Indian PSUs

In the era of globalisation and finance capitalism, the PSUs with their conservative management emerged as a countervailing force. In his Budget speech this year finance minister Pranab Mukherjee made a statement that left many wondering. While emphasising on the economic success of the previous UPA regime, Mr Mukherjee talked about the 'critical' role played by the public sector banks in insulating the Indian economy from the adverse affects of the global financial crisis. He talked in a manner that justified the nationalisation drive undertaken by the former prime-minister Mrs Indira Gandhi nearly 40 years ago.
The majority of Indians of this generation have grown up in an environment where government owned enterprises dominated our life; be it the slow moving telecom utility, or an airline which would not fly on time, or the local power distributor which could never match the rising demand. The situation was equally worse in the all important banking and financial services sector, where employees never seem to have the time or inclination to serve retail customers.
So when the Indian economy opened up in 1991 and the private sector was allowed entry into sectors earlier reserved for the public sector, it gave an opportunity to Indians to teach a lesson to the state-owned companies they used to deal with. In almost every sphere, PSUs lost market share and customers flocked to the new private sector entrants, who turned out to be much smarter and sleek in serving the customers. It was a new experience for Indians, who were used to standing in queues to buy everything-from a telephone connection to an airline ticket to a domestic gas connection.
Given this, Indians especially the urban middle class is not wrong in viewing PSUs in a certain manner. But it tells only half the story. The consumer's side of the PSUs was always small and has shrunk further in recent years, as private sector has made inroads in one consumer segment after the other. The public sector with their elaborate systems and procedures was never built to be great consumer organisation. Rather they were supposed to provide economic ammunition to the country.
The idea of PSUs was conceptualised at a time when, India hardly had any industrial infrastructure to talk about and it could not have been left to the domestic private sector or foreign companies to provide it. This is because, establishing the infrastructure is a long-drawn process, which may not have yielded profits in the short to near term. Besides, the projects of these kinds are highly capital intensive and was mostly beyond the scope of the fledgling private sector in 1950s and 1960s.
If India today is effortlessly implementing some of the world's largest and most complex industrial and infrastructure projects right from power projects to refineries to dams to mass rapid transit systems, it's because, there is expertise and resources available locally. It was not the case a few decades ago. In the decade following India’s independence, the biggest constraint that India faced was technical know-how and the ability to successfully implement large and nationally important projects. And worse, the technical expertise was either not available in the international market or it was prohibitively expensive. Now that India has successfully nurtured anchor companies across strategic sectors-BHEL (capital goods), SAIL (steel), Indian Oil (oil refining), Bharat Electronics (defence electronics), NTPC (Thermal Power), ONGC (oil exploration) and GAIL (gas) among others, the country has the requisite industrial ecosystems to conceptualise and implement the biggest and the most complex of projects. In fact, the presence of these large domestic companies is now forcing foreign firms to look at the Indian market in favourable terms and this has helped to boost the competition in the domestic market and has thus aided India’s growth story.
The situation was not very different in banking industry either. Though India had a thriving banking industry in 1950s and 60s, its presence was limited to urban areas. But a sustainable economic growth required them to open branches in smaller towns and villages. Not just for equity, but by mid-1960s, the country was facing a food crisis, also called wage-good constraint in development economics. Without cheap food readily available in urban areas, industrialisation was just not possible.
In such as situation a forced industrialisation would have resulted in spiralling wages making entire project economically unviable. Stepping up food production however required investment in new technology and inputs. But given the income levels in rural areas, farmers were not in a condition to invest in fertilisers, modern seeds, pesticides and farm mechanisation on their own. They needed credit and that also at favourable terms. The private sector dominated banking systems was however not geared for it. The agriculture credit was expected to be much less profitable than industrial or consumer loans. So why would a privately owned enterprise take a hit on its profitability?
This had put the government in a Catch 22 situation. So when the push came to shove, the then prime minister Mrs Gandhi did the unconceivable-nationalisation of all large commercial banks in 1969.
The nationalisation led to a massive expansion in the bank branches and farm credit that helped the country to step-up farm productivity and by early 1980s, India was self-sufficient in food. This eliminated the risk of food-price inflation that had weighed heavy on the India’s economic growth in the past. The newly nationalised banks also spread the reach of the formal economy in the farthest corner of the country, which dramatically improved the effectiveness of monetary and fiscal policies. This in itself was a big achievement. Another beneficial impact of a nationwide bank network was a sharp rise in domestic savings, which was now available for investment. In early 1950s, India’s gross saving rate was around 9% of GDP. In next twenty years, it grew at a snail's pace and was 12% on the eve of bank nationalisation. Given India’s long-term capital-output ratio of around 4x, this savings rate would have supported a GDP growth of not more than 3-4% per annum and this was that we were achieving in those days. In the next 20 years country's savings rate rocketed to reach 25% of GDP on the eve of the economic reforms of 1991. Now the Indian economy was ready for the take off.
So in many ways, the current generation is reaping the benefits of the economic plumbing provided by the PSUs. The government-owned companies have proved beneficial in other ways as well. In the post-1991 era, when unfettered globalisation and aggressive finance capitalism acquired the status of a religion, the PSUs with their conservative management style and commitment to the domestic economy emerged as a countervailing force.
While initially this approach was criticised by market men for being anti-growth and typical of PSUs inability to change with times, it proved to be a masterstroke. It saved nation's economic fabric in the aftermath of the global economic crisis. And nowhere was this more visible than the financial market. At the height of the credit crunch in second half of 2008, large PSUs such as State Bank of India and Life Insurance Corporation emerged as the lender of last resort for India Inc. "Many private sector and foreign banks withdrew from the market just when their clients needed them most. In contrast, PSU banks not only honoured their commitments but tried to their best to fill the vacuum," says SBI chairman Mr O P Bhatt. In the stock market LIC emerged as a large investor even as foreign investors were fleeing in hordes putting companies and retail investors in great peril.
A big complaint against PSUs has however been their lacklustre financial performance. But it seems to a case of stereotyping them. PSUs account for nearly half of the combined dividend payout by all listed companies in FY09. The stock market is now also waking up to this reality. In the past, market used to give PSUs a discount. Now companies such as BHEL, SBI, NTPC and Power Grid, among others, rank among one of the most valuable companies in their sectors. (See PSUs lead the way on page 67)
Also while analysing PSUs' past record we must also keep in mind that most of them are much younger than we believe. For instance, BHEL is nearly 20 years younger than its nearest peer L&T, while NTPC was established as late as 1975 compared to its private sector peer Tata Power, which is nearing 100 years of existence. So many of their past investments are still to bear fruit and it may be early to pass a judgement on their finances.
While PSUs are believed to be conservative and slow moving, the last few years have shown that they can be agile in spotting new opportunities and milking them full. Nothing illustrates this better than the MRPL acquisition and swift turnaround under ONGC's management despite stiff bureaucratic opposition. Subir Raha, the then chairman of ONGC still remembers, "The petroleum ministry refused to recognise the public sector status of MRPL for many more months." The deal was however recognised as best M&A deal in Asia in 2003 by Asia Money. The company's total investment in this acquisition was around Rs 1,000 Crore, less than 10% of a Greenfield refinery of same configuration and complexity. The oil major followed it up with large overseas acquisition of Imperial Energy, which it closed at the height of credit crisis last year.
In the banking industry meanwhile, PSUs have learnt their lessons and most of them are investing huge sums in brand building and promotion. (See Today's mega corporations, tomorrow's big brands on page 54). A similar revolution is sweeping through other sectors. For instance, NTPC, which is implementing its 10-year vision plan, has begun the preparatory work on drawing out its corporate plan for next 25 years. Just as last 15 years saw the emergence of a select band of global brands from India’s private sector, the next 20 years may see the emergence of global corporation from the public sector.

****Thanks are due to ET Intelligence Group's Krishna Kant