A recent study of India?s top PSUs by credit analysts Dun & Bradstreet has rather interestingly highlighted the improved performance of the public sector in recent times. At one level, this is perfectly explicable?economic reforms should have had a significant positive impact on the PSUs as a whole, and the savings of the sector have steadily gone up, from 3% of the GDP to 3.3% and further to 4.1% of the GDP over the last three Five Year Plans. These are not just incremental changes that take place in a business-as-usual scenario?each percentage point increase leads to additional savings of Rs 40,000 crore. It is, instead, likely to be a change forced on the sector by the growing market competition after the reforms.
Still, there are reasons for caution before according too much adulation to the performance of PSUs. First, the scope for improvement has probably reached a limit as is evident from the marginal drop in PSU savings to 4% (from 4.1%) of the GDP as estimated in the 11th Plan. Second, the PSU gains have been heavily skewed?most profits and savings come from a few niche areas where the public sector still has substantial monopoly/policy-induced dominance of the markets. As noted in the D&B report, oil & gas and banking contributed more than a quarter each of the total PSU profits. If one includes four other sectors like metals, power, coal and insurance, the total profit share of these select sectors rises to 90%. The scope for wringing out more profits from these segments is now getting increasingly constrained by the increasing competition from private players who have gained entry in many of these sectors. In fact, the PSUs which earned above 20% returns on net worth in sectors like oil & gas, metals, trading, coal, heavy engineering and insurance owe much to the government policies which handicapped competition. On the other hand, the 3% return on net worth from PSUs in the highly competitive telecom sector is evidence of how competition erodes PSU margins. In fact, it is likely that the high dividend payments, low debt-equity ratios and large cash reserves that characterise PSUs point more to lost opportunities for boosting investments and improving long-term growth than superlative performance. After all, according to CSO statistics, the contribution of PSUs to GDP has steadily shrunk from a peak of 11.4% in 2002-03 to 9.3% in 2006-07.
