India's Rs 1,66,276 Crore Problem - Vivek Kaul's Diary
Free Reports

India's Rs 1,66,276 Crore Problem

Feb 15, 2018


One of the major points that we talk about in India's Big Government is the fact that the Indian state is overambitious. The government wants to do too many things at the same time, and ends up making a mishmash of everything.

One of the areas where the governments (both central as well as state governments) devote a lot of their time and attention are public sector enterprises. In the past columns, we have discussed many cases of central public-sector enterprises continuing to bleed and the government continuing to bail them out, year on year. This includes loss makers like Air India and Hindustan Photo Films Manufacturing Corporation, which have been losing money for many years.

In fact, very recently, the government revealed the losses of the perennially loss-making Air India, in the Lok Sabha. For 2016-2017, the government owned airline made losses of Rs 5,765 crore. Despite all the government spin around the airline working in a much better way, than it was in the past, the losses increased by 50%. In 2015-2016, the losses of the airline were at Rs 3,837 crore. With these numbers, it is surprising that a few media houses chose to report the fact that the operating profit of Air India, had improved year on year. But how does that matter, when the losses have gone up by 50%?

The airline has lost a total of Rs 41,657 crore, between 2010-2011 and 2016-2017. It continues to function on back of the government investing money in it, every year. Between 2011-2012 and 2017-2018, the government has invested a total of Rs 26,545 crore, into the airline. Of course, as we keep saying, every extra rupee invested in this airline, is a rupee taken away from more important areas like defence, education, health, agriculture etc.

Over and above this, the banks give the airline working capital loans. These loans as of March 31, 2017, amounted to Rs 31,088 crore. The question is why do banks give an airline which has accumulated losses of greater than Rs 41,000 crore, more loans? The answer lies in the fact that Air India is ultimately owned by the Indian government. No private sector airline in a similar situation, will get bank loans.

And lending to Air India is essentially lending to the government. Any default on loan repayment by Air India will be seen as a default by the Indian government. Hence, the assumption is that such a default is never going to happen. Given this, banks are happy to keep giving loans.

The point in throwing all these numbers at you, dear reader, is to show you, that it takes a lot of money to keep a "dead elephant" like Air India, alive. It is beyond the government babus who run this airline, to breathe life into it. With every new appointment at the top, we are told this gentleman will now revive the airline. But that hasn't happened in years.

Meanwhile, the government continues to invest money in the airline. At the same time, the accumulated debt of the airline stands at Rs 48,447 crore (this includes aircraft loans over and above, the working capital loans). The good part is that the total debt is down from Rs 52,817 crore as of March 31, 2016. This is ultimately, the liability of the government of India, which actually does not show on its books.

In the recent past, there has been some talk about selling the airline, lock, stock and barrel. But then, until things really happen, talk is just talk. In fact, the government has been talking about selling the airline since June 2017. The proof of the pudding, as they say, is in the eating.

Air India, over the years, has become a poster boy of the government owning and continuing to run, loss making enterprises. This problem is well known at the central level. In 2015-2016 (the latest set of agglomerated numbers which are currently available) 78 out of the 244 central public sector enterprises, were loss making. Of these nearly half of the companies had made losses three years in a row. Further, between 2006-2007 and 2015-2016, a period of a decade, the net profit to capital employed ratio, of the central public sector enterprises has fallen from 12.27% to 5.97%. This tells us how well the government's capital (or in other words the taxpayer's capital) is being put to use.

The story of central public sector enterprises not doing well has been well highlighted over the years. But the same cannot be said for public sector enterprises owned by the state governments. Economist Vijay Joshi in a recent lecture pointed out: "In addition to Central PSEs, there are around 1000-odd State PSEs, of which two-thirds make losses, including notably the zombie electricity distribution companies. The aggregate losses of all PSEs, central and state, amount to about one per cent of GDP annually."

One percent of the GDP is not a small amount. The GDP (gross domestic product) at current prices for 2017-2018 is projected to be at Rs 16,627,585 crore. One percent of this works out to around Rs 1,66,276 crore. This is a large amount of money.

Of course, a lot of this amount, the government is not currently paying for directly. Many public sector enterprises borrow from banks, in order to make up for their losses. The banks lend them money simply because these companies are ultimately owned by the central and the state governments.

Hence, the total liabilities of the government keep increasing day by day and will have to be paid for one day, simply because a government cannot default.

Rs 1,66,276 crore are just the projected losses of India's public sector companies, for this year. Imagine, the kind of losses that have been accumulated over the years. Now imagine the kind of money that has been borrowed by these companies to keep running. And now imagine, the kind of money that the government of India will have to provide in the years to come, to keep repaying these loans.

It's a very scary proposition. And since, in the end, we are always asked, but what is the solution, let's provide a solution, at least this time around. As Joshi said in his speech: "So far, successive Indian governments have been stuck with the fetish of 51 per cent ownership and have only flirted with the idea of privatization...It is high time the government grasped the nettle of mounting a substantial programme of privatization, at least of those PSEs that make losses or meagre profits... This gain could be used by the government to invest in socially beneficial activities that the private sector would normally avoid, such as rural roads and irrigation."

But this is what we call an impossible solution. Joshi is not the first economist to have recommended the sale of public sector enterprises and the investment of the money thus generated into public goods. The government(s) have been in the know of this solution for a very long time, and have chosen to do nothing about it, up until now. And there is no reason for them to change that.

Warm Regards,

Vivek Kaul
Editor, Vivek Kaul's Diary

PS: You don't need to take unnecessary risks to make solid double or triple digit gains in the stock market. We have just released a premium report recommending the top 5 safe stocks. Get it here...

Vivek Kaul is the Editor of the Diary. He is the author of the Easy Money trilogy. The books were bestsellers on Amazon. His latest book is India's Big Government - The Intrusive State and How It is Hurting Us.

Disclaimer: The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

Recent Articles

When It Comes to Housing Loans, Banks/HFCs Have a Long Way to Go December 10, 2018
India's home loan to GDP ratio is a very low 10%. Only if home prices were more reasonable, the ratio would have expanded more.
This Indicator Can Tell You Where the Indian Economy is Headed December 7, 2018
Keep a watch on these numbers if you want to get a sense of how the GDP growth will pan out.
The End Game for Trump & Gold December 7, 2018
The Trump administration is likely to be fighting controversy after controversy in the months ahead. That's exactly what happened when he started his Presidency. And that drove the gold price higher.
Should You Worry About Global Warming? December 6, 2018
Is the earth heating up? Most appear to agree that temperatures are rising. A few dissent. Bill Bonner takes a closer look at both the sides.

Equitymaster requests your view! Post a comment on "India's Rs 1,66,276 Crore Problem". Click here!

5 Responses to "India's Rs 1,66,276 Crore Problem"

Tajuddin Mohammed Saith

Feb 18, 2018

Dear Sir, Your choice line acepeted, thanks. MST



Feb 15, 2018

I have been always advocating that this Govt is interested in Punitive measures than welfare measures .Govt job is not to run business but to run the govt which means it needs to look after its subjects and its welfare and not to find what his predecessors have done and now they are undoing it.Thats is not the need we need to look at now.

Like (2)

Balakrishnan R

Feb 15, 2018

Dear Sir,
Nice piece of writing on PSUs. FM has proposed in the budget to increase the support price to 1.5 times for farmers. RBI fears that this will fuel inflation. Why not the government think of reducing the cost of inputs to the farming. Water is one of the major input. FM has not proposed any money for linking of rivers or for developing irrigation. Except north, most of other three sides of our country is surrounded by sea. And our country is a tropical country; and there would always be sea breeze. Both will help to generate power either by solar or by wind mill. This power can be used to desalinate sea water and pump to inland in a huge way. This will solve water problem. If water is there, something will always grow. I request you to cover this topic in one of your writings.

Like (2)


Feb 15, 2018

I have following points.
1. 100% of state run PSUs are dud. The reason is all the staff from top to bottom are entrenched(No transfers). Their only aim is to milk these PSUs. Take for example, all electricity boards, NGEF (Karnataka), Poompuhar Shipping Corporation (Tamil Nadu).
2. Air India was made to fail because of Praful Patel. Why nobody is asking for his head (He does not feature in the news even) beats me. He sold off all the lucrative routes to Jet Airways who made a killing. I think a petition should be started to get back those routes. In fact I have a better suggestion. The Government instead of giving continuous financial support to the company, should resume services to these lucrative routes charging fares lower than lowest fares charged by other airlines. Although initially, losses will mount which would be supported by the Government. But other airlines which will stop these services due to unviability , their route permissions should be cancelled by the Government. After sometime, Air India having garnered back the traffic, should raise the fares to viable level. Then Air India will start making profit.
The Government should have guts and do this.
3. The middle level employees of PSUs are extremely capable people. In fact they do most of the work. They should be encouraged and paid more. In fact board level people of these PSUs are useless and DO NOT HAVE INTEREST OF THE ORGANISATION EITHER IN THEIR HEAD OR IN THEIR HEART. Take Kandla Port Trust for example. Tell me why Kandla Port Trust was prevented to become the largest container terminal in India. In the 80s and 90s (Before Mundra Port with promote Adani came on the scene), this port having a hinterland of whole of North India and part of Uttar Pradesh in addition to Rajasthan and Gujarat should have become the most profitable port in India. But the Board Of Trustees did not do anything to promote it but supported the then upcoming Mundra Port. The rest as the say is History. (Not known is the destruction of mangroves before construction of this port)

Like (3)

Thiruvalluvan V

Feb 15, 2018

The combine loss of all the PSUs may come to about 2% of GDP i.e. 3.4 lakh crores. But the combined default of all the Private behemoths(around 1000 personnel) is 11 lakh crores (NPA in PSU banks only). Why to blame the banks for that. The Industrialist pay money to politicians to twist the arm of bankers to pay to them. Why not much noise is made about that?

Like (1)
Equitymaster requests your view! Post a comment on "India's Rs 1,66,276 Crore Problem". Click here!