The burden of govt equity in PSUs

The Modi govt has outdone the Manmohan Singh regime in ramping up infrastructure outlay for state-controlled units

How has the Narendra Modi government engaged with the central public sector undertakings or PSUs in its second term? Has the engagement been any different from the way it took shape during its first term or during the tenure of earlier governments? One way of evaluating this engagement is to track how the Centre has contributed to the equity base of the PSUs over these years or sold its equity stake in them. The takeaways from a comparison with the past are quite instructive.

For instance, the total equity infused into PSUs by the Manmohan Singh government between 2009-10 and 2013-14 was estimated at Rs 2.34 trillion. This represented a near trebling of the Rs 80,000 crore of equity infused into PSUs by the Manmohan Singh government during its first term from 2004-05 to 2008-09. The story of PSU disinvestment was no different. Remember that this was a government that had grown deeply suspicious of privatisation and pursued disinvestment of its equity stake in PSUs with neither conviction nor zeal. Yet, the Manmohan Singh government’s receipts from disinvestment during the 2009-14 period shot up to about Rs 1.2 trillion, compared to Rs 46,000 crore during 2004-09.

In contrast, the Modi government in its first term (2014-19) was far more focused on disinvestment, although it was a little cautious about privatisation, which was pursued tentatively without any positive outcome. Air India privatisation had been initiated, but had to be dropped and IDBI Bank’s privatisation was only proposed without achieving that goal. Thus, the Modi government had no privatisation to take credit for, but it secured a huge increase in its disinvestment receipts in its first term — Rs 3.2 trillion.

Illustration: Binay Sinha

Significantly, while the Modi government pushed the disinvestment programme in a big way in its first term, its infusion of equity into PSUs saw an even bigger rise. PSU equity infusion almost trebled to Rs 6.26 trillion during 2014-19, compared to Rs 2.34 trillion under Manmohan Singh during 2009-14. On the face of it, this increase was surprising. Why should a government that believes in privatisation in principle and goes in for aggressive disinvestment should also apportion substantially more of its total expenditure for equity infusion into PSUs? But it appears there was a strategy at work, one that believed that the government must fix the banking mess through capital infusion and invest more in key infrastructure areas controlled by a few state-owned enterprises.

Not surprisingly, then, the bulk of the increase was on account of its focus on state-controlled enterprises in banking, railways and in construction of highways. The contribution to Air India’s equity base was almost stationary at just about Rs 17,000 crore during the Modi government’s first term, compared to about Rs 15,000 crore infused by the Manmohan Singh government during 2009-14. But equity for state-controlled banks shot up to Rs 2.52 trillion during 2014-19, compared to Rs 45,000 crore under the Singh government, because the non-performing assets situation in the public-sector banking system worsened, requiring higher capital infusion.

Similarly, equity infusion into the Indian Railways and the National Highways Authority of India (NHAI) more than doubled from Rs 1 trillion and Rs 46,000 crore during 2009-14 to Rs 2 trillion and Rs 1.14 trillion during 2014-19, respectively. This was a clear indication that the Modi government was committed to investing more in the infrastructure sector at a time when private-sector investment flows had slowed and higher government investments were needed to crowd in private investments and keep the growth momentum intact.  

This trend has continued even during the second term of the Modi government. For the four years between 2019-20 and 2022-23 (including the Budget estimates for next year), the amount of equity infusion into PSUs is set to go up to about Rs 9.5 trillion. In just four years of the second term of the Modi government, equity infusion into PSUs has already notched up a 52 per cent increase over that during the five years of its first term.

The composition of such equity infusion has also undergone a significant change. The biggest increase has taken place with respect to equity contribution to the NHAI at about Rs 2.77 trillion, followed by the Indian Railways at Rs 2.48 trillion. Recapitalisation of public-sector banks will see a decline at Rs 1 trillion, with their financial condition improving with lower non-performing assets. Expectedly, there is no provision for Air India. An estimated Rs 62,000 crore has been provided to the Air India Asset Holding Limited to complete the debt write-off formalities of the airline after its privatisation. But this is a one-off allocation and no further provision under this head will be needed after the successful privatisation of Air India.

What cannot escape attention is a slowdown in the pace of disinvestment in the second term of the Modi government. This is also a reflection of the volatility in the markets in the wake of the Covid pandemic. The markets may continue to remain volatile as a result of the Russia-Ukraine conflict and this will adversely impact the disinvestment prospects in the remaining years of the Modi government’s second term. Also, there is a certain pragmatism that has informed the Modi government’s disinvestment plans during the second term.

The broad conclusion from PSU investments by governments under different political dispensations in the last two decades is that their share in total government expenditure increased rapidly during the Modi regime. From about just 2.5 per cent and 3.6 per cent, respectively during the two terms of the Manmohan Singh government, the share of equity infusion into PSUs in the government’s total expenditure shot up to 6.3 per cent during the Modi government’s first term (2014-2019) and will go up further to 6.8 per cent in the first four years of its second term (2019-2023).

This appears to have been caused by a variety of factors. One, the financial health of PSUs has got worse over time requiring increased equity infusion. Two, the growing investment needs for the country’s transport sector, largely controlled by the government-owned enterprises, has to be met. This also implies that in spite of the privatisation drive for the last so many years, the transport infrastructure continues to be driven by the public sector and the government has to step in to meet the investment gap. The banking sector’s financial health issues are no longer using up government resources. It is the infrastructure sector that is cornering a larger share of government equity infused into PSUs. This is also a reflection of the Modi government’s failure to attract the private sector to carry the load of infrastructure building in the economy. If the demand for more equity in PSUs is not managed well, it could become a financial burden that the Centre could do without.