Will Babu Culture Be the Downfall of Sarkari Companies?

In this issue:

» Why Make in India is still to benefit from robust FDI flows

» Inflation showing signs of tempering

» ...and more!

Who wouldn't want the job security of a sarkari bank?

Not only are you entitled to bank holidays and other perks, but you can enjoy the famous mismatch between remuneration and output.

It's no surprise that educated youth across the country covet bank jobs. Everyone knows once you land a sarkari bank job, life becomes a bed of roses.

Reserve Bank of India Governor Raghuram Rajan knows it.

He recently acknowledged that public sector entities tend to pay more to lower-level employees than the private sector. And less than the private sector to higher-level employees.

The fallout of this skewed strategy is that lower-level employees of public sector banks remain overpaid. Yet they continue to lag private sector bank employees in efficiency. The protectionism of trade unions coupled with regular Pay Commission recommendations allows them to make merry at the expense of the poor taxpayer.

But public sector banks struggle to get experienced hires for the top management positions. No doubt that the overall productivity at state-run banks continues to be poor. It's obvious in their dismal financials and weak balance sheets.

Most public sector banks are grappling with surging bad loans and single-digit growth in credit offtake. At the end of last financial year (FY16), the stressed loans for PSBs had mounted to 14.5% of the overall loan book. This necessitated higher provisioning, pushing a large number of PSBs into the red during the year.

Other than the state-run banks, many public sector companies are also neck-down in losses. That's despite the government pumping in crores of money to keep them afloat. The guarantee of a saviour to bail them out each time has turned most public sector enterprises into masters of inefficiency and bureaucracy.

On the other hand, their private sector counterparts, with their professionalism and businesslike approach, continue to flourish. In FY16, private sector banks reported a robust 25% credit growth despite the economic slowdown. Even their stressed loans ratio at 4.5% was benign, enabling them to post a healthy 11.6% earnings growth during the year. Many private companies from other sectors have also thrived.

The dichotomy in the working culture and financial health of public sector and private sector companies is too stark to ignore. And with so much taxpayer money being frittered away to keep these white elephants alive, you can't help but wonder at the futility of the entire exercise.

Is the government really serious about privatisation?

We do not think so.

In the words of Prime Minister Narendra Modi:

• In any developing country in the world, both the public and private sector have a very important role to play. You can't suddenly get rid of the public sector, nor should you.

Vivek Kaul has hit the nail on the head when he says that economic reins of the country have been taken over by crony socialism.

To get more insights, download Vivek Kaul's Special Report, The Crony Socialism of Narendra Modi.

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02:45 Chart of the day

The 'Make in India' is a very important project for the Modi government as it looks to make India a manufacturing powerhouse. But for that to happen, a lot of bureaucratic bottlenecks have to be eliminated and labour laws overhauled. Not just that, the pace of investments in the sector need to increase.

The good news is that India has managed to convince foreign investors that there is a lot of potential in the Indian economy. It certainly explains why foreign direct investment (FDI) in India has been rising. FDI is important because it signifies that foreign investors are keen to remain invested in India for the long haul. According to Livemint, overall FDI has grown at a solid 25% and 22% respectively in the last two years.

But, if one looks at the chart below, it becomes apparent that most of the FDI is going towards services and construction. Indeed, foreign investors are yet to direct visible interest into manufacturing sectors, exceptions being automobiles and chemicals.

A bit more commitment from the government to do away with red tape and archaic laws going forward, will probably give the much needed boost to foreign investment in the manufacturing sector.

Where Is the FDI in Manufacturing?

There is likely to be some relief on the inflation front. As reported in the Economic Times, food inflation is set to moderate significantly when the August data is released next month. This is largely because good monsoons this season have raised prospects of a healthy harvest. This is significant given that India grappled with drought like conditions in the last couple of years.

The prices of food items reflect this. Price of pulses have fallen around 30%, while for vegetables, the price decline has been around 50% in many markets. Basically, an increase in the acreage has led to more production and hence the fall in prices. For instance, the acreage for pulses increased 33% in August.

Of course, this is data for a month, but if the trend continues, there is likely to be more pressure on the RBI to reduce rates.

Indian stock markets had a volatile trading session today as any gains by the indices were met by bouts of profit booking. At the time of writing, BSE Sensex was trading higher by 13 points and NSE-Nifty was trading flat. Both mid cap and small cap stocks are also trading higher by 1% each.

"The key to investing is not assessing how much an industry is going to affect society, or how much it will grow, but rather determining the competitive advantage of any given company and, above all, the durability of that advantage." - Warren Buffett