India’s public sector is going downhill

India’s economy has been sliding almost non-stop. The fundamentals of our economy, namely savings, investment, consumption and employment are severely challenged. The government on the revenue side has consistently been unable to mop-up enough revenues. The lack of tax collections is manifesting itself as a problem in myriad ways. Two key issues relating to the inadequacy of tax revenues are that on one hand the government has cut program allocations, and on the other, it is pressuring Public Sector Units (PSUs) to contribute more to the central kitty. PSUs are being asked to contribute more by either bearing the subsidy burden on the government’s behalf or by making costly acquisitions to improve the government’s budgetary position or by paying government heavy dividends.

PSUs not only play a pivotal role in the economy, but also contribute overall to nation building. The Life Insurance Corporation (LIC) in the financial sector, the Oil and Natural Gas Corporation (ONGC) in the energy sector and the Food Corporation of India (FCI) as the guarantor of food security are sterling examples of this paradigm.

The LIC was established in 1956 with a capital of Rs 5 crore and is today estimated to be valued around Rs 8-10 lakh crore. The LIC is one such asset that the Indian state invested in early, and reaped dividends for several years thereafter. The LIC is among India’s biggest institutional investors. It is also the largest participant in public sector bond issuances. Therefore, it acts as a key lender to the government, without which the government would not be able to make infrastructure investments at the scale that it does. Today, the LIC is ailing. The LIC has an exposure of more than Rs 20,000 crores to various debt instruments that have now been downgraded to default category by credit rating agencies. The contagion that started in the shadow banking sector, then spread to housing finance companies and then to cooperative banks, has now made its presence felt in the insurance sector too, with none other than the gargantuan LIC feeling the heat. Its bond investments in various failing entities now in the headlines are all now default grade.

The LIC is not only suffering because of risky companies on its portfolio. The LIC’s precarious finances are also due to acute political pressure during the BJP-government’s rule starting in 2014. Under that pressure, the LIC bought heavy stakes in a number of public sector companies when they went for their IPO. These include New India Assurance Company in November 2017, General Insurance Corporation in October 2017, Hindustan Aeronautics Ltd. in March 2018 and of course in its acquisition of loss-making state-run IDBI Bank. By September 2019, the LIC’s equity holdings in IDBI had fallen to Rs 10,967 crores from Rs 21,624 crores about a year ago. Such gross injustices to the LIC’s financial position due to the government’s interference is sheer callousness on its part given that the LIC deals with people’s savings. The problem is that the LIC is one of those companies in India which is just “too-big-to-fail”. And unlike in the United States, the Indian government might not be able to save it, given its sheer size. So when it does fail, it will take the Indian economy down with it.

ONGC is also reeling under a mountain of debt, after the BJP-led government’s interference brought matters to a head. Not long ago, ONGC was among India’s richest PSUs that was virtually debt-free, but has been reduced to a shadow of its former self by the current dispensation. ONGC is now cash-strapped and under a mountain of debt due to high dividend pay-outs and unnecessary acquisitions. In March 2018, ONGC’s cash reserves were at their lowest since March 2001, and had registered a drop of more than 90 per cent in just one financial year. The government basically treats ONGC as its cash cow, expecting it to declare dividends whenever the government is looking to plug a fiscal shortfall. In FY-18, ONGC had to pay its highest dividend till then of Rs 8,470 crore, further imperilling its financial position.

However, this is not it. Two decisions that almost dealt a death blow to ONGC’s financial position were its bailout of the debt-ridden Gujarat State Petroleum Corporation (GSPC) and the buy-out of the Central government’s stake in Hindustan Petroleum Corporation Limited (HPCL). The GSPC investment turned out a dud due to limited production in its KG basin gas block. And because it could not acquire HPCL fully, it had to take on Rs 35,000 crore worth of debt from three private banks and four public sector banks, all of which could turn into NPAs because ONGC is struggling to service these loans. Not only will ONGC’s downfall imperil banks, but it would also endanger India’s energy security, which is already under pressure due to sanctions on Iran and the wider tensions in the Middle East.

The story at FCI, which is the agency that manages the procurement and distribution of food grains and administers the Food Security Act, is no different. FCI has witnessed its debt treble since the Narendra Modi government came to power in 2014. With no income stream of its own, FCI is completely reliant on budget allocations from the Union government for servicing its debt. Debt levels have grown from Rs 91,409 crore in March 2014 to Rs 2.65 lakh crore in March 2019, which is an increase of over 190 per cent. This is because the BJP-led government at the Centre had been budgeting much less than the required food subsidy amount, leading to FCI borrowing from the National Small Savings Fund (NSSF) to fill the gap. By the end of FY-19, FCI debt through the NSSF alone had ballooned up to Rs 1.91 lakh crores. Citizens below the poverty line benefit from the FCI’s food grain distribution. As India further slips on the Hunger Index, on which it is already placed at 102nd among 117 countries — FCI may well become among the first public sector titans to turn into a NPA.

That is why I had commenced the discussion on the Union Budget by asking the finance minister to articulate whether the government believes that the public sector should exist in India or not.