An appeal to save PSUs from Government? - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster
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An appeal to save PSUs from Government? 

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In this issue:
» Chinese commodity majors on the brink of closure
» Businesses moving out of India
» Is the government encouraging gold smuggling by raising duties?
» The best way for Indian banks to become MNCs
» ...and more!


00:00
 
The June quarter results have been an eye opener for anyone who underestimated India's economic slowdown. Volume pressures, higher input costs and competitive pricing have taken a toll on sales growth and margins across industries. Industries dependent on exports were also hurt by the currency volatility. If that was not enough, the Reserve Bank of India's unexpected liquidity tightening moves hurt treasury portfolios as well. In short, just a handful of companies managed to save themselves from economic distress.

But what is painfully evident is the fact that the PSUs (government owned entities) have been worse off than their private sector counterparts in most sectors. The PSUs are the biggest beneficiaries in the event of facilitative reforms. The opposite holds true when reforms do not see the light of the day, as has been the case for several months.

The largest infrastructure, engineering, mining, banking and power generation companies in India are government owned. Unfortunately this has been their biggest drawback! Lack of reforms apart, complete apathy on the part of the government has been instrumental in the financial weakening of several PSUs.

We are not even talking about the likes of Air India, Mahanagar Telephone Nigam Limited (MTNL) and BSNL here. These PSU heavyweights have been bleeding for years and wasting billions of taxpayer money. But what is shocking is that some of fundamentally sound and well run PSU banks have been brought to their knees by the government! Loan waivers, write-offs and restructuring may have helped the government earn brownie points. But for the PSU banks these have meant a meteoric rise in NPAs. Something that will hurt their profits and valuations for years. PSU banks have been typically used by the government as tools to achieve its social and political objectives. As a result, their financial wellbeing is hardly a concern for policy makers.

Mining major Coal India and power generation major National Thermal Power Corp. have hardly lived up to their 'Maharatna' and 'Navratna' tags. Absence of reforms has turned away investors from these PSU giants despite their economic moats and strong fundamentals.

Thus while India Inc. strives to survive 'despite the government', the PSUs need help. These entities have vast and critical resources at their disposal. Hence, it will be a sorry state of affairs if government policies lead them to economic distress. As per new RBI governor Raghuram Rajan, a mix of governance, compensation reform and privatization could save the PSUs. Probably it is time that as taxpayers we make a petition to save the PSUs from the government.

Should Indian taxpayers we make an appeal to save the PSUs from the government? Please share your comments or post them on our Facebook page / Google+ page

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01:35  Chart of the day
 
India is not the only emerging economy feeling the heat of current account deficit on its currency. Several others like Brazil, South Africa, Turkey and Indonesia have seen their currencies lose value against the US dollar over the past couple of months. In fact even countries like Philippines and Russia that have a current account surplus have seen their currencies depreciating by 6% and 4.5% respectively since April 2013.

Source: RBI Economic Survey


02:05
 
What happens when an economy is growing at a brisk pace? A lot of new capacities start pouring in to catch up with the growing demand. But what if the economy starts slowing down? The excess capacities will have to sit idle. Excess supply will also bring down product prices and lower profitability. Now, what if the new capacities that were added in frenzy for bigger profits were funded with debt? Dwindling profitability and high interest burden is often a recipe for disaster.

This is precisely the tragic story of raw material suppliers to China. As per an article in Reuters, the slowdown in China has pushed many highly leveraged coal and aluminium firms on the brink of defaults and closures. Together, raw material suppliers seem to be sitting on a mountain of debt worth US$ 490 bn. That's a very huge amount. Almost one-fourth of India's GDP! It seems like a massive credit bubble is on the verge of collapse. Or has it started already?

02:35
 
That the Indian economy is facing challenges is not new. The country is facing a mountainous problem in the form of high deficits, weakening currency and failing investor confidence. This has hurt nearly every industry and company in the country. And this has prompted many of them to move beyond the country's borders to try and boost their fortunes. And this sort of makes sense. The country's policy framework has not really helped companies. The red tapism and bureaucratic procedures have made doing business next to impossible. The government dillydallying on existing policies has not helped the situation either. At the same time structural roadblocks have kept inflation high. To add to this is the problem of the falling Rupee. All this have forced RBI to keep interest rates high as well. Therefore the only way out for many companies is to move out of the country. Leading business tycoon, Kumar Mangalam Birla has already indicated that he preference to do business outside the country due to lack of transparency in the government policies. As things are worsening many more businesses seem to be opting to either cancel their expansion plans in India or to shift focus to overseas markets. The only way out is for the government to step in and do its job. But is it willing to do so?

03:03
 
India is in a mess. Its economy's growing the slowest it has in a decade. Its currency is at an all time low and inflation at the consumer level just refuses to relent. Thus, any suggestions on how to get this elephant moving again will no doubt be appreciated by its policymakers. An economist at Morgan Stanley has exactly these kinds of suggestions. Three to be precise. Number one, India needs to have a right mix of fiscal and monetary policies. Number two, there has to be a reversion in the distortion of prices of land, labour and capital. And number three, business climate needs to be considerably improved. Pretty good suggestions we should say. Growing an economy is all about enhancing productivity we believe. Thus, the more people we employ and the more capital we give them to work with, the better off we will be in the long run. Measures like subsidy and employment guarantee schemes are not the best use of taxpayers' money. They should instead be directed into areas like infrastructure and capital investments so that overall standard of living is improved.

03:22
 
In yet another move to curb current account deficit (CAD) the government has raised taxes on gold imports. This is the third time that import taxes have been raised in the year. But the efficacy of this move is questioned. There is a fear that increasing taxes will not curb gold imports but rather open the doors for smuggling. And rightly so. Taxes are being raised to curtail demand. But in India the demand for gold still continues to rise. And with the festive season approaching soon, the demand may get a further fillip. This would mean that traders would find unethical ways to meet this demand. This can result in smuggling of the yellow metal. Further, it may be noted that majority of the gold demand in India is met via imports. Hence, cutting that source out via increasing taxes means that supplies in the channel may dry. But with demand remaining intact gold premiums would rise. This entices imports via unethical means like smuggling. While the taxation move is to curb CAD perhaps government should find other ways to increase capital flows in order to fund the deficit. Else gold smuggling would prosper and may lead us back to the days of Gold Control Act!

04:00
 
Increasing number of large banks is what India requires today. Indian financial system is hungry for large banks of global stature. Rather than a monopolistic power, we require multinational banks. Large banks, either in terms of asset base or global reach, can go a long way in strengthening the Indian banking system. However, it would take years for an Indian bank to achieve the status of a large global bank. Selective acquisition can help banks go the multinational route in the near future.

Today, the second largest bank in the system is merely one-third the size of the biggest bank. The fragmented market share and skewed size can create a monopolistic situation. Here, acquisition routes can come to rescue. And consolidated banks of comparable size and reach can grow into MNCs. Such large banks can restrict a monopolistic situation and allow small players to co-exist. Reserve Bank of India (RBI) Governor Subbarao believes that acquisition is the best way for Indian banks to become MNCs. Inorganic growth can also help consolidation in the sector.

04:30
 
Buying interest in auto, commodity and energy stocks helped the key indices in Indian equity markets stay in the positive territory today. The BSE Sensex was trading higher by around 85 points at the time of writing. Key indices in Asia and Europe also closed higher today.

04:50  Today's investing mantra
"Get inside information from the president and you will probably lose half of your money. If you get it from the chairman of the board, you will lose all of it."- Jim Rogers
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15 Responses to "An appeal to save PSUs from Government?"

S.Balasubramanian

Aug 17, 2013

Indian Govt started the Banks, Industries etc., after Independence. So, they are owned by the Govt. No wonder, Govt uses them for political and social objectives.
From 1991 onwards, we are slowly moving towards Capitalism. That means Private sectors (meaning Individuals and Companies) will be allowed ownership in PSUs. SEBI is facilitating that.
At times, when the going is tough, Govt uses its leverage over the PSUs towards its own survival.

Like 

B K Nandi

Aug 17, 2013

The present government has created a tsunami disaster on Indian economy. The huge PSU asset is being used ruthlessly. There is no breaker or limit on the asset used for other purpose by the government. Mostly the PSU asset are used for political purpose and for manipulation of votes, parliament and assembly turnout. Moreover this government made a series of scams on these giant PSU and there is no proper investigation. In name of the disinvestment the government only used LIC or SBI earnings for the government expenses. This government mercilessly without any responsibility has been destroying these giant PSU since they come to power. It is high time we must raise protest at least to limit the usage of these PSU’s asset specially for cheap popularity for vote banking.

Like 

Ramesh chandra jain

Aug 16, 2013

Politician are always try to misuse their authority for a little money and overlooking the national interest. our existing system is very robust but every Regulator/department had tempered the system to the benefit of individuals that leads to doom the PSU and in future collapse the PSU establishment

Like 

CA RAM A AGRAWAL

Aug 16, 2013

it is better to give these psu to good trusted indian pvt management fairly like nda did earlier ,otherwise be prepare one day these navratna becocome,s nau do gyareh

Like 

sohan jain C.A.

Aug 16, 2013

why have old policy of retaining n nourishing psu like air india mtnl n bsnl etc which are in coma n icu. why waste so much money when it is obvious to even layman that it is futile. would ministers waste money on these types of companies if these were their personal family concers , NEVER, it is somebody else money so they can spurlge, KISKE BAAP KI DIWALI,our FM is totally unfit to continue as FM as he is devoid of imaginative ideas or may be prevented by congress cotrie. As all knows sonia n her pappu are useless devoid of good idead n interested in saving their backdoor power only. without political reason but with economical reason india,s only hopy for safe vibrant progressive n powerful india is only NARENDRA MODI n nobody else as he is unmarried n is not corrupt so he can fully change india we all must support him for our better india

Like 

manoharkantak

Aug 16, 2013

The best way is to privatize or shut down and dispose off the assets. Too much taxation will harm other businesses which are already facing trouble.

Like 

Amit Sengupta

Aug 15, 2013

I am not sure if an appeal will help. We need a massive, sustained outcry of the people to get rid of this nature of governance. Nothing could be more apt than the Jug Syraiya & Ajit Ninan cartoon in the TOI on the 15th August. The PSU-s have been built over a long priod of time using huge amount of tax payer's money. They did play a role in the stated objective of building a socialist republic. In fact you cold include even the Indian Railways in your list. It has been quite a few years now when the powers that be, sans some exceptions of course, seems determined to spoil these organisations and institutions. They will be kept alive, for a death doesn't serve the greed. At this point in time we need a radical political reform. No other reform preceding a political reform will work, for there are no other tool to manage and control greed of this magnitude on such a wide spread.

Like (3)

HARIS.M

Aug 15, 2013

While it may be argued that commercial entities must make profits, sometime it is good to take a step back and reflect why Govts treat PSUs differently.
As like any shareholder of a Co, the govt too needs to draw its pound of flesh from the PSUs which it promotes, funds and even supports if need be.
After all the PSUs are owned by the taxpayers and if the Govt draws its share or pushes the PSUs to extremes it is eventually for the good(or needs) of its citizens.
Unlike private enterprises PSU's are more or less 'savings/investments' by the GOVT on behalf of the taxpayers for a RAINY DAY.
And if a FII or a HNI is investing in a PSU, it is surely to draw maximum mileage out of the Critical assets or possible subsidies the GOVT provides to such PSUs at virtually no price often, and they are not being naive.
But retail investors need to take a hard look on the ROI in such investments.
Otherwise I would certainly bat for Govt's current action/inaction in such PSUs

Like (3)

PRAKASH KRISHNAN

Aug 15, 2013

Yes. Immediately after independence Govt provided capital to promote certain key industries. Now it is time for Govt to exit/keep a mere strategic holding all these entities to function as commercial entities. It benefits every one.
Govt interference should stop more so in Banking where public money is handle by banks in fiduciary capacity. Govt policies and give-aways cann't be at the cost general public savings. I would even challenge parliamentarians power to make policies that transgress into private domain. Govt may hold majority shares in banks but it handles crores of individual depositors money who are not party to the decision.

Like (3)

N.M.R.Shreedhar

Aug 15, 2013

Definitely. The so-called PSU's autonomy is only for namesake.As taxpayers, the general public is a stakeholder in the PSU's--the bleeding needs to be plugged immediately and the PSU's need to be operated in a professional and cost-efficient way--If it is political/bureaucratic interference that is hampering their operations, clear guidelines need to be established -- if big corporates like GE,Siemens can be function professionally, there is no reason why PSU's cannot be professionally run. And, left to themselves, time and again PSU's have proved that they can be operated as efficient, profit-maximising entities. regds

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