Column : Focus on India Inc, not PSU Inc

Written by Sunil Jain | Updated: Nov 22 2012, 07:01am hrs
Faced with a sea of stalled investment projects, finance minister P Chidambaram is understandably exercised, which is why he is exhorting PSUs to invest more, even threatening to take away their spare cash if they dont do so. That, as weve pointed out before ( and ( is probably not a great idea. If PSUs are sitting on cash, its probably because their investments are being slowed. ONGC, for instance, has R28,768 crore of cash, but it invests more than this each year, and a three-year delay in getting permissions for its KG Basin field held back what was likely to be a $5 billion investment over 10-15 years. And to the extent government policy makes sectors like oil unattractiveoil PSUs gave out subsidies worth R1,58,300 crore over the last five yearswhy would PSUs want to invest anyway

Even this, however, is missing the wood for the trees. With a 20-21% share of GDP, and falling steadily with the government rightly chipping away at PSU monopolies, the public sector (and that includes the government) is batting well above its average since it accounts for around 26-27% of total investment in the country. So the finance minister would do well to relook his exhortation to PSUs.

Before we delve a little more into public investment (from either the government or from PSUs), its important to keep in mind the factors that determined Indias turnaround from the early 2000s to the mid-2000s and the subsequent collapse. First, it was the sharp reduction in government dissavingsgovernment overspent R99,000 crore in 1999-2000 and began saving R25,000 crore in 2007-08 according to CSO data on savings in Indiaand nothing else, that helped overall public savings rise from -0.8% of GDP to 5% of GDP over the same period. This helped Indias overall savings improve from 25% of GDP in 1999-2000 to 36.8% by 2007-08. When the government started over-spending again and dissavings rose to R2,03,500 crore in 2009-10, public sector savings fell to 0.2% of GDP and overall savings fell to 33.8% of GDP.

The mirror image of this picture is the sharp rise in investments by India Inc. From a mere 7.4% of GDP in 1999-2000, the rise in the global economy, the China-led boom in commodities and the growth of the Indian economy led to India Incs investments rising to a stunning 17.3% of GDP by 2007-08. In terms of the overall investment in the economy, India Incs share rose from 28.2% to a stunning 45.5%. With the global economy slowing, Chinas boom no longer there and the Indian economy also slowing, apart from the policy paralysis, India Incs investments were down to just 12.1% of GDP in 2010-11. It is this that needs to be fixed, by getting the National Investment Board in place, by getting the economy on track again.

By contrast, the public sector investment story hasnt really changed that much. Sure it has slowed but by levels that arent anywhere as significant as whats happened to India Inc. And here too, the story appears one of government subsidy programmes playing havoc.

PSU investments have slowed with their share falling from 4.6% of GDP in 2008-09 to 3.9% in 2010-11, but as compared to 3.4% in 2004-05, the share has risenbut even if you look at the fall, its insignificant compared to whats happened to the private sector. And while exhorting PSUs to raise investments may still be a good idea, its important to see where this is happening. In telecom, there is little sense in BSNL/MTNL investing more if their market shares are falling compared to a Bharti Airtel and, in any case, both are loss-making units as compared to Bharti. In the case of the oil sector, similarly, if government oil PSUs want to invest more, the fact that government is bleeding them to death makes this difficult.

While the PSUs have more or less held their own, government investments, which comprise around 55% of all public sector investments (think roads under NHAI, for instance, or irrigation facilities or schools), arent growing as robustly either, partly due to increased expenditure on subsidies. Government investments rose from 3.1% of GDP in 2004-05 to 3.9% in 2010-11 if you use the CSO data, but the numbers are much lower if you use the finance ministrys economic and functional classification of the budgetfor 2004-05, for instance, CSO talks of R99,377 crore of investment while the economic and functional classification talks of R92,855 crore; for 2010-11, the figures are R2,99,275 crore and R2,74,823 crore, respectively. Indeed, for 2011-12, the economic and functional classification says capital investment funded through the budget rose just 4.3%, taking the share of government investments down from 3.6% of GDP in 2010-11 to 3.2% in 2011-12. Considering overall government expenditure rose 10.14% that year, its pretty clear investments are being sacrificed for more revenue expenditure. Before exhorting PSUs to invest, the finance minister needs to keep these realities in mind.