up by 1.9% during the week. This was the highest weekly close registered in the past five weeks. Easing inflation and recovery in manufacturing output buoyed markets. While food inflation remained negative for the week, industrial production grew by 5.9% in November 2011.

Amongst the other world markets, Hong Kong was up 3.3%, followed by Singapore (up 2.8%). However, UK ended the week on a flattish note with minor losses of 0.2%.

Data Source: Yahoo Finance

 Weekend Investing Mantra
"Spend at least as much time researching a stock as you would choosing a refrigerator." - Peter Lynch

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4 Responses to "This has seriously impacted performance of PSUs"


Jan 15, 2012

There are few factors which adversely effect performance of PSUs.
1. Selection & appointment of CEOs.
2. Compensation package of employees Particularly that of the CEO'
3. several negative aspects of Ministry's control.
4. Fear psychosis in top management besides hardly any encouragement for good performance.
5. Constitution of the Board of Directors. The Govt appointed/ nominated Directors not clear what interst they are required to serve.


Pradeep Hattangadi

Jan 15, 2012

This has been the norms in PSU's for a long time. Lack of Accountability has been the major problem in effective running of the PSU's. The current trend of excessive vigilance action has further deteriorated the conditions because even the one who having been taking decisions in the past have decided to take the safe path of no decision or passing the buck.



Jan 14, 2012

The Govt.'s job is to run the Gov. and not the Industry. Rather all most all the PSU's are mismanaged, there is lot of money being drained out by the corrupt official. You just have the example of OMC's which are running into heavy loss, due to the overpricing by the private sector refineries run by Ambani and others. Every year the Govt. is shellinmg out over Rs.1,00,000.00 Crores (one Lac Crores) as subsidy on LPG (Domestic) Kerosene and Diesal. Then you have the case of Air India running into a whopping loss of Rs. 43,000.00 (Forty-three Thousand Crores)and the Nationalised Bank which need huge Capital to meet the Basel II norms. All this money is being arranged through heavy Tax doses like service tax on each and every Indian, Then the Central Excise and Customs on the Industry as a whole and the Income Tax on every person earning say even rs. 12,000.00 a month. We all Indian today are living on borrowed money, be it the FDI, FII or the ECB's... the reserve of forex which the RBI makes public from time to time is all made up of all these three factors combines as we have still a huge negative being genertaed by our Imports and Exports.... The imports surpass the exports by more than 20% every year leading to the weakening of our own currency to a large extent say some 18-20% in the last 6 months alone. It time for our worthy Prime Minister to wake up and also our FM Mr. Pranab Mukerjee to stop misleading the entire country and thw rold by giving false GDP figures which are all fabricated.... The Growth is there only in Industries like Automobiles.. which we do not need as it is huge drain on our Forex reserves.. we have no infrastructure to run the automobles but only God knows why we are spending Billions of Dollars for the of semi knock down cars and other SUV's... and especially the luxary vehicles running on Diesal which is highly subsidised at the cost of the tax payers. Onllt God knows where we are heading to.. The best Economist in the Worl (our worty PM) is the worst performer on the home front.. when it comes to earning from liberalisation like 2G & 3G spectum sale the entire cream is swindled offby our corrupt ministers like, Raja, and Chdiambram... it may be too late for the common man to know... what is in store for him...performace of stock market is in no way a barometer to judge the growth as it a highly monopalised by a few (HNI's) High Net Worth Individuals...



Jan 14, 2012

We have to first of all free the PSUs from the IAS babus. If that is done and bring some hardcore professionals with normal controls that are exercised by government on other companies, the PSUs will definitely go a long way. The government holding should be below 50% in the PSUs for anyone to see any tangible benefit.

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