How spend, spend is giving state-owned companies diminishing returns

The private sector has been going slow in adding fixed assets but squeezing out more

Government companies are likely to be nudged to spend more on setting up new factories and other assets in a capital expenditure (capex) push. But they have been making less money than before from earlier investments.

Public sector businesses earn less than Rs 8 for every Rs 100 worth of net fixed assets, shows data compiled from the Centre for Monitoring Indian Economy (CMIE) which looked at non-financial entities. The private sector earns twice as much or more.

A rise in net fixed assets amid poor demand diminishes returns. Government companies’ net fixed assets went up 14 per cent annually on average in the 1990s. The private sector was more bullish at the same time, with net fixed assets growing 20 per cent every year on average. In the last few years, double-digit growth in such assets has been rare in the private sector. But government companies’ net fixed assets have grown faster in three out of the last five years (chart 1).

That’s because the government prods its companies to spend and keep the economy stimulated. Large capex spends boost the economy. The private sector is said to be reluctant to increase spending on additional capacity amid low utilisation of existing facilities and economic uncertainty. Government companies continue to invest despite lower returns (chart 2).

The private sector is squeezing out more from existing assets, earning 17 per cent return on net fixed assets in 2022-23. It was less than 8 per cent for government companies overall, including those owned by the states and the centre. Data suggests that state government companies are faring worse. They had negative returns as a whole, CMIE data shows. Foreign private companies in India had the highest return on net fixed assets – of more than 30 per cent – compared to around 15 per cent for Indian private companies.

Private companies earn higher returns across most major sectors. Manufacturing, for example, shows a 23 per cent return on net fixed assets for the private sector. It is less than five per cent for government companies (chart 3).

There have been attempts to improve returns for government companies. Asset turnover and similar metrics were reportedly going to be part of the criteria by which the government would judge the performance of those heading government companies. Also included, however, was a target for increasing capex.