{"id":1047,"date":"2020-07-16T20:48:00","date_gmt":"2020-07-16T20:48:00","guid":{"rendered":"http:\/\/oscillationss.blogspot.com\/?p=1047"},"modified":"2020-07-16T20:48:00","modified_gmt":"2020-07-16T20:48:00","slug":"indian-public-sector-undertakings-psus-pride-or-prejudice-updates","status":"publish","type":"post","link":"https:\/\/oscillations.in\/?p=1047","title":{"rendered":"Indian Public Sector Undertakings (PSUs): Pride or Prejudice- Updates"},"content":{"rendered":"
\n<\/p>\n
\nIn the recent post on PSUs (click here for the post)<\/a>, I wanted
\nto explain the impact of Govt\/PSU investments on the economic growth which is
\nmuch deeper and complex than checking their profit & loss account
\nstatement. PSUs mobilize resources and channelize investments in an economy
\ndifferently so their performance shall be judged from macro level of socio-economic
\nimpact rather than micro level of linear net profits. But I left this segment in
\nthat post as I had decided to explain the same in the next post on development of semiconductor
\nindustry in India. But now I have decided to put a brief note on this in the blog
\npost on PSUs. I have added the same under para A(c) of the post. I am putting
\nthe same here also:<\/div>\n
\n<\/div>\n
\nNet
\nprofit is a wrong measure to evaluate the contribution of PSUs to economic
\ngrowth<\/span><\/u><\/b><\/div>\n
\n
<\/span><\/u><\/b><\/div>\n
\nI have seen many attempts to
\nevaluate PSUs by comparing their performances (Profit & Loss account) with
\nprivate sector counterparts and straightforward conclusions are derived fairly
\neasily just on the basis of profit & loss statement. But great thing about
\nlife is that it is multidimensional (not just 3D). Net profit is just one
\ndimension of multi-dimensional growth matrix and this growth matrix becomes more
\ncomplex when we raise the platform from micro level (Firm level) to macro level
\n(Economy level).<\/div>\n
\n<\/div>\n
\nGrowth (profit) for a corporate
\nfirm is an individual (linear) phenomenon while for the economy the same is a comprehensive
\n(inclusive) phenomenon. Actually GDP is a composition phenomenon but GDP growth
\nis a distribution phenomenon. Economic growth occurs when wealth is
\ndistributed. That\u2019s why when a private bank like ICICI decides to close a loss
\nmaking remote town branch (or decides not to open a branch) then this will
\nincrease their profits but when SBI does the same then it does hit their
\nprofits but it results in economic growth (wealth creation). Another way to see
\nthis opening of a bank branch by SBI is that it distributes income (wealth)
\nfrom SBI to village in the form of investments in Branch (assets\/employees) which results in further growth of wealth (Because village as a
\nwhole also grows due to availability of banking… result is the higher production and so economic growth). So loss to SBI is an investment for the economy.<\/span> Hence, net profit is a very
\ninefficient barometer to measure growth at macro level (economy) just like GDP which is good enough to measure \u201cIncome generated in an economy\u201d but not \u201cwealth\u201d
\ncreated.<\/div>\n
\n<\/div>\n
\nI have seen SBI branches in
\nremotest places in India and so it is not appropriate to compare SBI to other
\nprivate sector banks just on the basis of net profit. Once I was posted in a small town in MP (Sarni) and there was no other mobile services working properly (no tower) except BSNL and BSNL broadband internet was a pleasant surprise for me
\nwhen dongles of other providers were too slow. So value of PSUs can\u2019t be judged
\non the basis of net profits but their contribution to economic growth which I think
\nis massive. Like PSUs are required to procure around 25% of their procurements
\nfrom MSME vendors so this process may result in higher costs and execution
\ndelays but the impact of economic growth is much higher in the form of development
\nof these MSMEs and employment generated through these MSMEs. We can see PSUs
\nare distributing their wealth more comprehensively. Concentration of wealth in
\nthe hands of few is not good for an economy. It has to be distributed. Socio-economic
\nimpact of PSUs is very high.<\/div>\n
\n<\/div>\n
\nLike, the role and importance of
\nIndian railway can\u2019t be gauged from profit and loss account alone. Now, as private
\nplayers will be allowed to run passenger trains so they can choose profitable routes thus maximizing profits. So there is a much higher purpose behind PSUs and
\nif these can be made better then they can provide massive boost to economic
\ngrowth. As they are dealing with public money so there are processes, checks
\nand control measures to avoid any willful mishap like fraud etc. So there are
\ntendering norms (against selective buying), L1 norms for awarding contracts, regulatory
\nagencies like CAG, CBI and CVC etc. This is to ensure the fulfillment of
\nobjectives and to stop the misuse of power and public money. So these checks
\nand controls can make PSUs bulky and slow moving at times but safeguarding of
\npublic money is also equally important. The need is to choose a midway to allow
\nmore freedom.<\/div>\n
\n<\/div>\n
\nThat\u2019s why private firms are more
\nnimble and a firm like Reliance can source crude oil at spot market to get the
\nbenefit of big temporary fall in prices but state owned refineries like IOCL
\nare required to issue tenders for the same. This is one of the reason for
\nReliance to have high GRM (It has highest Nelson Complexity Index for its refineries;
\nRecently IOCL\u2019s Paradip refinery is having high NCI. Then Reliance\u2019s refineries
\nare near coast saving money, big size). But now as controls\/managements are getting
\nbetter so state owned refineries are also allowed to source crude at spot
\nprices. Recently IOCL has set up a trading desk in Delhi to source cheap crude
\nat spot prices just like Reliance. IOCL\/HPCL\/BPCL are setting up a massive
\nrefinery (60MT almost double of Reliance\u2019s biggest) at west coast.<\/div>\n
\n<\/div>\n
\nBut there is a risk with the
\nconcentration of power\/agility in a thundering juggernaut like Reliance. Fraudulent
\nmanagements can siphon off the shareholder\u2019s wealth by taking dubious decisions
\nthus leaking out the money. We have seen many examples recently in the cases of
\nVijay Mallaya, Yes bank, DHFL, Videocon, IL&FS. So there was a purpose
\nbehind CAG and CVC to have an eye on the working of PSUs and this acts as a
\ncheck against these destructive frauds though this has a cost on PSUs in the
\nform of bulkiness. We can\u2019t afford a Videocon, Satyam in a critical sector like
\ndefense. But still there are better ways to ensure more freedom for better
\nagility (which I\u2019ll discuss in a separate post in more details) by empowering
\ntheir managements\u2026like Singapore\u2019s Temasek Holdings which acts as Investment
\ncompany where portfolio companies are managed by their independent boards.
\nTamasek can independent business decisions and Singapore govt has no role in
\nit. . However, in any case the RISKS of existence threatening frauds are much
\nlower in PSUs.<\/div>\n
\n<\/div>\n
\nAnd if you ask me then these
\nlesser risks should lower the cost of equity capital of a PSU just like
\nbulkiness may raise the cost of equity (At times I find calculations of cost of
\nequity somewhat funny and not much worthy in practical life\u2026but still a fair theoretical
\nconcept to understand the factors making a firm more risky than the other.) <\/div>\n
\n<\/div>\n
\nPSU is not an Indian concept
\nand they are still used globally for achieving socio-economic goals. In fact, State owned enterprises (SOE) have
\nplayed major role in the stunning economic growth of China. Government is
\nrequired to invest in sectors which are strategic for the nation long term
\ngrowth and safety like Defence, Energy, Mining etc. Government is required to
\nplay a major role in high risk sectors where private sector has lesser appetite
\nfor risk like take for example Semiconductor, AI, advanced telecommunication
\ntech etc. Govt. has access to cheap capital and it can afford to take risks
\nmuch better. Indian private sector has failed to capture and develop the
\nmassive opportunities in sectors like Solar power, Electronics goods, Semiconductor,
\ntelecom equipment and so now it is better if Govt. (through PSUs) invests in
\ncreating these capacities in India. I\u2019ll discuss more on Govt. investments in
\nthese sectors in a separate post on development of semiconductor industry in
\nIndia.<\/span><\/div>\n

<\/div>\n","protected":false},"excerpt":{"rendered":"

In the recent post on PSUs (click here for the post), I wanted to explain the impact of Govt\/PSU investments on the economic growth which is much deeper and complex than checking their profit & loss account statement. PSUs mobilize resources and channelize investments in an economy differently so their performance shall be judged from macro level of socio-economic impact rather than micro level of linear net profits. But I left this segment in that post as I had decided to explain the same in the next post on development of semiconductor industry in India. But now I have decided…<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[1],"tags":[],"class_list":["post-1047","post","type-post","status-publish","format-standard","hentry","category-blog"],"_links":{"self":[{"href":"https:\/\/oscillations.in\/index.php?rest_route=\/wp\/v2\/posts\/1047","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/oscillations.in\/index.php?rest_route=\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/oscillations.in\/index.php?rest_route=\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/oscillations.in\/index.php?rest_route=\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/oscillations.in\/index.php?rest_route=%2Fwp%2Fv2%2Fcomments&post=1047"}],"version-history":[{"count":0,"href":"https:\/\/oscillations.in\/index.php?rest_route=\/wp\/v2\/posts\/1047\/revisions"}],"wp:attachment":[{"href":"https:\/\/oscillations.in\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=1047"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/oscillations.in\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=1047"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/oscillations.in\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=1047"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}