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Is Chidambaram right in compelling PSUs to invest?

PSUs are sitting on cash due to 'policy paralysis' that has prevented even the private sector investment

P Chidambaram

Shishir Asthana Mumbai
Finance Minister P Chidambaram is in an unenviable position. No one listens to him. He tried wooing the domestic companies to invest and help propel the economy, but nobody listened. He tried to bring in FDI in the country, making a desperate pitch by even clearing parliament hurdles to allowing FDI in retail, yet no one looks excited. He has been trying to tell public sector companies for the last one year to invest and utilise their cash, but even they do not seem to be listening.

The finance minister will be meeting heads of major public sector units to nudge them to invest surplus funds or else pay higher dividend to the exchequer. PSUs are sitting on an estimated Rs 2.8 lakh crore of cash pile.
 
 
In an ideal world, what's not good for the goose is also not good for the gander. If private players do not find the economic scenario good enough for investment, why should the public sector do. Public sector companies are subjected to the same 'policy paralysis' which has stalled projects in the private sector. It does not make business sense to invest and create assets and then wait for the market to pick up, or create assets at a time when imports are cheaper and see their money go down the drain.
 
Let's look at some of the companies/sectors which are sitting on cash piles and look at reasons why they are not investing.
 
Most of the companies sitting on cash are either directly or indirectly related to the power sector. NTPC, Coal India, BHEL are some of the public sector companies who have cash on their books. The only reason they are not investing despite announcing an intent to do so is because their projects are stuck in a maze of government clearances. Even where NTPC has the ability to commission a project, it would not like to do so, because none of the distribution companies are in a state to purchase the power at the cost at which it can sell profitably.
 
Coal India, which has the maximum amount of cash is unable to expand because it cannot evacuate the coal it produces. Government has not been able to provide the company with enough railway rakes to take the coal to the power companies. Ironically, the company is sitting on a pile of coal, but the country is importing it. What is the point of expanding when you cannot sell. Due to lack of policies, private players are not willing to pay market rates to Coal India which would have helped propel growth in the power sector.
 
The other sector which 'technically' is sitting on cash is the oil and refining sector. Government is bleeding the sector by asking them to bear the subsidy burden and not paying back in time, thus creating a liquidity squeeze. Companies like ONGC which has a good amount of cash are trying to secure fuel security for the country by acquiring assets abroad. They need to sit on a decent amount of cash to capitalise on an opportunity. The company has lost on acquisition opportunities to an aggressive China, waiting for the government to clear its bid. It cannot afford to spend time running for money when a target company or oil reserve is in front of it.
 
Finance Minister in his interview said that .."the surpluses need to be invested, either they (PSUs) invest or give it to somebody who can invest it". The assumption here is the government will invest wisely rather than the individual companies.
 
Where will they invest, is a question that needs to be answered? Infrastructure? There is enough money waiting on the sidelines to be invested in the sector, provided projects are cleared.
 
Finance minister seems to be missing the point that the problem is not dearth of funds needed for investment, it is the right climate and smooth working that is preventing investment.
 
To add to the problem is the recent Hindalco fiasco. TSR Subramanian, former cabinet secretary in an interview with Economic Times rightly pointed out that no IAS officer will now clear any file post-Hindalco coal block row. What will the finance minister do with the money if the PSU decides to give him? Some may say he can use it to reduce the deficit created by the food security bill. But is that investment? Isn't the money better off with the PSUs who will use it as growth capital during better times?

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First Published: Oct 18 2013 | 9:48 AM IST

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