THE PSU DISCONNECT

Relevance:

  • GS 2: Governance
  • GS 3: Economy

Focus

  • In light of current political and economic developments, this article looks at how India’s public sector firms (PSUs) are developing.
  • It draws attention to the effects of slower privatization activities on the economy and the pressing need for changes to improve public sector performance.

THE PSU DISCONNECT - UPSC

Context

  • An important part of India’s economic strategy has always been the country’s public sector firms.
  • But the COVID-19 pandemic’s effects and recent changes in governmental policy have sparked questions about their long-term viability.
  • This article explores the necessity for strategic reforms, the reasons for the delayed privatization, and the implications for the economy.

Key Issues

Shift in Government Policy

  1. Political Calculations: Election-related concerns have an impact on the government’s cautious privatization strategy. The sensitivity of these decisions in the political sphere was demonstrated by the fact that public sector banks, which were scheduled for privatization, saw their disinvestment delayed because of impending state elections.
  2. Economic Recovery: Maintaining economic growth has become more important following the pandemic. The Ministry of Finance’s data shows that in order to accommodate economic stimulus packages, the fiscal deficit targets were raised, which postponed disinvestment.
  3. Public Opinion: The bank unions’ 2021 rallies against privatization serve as a reminder of how public opinion influences governmental decisions. Over 2 million bank workers took part in strikes against privatization, according to a study by the All-India Bank Officers’ Confederation.
  4. Sectoral Focus: The Defense Production Policy of 2020 highlights the strategic significance of public sector firms in national security, and the government continues to maintain control over vital areas like defense.
  5. Ambiguity in Policy: Investors are uneasy due to the inconsistent privatization policy. For instance, the market’s concerns were reflected in the company’s stock price decrease of more than 10% in 2022 as a result of the BPCL privatization’s postponement.

Performance and Financial Viability

  • Capital Outlay Decline: PSUs’ capacity to invest in modernization and expansion has been limited by their capital outlay reduction, which went from ₹33.21 trillion in 2013–14 to ₹8.57 trillion in 2019–20.
  • Reduced Dividends: PSU dividends dropped from 0.32% of GDP in 2013–14 to 0.11% in 2021–22, a sign of decreased profitability and financial distress.
  • Operational Inefficiencies: Between 2015 and 2020, PSU losses totalling ₹1.45 lakh crore were attributed to operational inefficiencies, as reported by the Comptroller and Auditor General of India (CAG).
  • Investment plan: Industries like manufacturing have underperformed as a result of a lacklustre investment plan. For instance, in 2021–2022, the Steel Authority of India Limited (SAIL) revealed a 12% drop in production efficiency.
  • Global Competitiveness: PSUs have had difficulty being globally competitive, and as a result, India has fallen to 63rd position in the World Bank’s Ease of Doing Business rating. This decline is partially attributable to state-run companies’ poor performance.

Public Sector Reforms

  • Obstacles to Privatization: Labor disputes and valuation disagreements have impeded the privatization process. Potential bidders, for example, disputed Air India’s value, which resulted in several rounds of bidding and a drawn-out disinvestment process.
  • Legal Framework: Although the Banking Companies Act has been amended to allow for more seamless disinvestment, shareholder legal challenges are still causing the process to drag out.
  • Autonomy in Management: In order to improve operational efficiency and decision-making, PSUs must have more managerial autonomy, according to a Department of Public Enterprises report from 2022.
  • Strategic Reorientation: In 2022, the government sold off loss-making companies like Scooters India Limited as part of its strategic reorientation towards disinvesting in non-core sectors.
  • Sector-Specific Reforms: Improving PSU performance requires customizing reforms to industries like transportation and energy. The necessity of sector-specific methods to improve the effectiveness of public sector initiatives is emphasized by the National Infrastructure Pipeline (NIP).

Economic Impact

  • GDP Contribution reduction: PSUs’ declining significance in the economy is shown by the reduction in their GDP contribution, which went from 2.9% in 2013–14 to 0.42% in 2019–20.
  • Concerns about Employment: The Labour Bureau claims that between 2015 and 2020, job losses in PSUs resulted in the loss of nearly 1 lakh jobs, which increased unemployment, especially in industrial areas.
  • Pressure on the Fiscal Deficit: The government’s plans for the fiscal deficit have been further strained by the delay in disinvestment, with the deficit expected to reach 9.5% of GDP in 2020–21.
  • Revenue Generation: The Department of Investment and Public Asset Management (DIPAM) reports that there will be a ₹1.6 lakh crore deficit in projected revenue between 2019 and 2022 as a result of the failure to satisfy disinvestment targets.
  • Regional Development: The poor performance of PSUs has had an impact on regional development, especially in places where employment in the public sector plays a major role in the local economy, such as Jharkhand and Chhattisgarh.
Case Studies

  • Air India Privatization: In 2022, Air India underwent a successful privatization following years of financial difficulties and unsuccessful efforts. This instance emphasizes both the potential advantages, such as lessening the financial burden on the government, and the complexities and difficulties of privatization sizable, loss-making PSUs.
  • Oil and Natural Gas Corporation (ONGC): ONGC has played a significant role in India’s energy industry, but the changes in government policy and the state of the global energy market have negatively impacted its performance. Its competitiveness in the global market has been impacted by the lack of investment in exploration and technology.
  • Steel Authority of India Limited (SAIL): Over the last ten years, SAIL’s production efficiency and financial performance have declined, which underscores the larger problems PSUs in the industrial sector are confronting. It is obvious that modernization and wise investment are necessary.
  • Public Sector Banks (PSBs): In order to create stronger organizations that can endure global competition, PSB consolidation has been a major reform. Unions have opposed the procedure, though, and there have been worries about job losses.
  • National Aluminium Company Limited (NALCO): NALCO has experienced difficulties due to changes in global commodity prices and operational inefficiencies. Despite being a prosperous PSU, legislative restrictions and a lack of value-adding investment have prevented it from realizing its full potential.

Statistical Data

  • Capital Outlay: From ₹33.21 trillion in 2013–14 to ₹8.57 trillion in 2019–20, PSUs’ capital outlay declined.
  • Payouts GDP Contribution: Between 2013–14 and 2021–22, the GDP contribution from PSU dividends decreased from 0.32% to 0.11%.
  • Losses: Between 2015 and 2020, PSU operational losses came to ₹1.45 lakh crore.
  • Global Competitiveness: In part because to PSU underperformance, India placed 63rd in the World Bank’s Ease of Doing Business index.
  • Bank Consolidation: To increase efficiency and competitiveness, ten public sector banks were combined into four larger organizations in 2019.

Way Forward

  1. Strategic Privatization: While maintaining control over vital industries like energy and defense, the government should move forward with the strategic privatization of non-core PSUs. This would boost productivity and lessen the financial strain.
  2. Management Autonomy: Giving PSU managements more freedom to make their own decisions will improve operational effectiveness. Reducing bureaucratic intervention and promoting more market-driven tactics could be two ways to achieve this.
  3. Financial Restructuring: To improve PSUs’ fiscal health, a comprehensive financial restructuring plan that includes debt reduction and recapitalization is required. Accompanying this should be well-defined investing plans.
  4. Global Competitiveness: PSUs must prioritize making investments in technology, innovation, and human resources in order to become globally competitive. This would necessitate a change in perspective from only accomplishing social goals to reaching corporate excellence.
  5. Policy Uniformity: To reassure investors and prevent market upheavals, the government must maintain uniformity in its privatization and PSU management strategies. This entails unambiguous deadlines and open disinvestment procedures.

Conclusion

India’s public sector companies are at a turning point in their development. Even if the government has made great progress in reforming the industry, there is still much to be done. The capacity of PSUs to support India’s economic expansion has been limited by the sluggish pace of privatization as well as administrative and financial difficulties. PSUs can still be extremely important to India’s economic recovery, nevertheless, if strategic changes like privatization, management autonomy, and financial restructuring are implemented. The secret is striking a balance between political and economic needs in order to keep the public sector a vital component of India’s development narrative while allowing it to change with the times.

Mains Question

Discuss the problems and prospects for improving India’s public-sector enterprises. How might strategic privatization and policy consistency help PSUs enhance their performance and global competitiveness? (250 words)