Will Indian PSUs no longer assure you of job security?

Feb 20, 2015

In this issue:
» The truth behind India's lower public debt
» Why this is the best time for reforms...
» Our confusion about Buffett's latest decisions on Berkshire portfolio
» ...and more!

With the second largest and one of the youngest populations in the world, adequacy of jobs needs to be the top priority of Indian policy makers. Too many youngsters, able and qualified, lurking on the streets without jobs can be the biggest social risk for a country. Besides the risk of crime rates and inequality of income going up, such a scenario can potentially be a demographic disaster for an over populated country!

Now, since independence, the public sector behemoths have been amongst the biggest job creators in India. Of course, the IT and BPO sectors have absorbed a respectable proportion of the incremental labour flow. But barring these, no other private sector has contributed significantly to job creation. Even sectors like textiles and auto ancillary have become more technology oriented despite being predominantly labour intensive industries. What has also continued to draw employees to PSU jobs is the job assurance and government pension. But it seems that neither job assurance nor handsome pensions can remain the mainstay for PSUs for long.

Most of you would remember how mounting pension liabilities drove General Motors (GM) to the verge of bankruptcy in 2008. That was until the US government bailed it out. The company has since aggressively and painstakingly been addressing its estimated pensions obligations. In 2008 itself, the pension liabilities exceeded GM's revenues. At the beginning of 2014, that obligation stood at US$ 105 bn, an amount that can potentially buy it Ford Motors, Tesla Motors and Fiat Chrysler. So the auto behemoth's pension woes are far from over!

Interestingly, an article in Mint points out that the pension liability woes of Indian Railways, the biggest corporate employer in India are no different from GM's. In fact since financial year 2009, the Railways has been appropriating a much larger sum to the Pension fund than its operating profits. And over the past 5 years, on an average, the PSU has appropriated about 10 times its operating profits to the Pension fund! Although the employee base of Indian Railways has gone down to a 30-year low of 1.31 million, the life expectancy of employees has gone up from 49 years in 1971 to 66 years in 2013. And this problem makes its unfunded liabilities situation exactly similar to that of GM.

It is not just the Railways but also entities like PSU banks etc that have had the burden of rising employee costs eating into their profits over the past few years. And in their effort to become leaner and more cost efficient, these entities will have to shed the excess employee base. This will mean that not only will these entities not remain the biggest job creators but will no longer assure job security. On the contrary, companies both in PSU and private sector may be more inclined to make use of automation and robotics to keep employee liabilities in check.

So as investors, we would definitely want to see the big PSUs get more efficient, profit focused and minority shareholder friendly over time. However, we do hope that new initiatives like infrastructure development and private sector manufacturing pick up the slack in terms of new job creation. Else, joblessness can be India's most underestimated yet lethal problem.

Do you think lack of job creation will be one of India's biggest socio-economic problems in the coming decade? Let us know your comments or share your views in the Equitymaster Club.

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  Chart of the day
There's some mixed news on the macroeconomic front as far as the status of India's public debt is concerned. First the good news: India's government debt as a percentage of its gross domestic product (GDP) has come down significantly over the last decade. In fact, 17 percentage points lower compared to its level 10 years back to be precise.

And while this is great news, it is only one side of the story. The other being that the primary reason for this figure coming down seems to be the high nominal GDP growth during this period. And considering that nominal GDP growth includes the effects of inflation, it becomes easy to see the driving force behind this fall public debt relative to GDP.Further, even after this fall to 61% or thereabouts in 2014, this number for India does not stack up quite well when compared to many of its peers. Today's chart illustrates a snapshot of such a comparison. Indeed, as the Union Budget nears, we hope this time the government takes some concrete steps to lower our country's fiscal deficit as we move forward.

India's public debt higher than most peers

However, not all comparisons paint so grim a picture. In fact, The Economist magazine in a recent report has been quick to point that India is probably the only big emerging market that really stands out as far as the potential for rapid economic growth is concerned.

Consider this. While China's economy is slowing, Brazil's is gripped by stagflation. Western sanctions and the oil price slump have meant that Russia is firmly in the clutches of recession. South Africa too has its plate full with inefficiency and corruption.

But as far as India is concerned, the stars all seem to be lining up. The scourge of inflation is finally giving in. The current account deficit has come down and the rupee seems to have finally found stability. Commodity prices have eased and the stock market has boomed. No wonder then that while the IMF cut its forecasts for the world economy recently, India was one of the biggest exceptions.

While most of these factors have fallen into the NDA government's lap, now seems to be the perfect time for it to put in place some radical reforms to take India to another level. Indeed, the time is ripe for India to literally be on top of the world. We hope the government does not let us down this time.

At Equitymaster, we are die-hard fans of Buffett and his style of value investing. His dedication to share his profound understanding and deep insights on value investing with common investors is what makes him unique. But at times, and more often so in recent years, some of his decisions for the portfolio of Berkshire Hathaway have stumped us. Now, as we always acknowledge, unlike Buffett who has nearly figured out almost every kind of business in and out, most of us have very limited understanding of the same. And therefore what we always try to do is benchmark our investing principles with the ones laid out by Buffett himself. And this is exactly where things start getting confusing. Allow us to explain why.

The latest decision of Berkshire Hathaway to sell its stake in oil major Exxon Mobil and buy a small stake in media major 21st Century Fox is something that we intuitively cannot agree with. Now, we will not touch the valuation aspect of these businesses as we have no clue of their intrinsic values. However, that apart, the rationale to judge the fundamental soundness of these businesses has stumped us. As we know, 21st Century Fox is more of a company managed by the Murdoch family than being a professionally managed one. And the reputation of this management does pale in comparison to the high standards Buffett has set for his other companies. So one wonders if there was any compromise on this aspect. Similarly, Exxon Mobil apart from being a company with very strong cash flows and attractive payouts is also one that has survived several cycles in oil prices. So one wonders if Buffett's decision to sell the stock is due to any unique insight on long term trend in oil prices or a bet on near term trends in the commodity. Honestly, we do not have very clear answers to these. However, we hope that over time we understand Buffett's decisions for the Berkshire portfolio better!

The Indian stock markets were trading weak today on the back of sustained selling activity across most index heavyweights. At the time of writing, the BSE-Sensex was trading lower by around 220 points. Losses were largely seen in IT and energy stocks.

 Today's investing mantra
"Most of the time common stocks are subject to irrational and excessive price fluctuations in both directions as the consequence of the ingrained tendency of most people to speculate or gamble... to give way to hope, fear and greed." - Benjamin Graham

This edition of The 5 Minute WrapUp is authored by Tanushree Banerjee.

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7 Responses to "Will Indian PSUs no longer assure you of job security?"


Feb 23, 2015

In PSUs, the officers are underpaid and blue collared workers are overpaid. Ideally, the salary of the person should be proportionate to the value they add to the organisation. Fir eg. in banking, the salary of top officers in Indian PSUs is no where comparable to salary in developed countries. Therefore, most of the talented officers move to private banks and blue collared workers make union and ask for higher salary.

Like (1)


Feb 22, 2015

Who are unable to compete in PSU are saying or cribbing like that. When Management graduates are getting hefty salaries nobody is bothered ,then why such hue and cry on PSU jobs . all the PSU are giving a net profit and dividend to their shareholders and giving jobs to the countrymem. They are the pillars and acts in regulating prices and check the profits made by private companies. Many people want that there should be no check on private companies profit and they are writing these type of articles.

Like (1)


Feb 21, 2015

As long as reservation continues based on the caste and creed, the PSU or PSE can not deliver the basic product quality or the minimum profit to share for the country. These may call (NPE) NON PERFORMING ELEMENTS. THis may include, subsidy, unemployment payment for SC/ST,MNREGA, HAJ, SC/SC development cost, Anna Bhagy, THali bagya, sidda bhagy, Gundu Bagya, mutton and chicken Bhagya, lottery bagy, and all bagyas of doled out by congress to garner vote at the cost of nation security and peaceful living..

Like (1)

satish dabholkar

Feb 21, 2015

Now the Government has come out with National Pension policy by which public sector corporation should not be worried about their contribution to pension fund.But now public sector should concentrate more on job creation by expanding their network.In particular for Public sector Banks though business has increased many times but total employees on muster have drastically came down.This is affecting the service and growth of public sector banks,I am of the view that required number of employees not provided,will make all the nationalized banks sick in coming years.The backbone of Indian economy is shaking because of curb in recruitment.Alarm bell is ringing for last few years and the "Equitymaster" should take independent research for the public sectors banks to Analise negative effects of non employment of required staff.This will benefit to the Indian economy.

Like (1)


Feb 21, 2015

The efficiency of the PSUs are pointing downwards.The managements are not effective.Motivation of workers are not there.Only very few people work.UNDER THESE CIRCUMSTANCES HOW CAN THEY ASSURE JOB SECURITY.

Like (1)

G S Sethi

Feb 20, 2015

Absolutely right. The Govt & PSU Servants not only get paid well these days but also get hefty sums as pensions for themselves & their spouses. It is time Govt takes a step back & reviews CTCs at various levels. After all pensions funds are a part of CTC.

Rather than increasing salaries blindfold in the next review commission, it would be better if the Govt brings salaries of staff on contract near to the regular employees. This will bring about some parity for equal work & reward those who have been slogging despite having no safety mechanism. Also, review of every organization's structure si required to see if all the posts created are really required.

Like (1)

Bijoy K. Jha

Feb 20, 2015

No longer job in PSU like coal india ,is pensionable applicable for new recruits but extended medical facility after retirement has some other effects.

Like (1)
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