Should sick PSUs be closed?

ICRA Limited

Last year, the government paid more than Rs 2,000 crore as non-plan grants, loans and interest subsidies to central public sector units (PSUs) in various states of sickness.

The idea of giving "loans" to such units is a poor joke and is about as bankrupt as our policies to these failed businesses have been.

For the most part, these sick PSUs that were formerly in the private sector, were in the face of financial losses, were over-staffed and had over-militant trade unionism.

These were then taken over by the government to avoid closure and motivated by the desire to save the workers their jobs. It was viewed as an ad interim measure, but three decades have passed and so have the generation of the workers whose jobs were to be saved.

A few were indeed set up as central PSUs, but were a disaster from birth in every case, even in the days when many other central PSUs were doing quite well.

India is, as we all know, unique. So it is only here that we have to ask what we ought to do about the failed businesses that we took over 30 years ago, which have continued to fail ever since, and that live on handouts financed by the treasury.

After all, the financial resources that are at the command of government "" from the taxes that it collects and loans that it obtains from citizens "" have competing uses: in building infrastructure and in providing schooling and healthcare.

Why should resources be taken away from these ends and poured into this pit? To soothe someone's socialist conscience is not a good enough reason.

Ideological advocates for the public sector, whose Pavlovian response for 30 years has been: " Put more money and revive it", "Write off the interest and loans," have nothing new to say.

They fail to recognise that units that did badly even in the days of control raj, import protection and public sector preference cannot do any better in a competitive atmosphere.

These failed businesses cannot be sold because nobody in their right mind will buy a business that has been doing badly for 30 years and more. If the units have assets such as land, there might be some buyers, but the new owner will shut the unit down.

Hence, the best thing that government can do is shut down the unit itself, pay the workers their separation dues, clear other liabilities and auction off whatever assets the unit might have.

In fact, if ideological advocates of the public sector sincerely believe that these failed businesses can be revived, they should get together and buy them off the government, put their money where their mouth is and prove their point.

But for the citizen whose money is being spent, there are other more important and productive uses in mind that public financial resources can be put into.

Apart from the financial side, there are other good reasons to do away with sick PSUs. In each case they occupy a space either on the output or input side and they do so in an inefficient manner. Their exit will permit more efficient units to occupy that space and scale up.

And the average level of efficiency (which is really about the use of material, land and energy, besides financial resources) of the industry will be greatly enhanced.

And that is how the closure of failed businesses in the private sector is intrinsic to the increase in productivity of the industry "" a natural outcome that government ownership can, and has, prevented in this country.

With the removal of the quota regime from January 2005, Indian textile and garment businesses "" the industry with the largest workforce "" stands to gain enormously. Maharashtra, however, persists with a monopoly procurement scheme that benefits the middleman, not the peasant, and causes different qualities of cotton to be mixed up and is, therefore, of less value to the spinner.

Government-run mills live on handouts, but continue to consume cotton inefficiently. If we remove both these obstacles, who will benefit? The rest of the textile business, of course! The immutable fact is that it is a profitable business that has a chance of expanding and creating new jobs.

Sick businesses do not create jobs "" they consume potential ones.

Basudeb Acharya
Lok Sabha MP
CPI (M)

PSUs are criticised by a section of people who call them holy cows or white elephants and say that the government is unnecessarily investing a huge amount of money to run these units. This criticism is not fair.

They may be sick PSUs, the accumulated losses huge and return to the government exchequer almost nil, but the basic question is whether our country should have government-controlled industrial units or not. Whether it is the government's business to run these units, whether the PSUs have outlived their utility are topics that have been debated since the government adopted the policy of economic reform. But why did the government adopt the concept of PSUs? The main purpose was to achieve self-reliance in the economy.

Right after Independence, when nobody came forward to set up big industrial units, the government decided to set up industrial units in the steel sector, the petroleum sector and the heavy engineering sector. PSUs are divided into two categories "" those that have been in the public sector since inception and two, those industrial units that were closed and abandoned by erstwhile owners, which the government took over and, subsequently, nationalised them.

Some of these taken-over and nationalised units are chronically sick. The government took over 126 closed mills, nationalised them, and formed the National Textile Corporation. A majority of these mills were sick and no attempts were made by the government to revive those units. There were no investments for the replacement of worn-out plant and machinery. How then can we expect these units to be profit making?

Take the example of Indian Iron and Steel Company (IISCO), Burnpur, West Bengal. This unit was taken over by the government and nationalised in the 1970s. No substantial investment was made to modernise the country's oldest steel plant.

Despite all this, the unit registered a profit during 2003-2004. Our premier coal companies such as Eastern Coalfields Ltd (ECL) and BCCL are making losses. The best quality of coal is available in the underground mines of ECL.

However, the government has stopped giving financial assistance to ECL and BCCL since 1996. Thus, these firms do not have the funds for development of underground mines, which is where investment is required. Is closing down these underground mines the only solution?

Today, China has 60 per cent of the world's underground mines and is the largest producer of coal. If the Indian government spends Rs 56,000 crore on highways, can't it put aside Rs 1,000 crore for the revival of ECL, which will substantially reduce our dependence on import of coal? Seven urea manufacturing units were closed during the National Democratic Alliance regime. Today, three states "" Bihar, Jharkhand and West Bengal "" do not have a single urea manufacturing unit. Can't these units be re-started by extending the gas pipeline?

Another important aspect we cannot ignore is employment. PSUs have given employment to lakhs of unemployed people. Today, the growth in employment generation is almost negative.

Even during the period when there was an assault on PSUs, there was an impressive improvement in financial performance. Profit before depreciation, interest and tax increased from Rs 27,707 crore in 1993-1994, to Rs 100,918 crore in 2002-2003, thereby registering an increase of 264.23 per cent.

Profit before interest and tax during this period has increased from Rs 18,556 crore to Rs 73,077 crore. The increase works out to 293.82 per cent. Profit before interest tax to the capital employed, that is, the return on investment, has gone up from 11.6 per cent to 17.45 per cent. Net profit during this period has increased from Rs 4,545 crore to Rs 32,141 crore, thus registering an increase of 607.17 per cent. The dividend declared by central PSUs during 2000-01,02,03 increased from Rs 8,260 crore to Rs 13,735 crore (2002-03). (Source: Public Enterprises Survey 2002-2003, Volume ""I)

Thus, to criticise the central PSUs as white elephants is unfair. The United Progressive Alliance's action to form a Board of Reconstruction for PSUs is a step in the right direction.

All such units should now be referred to the Board for Reconstruction of PSUs and attempts should be made to revive them. Some of these units have potential but no serious efforts have been made to revive them.