The Case for Healing ‘Sick’ PSUs

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For many in India, the products and services of one’s childhood were mostly public sector. If one had to fly on an airline, it would be in Air India; when one wanted to watch television, there would be only one channel, Doordarshan. Early internet and landline connections all had to be BSNL’s.

Of course, post liberalization of the economy, the situation has reversed tremendously. The public sector is often looked down upon in an economy that thrives on rapid decision making and efficiency.

Recent developments may even lead erstwhile giants like Air India and MTNL to shut down, as the Modi government identifies 65 Public Sector Enterprises deemed ‘sick’, i.e. undertakings that incurred losses that were more than 50 per cent of their net worth across four consecutive years. Air India and MTNL had been added to this list in the Lok Sabha on Tuesday. Unverified reports have been spreading that the two will also be shut down, although the government is yet to confirm the same.

It may soon be time to say goodbye to Hindustan Machine Tools, however, as the government just shut three of its units – HMT Watches, HMT Machine Tools and HMT Bearings. Prices of HMT watches on the internet have been rising, as buyers perceive a potential rarity in them. Two more sick PSUs are expected to be shut down and, it is yet to be known at which the axe will fall. The axed companies will receive settlements plans totaling 1,100 crores.

Not all PSUs are under loss, however. Companies like ONGC, NTPC and IOC are among the largest profit runners in the country. The burden to rescue their public sector brethren may rest on their shoulders, as the government prepares revival programmes for the sick sectors. Public sector companies are divided into three categories – Maharatna, Navratna and Miniratna – based on how much autonomy they enjoy with regard to their investment decisions. They are awarded the same based on their profit making ability and record. The government in September 2014 announced a plan to form a consortium of Maharatna companies to identify and revive sick PSUs. The Maharatnas were not amused, however, reportedly unhappy with the proposal that their money and not the government’s would be used for the revival.

India is not the first country to try reviving its ailing corporations through giant holding companies. The US Government recently ended its controversial $80 billion bailout of the big three of its auto industry (General Motors, Ford and Chrysler) in December 2014, selling its last shares in the same at a time when the stocks were valued high. The bailout began in 2009, in the midst of a recession that saw many outraged, given that public money would be used to rescue private corporations. The end result was a loss for the exchequer at about $9.2 billion, but some of America’s biggest names in the auto industry survived bankruptcy and the recession as a result.

Russia too pulled a similar move following the financial crises in its aviation industry following the breakup of the Soviet Union. It merged most of its key private and state-owned aircraft construction companies into the United Aircraft Corporation in 2006.

For a government that is increasingly eyeing privatisation of its problems, these sick companies will have to remain on tenterhooks as to whether they will be bailed out or washed out.

Varun Ramesh

Image Source: The Viewspaper