Jayanta Roy Chowdhury he traditional way to kick-start the Indian economy’s growth engine since independence has been to egg-on state-run enterprises to invest large sums of money in mega-steel, power, construction and oil and gas projects.
The global slowdown in 2008-09 saw the Indian government urging steel and power public sector units to come up with new greenfield projects and step up modernisation of existing plants as part of an effort to pump-prime the economy. Steel Authority of India’s modernisation-cum-expansion programme took off during this phase, as did NTPC’s expansion through its own units as well as a large number of joint ventures, and gained momentum during the next five years or so.
“PSUs have been the engine of growth in difficult times, mainly because private enterprise is usually shy of capacity expansion during a demand slowdown. However, over the years, the PSUs have shelled out much of their reserves by way of special dividends or by buying back shares etc., so one has to see their financial position before embarking on another round of expansion,” said Arup Roy Choudhury, former CMD of NTPC, who also chaired the Standing Conference of Public Enterprises, an apex body for PSU CEOs.
Top government officials said that though the current slowdown in the Indian and global economy, which saw factory output shrink in March and car sales contract by a whopping 16 per cent in April, is not considered “as bad a case as the slowdown in 2008”, any new Government which gets sworn in later this month would try to pep up growth by urging PSUs to invest more. “Also, it makes sense for PSUs to step up investments now. Their investment rate in previous quarters have been low,” they added. PSUs had announced fresh investments of about Rs 50,604 crore in the October-December 2018 quarter, the lowest since December 2004.
The idea of PSUs as saviours during slowdowns has historical connotations. Not only is public works a prescribed part of Keynesian economics used famously by the then United States President Franklin D Roosevelt in his New Deal programme, but it also formed the basis of ancient India’s way of handling its cycle of droughts and floods. Mughal emperors are known to have ordered public works as a way of giving employment and distributing money during extreme famines.
“Most PSUs have invested during slowdowns… In a way, it is good as plant and equipment can be bought cheap,” said George Thomas, former executive director with Steel Authority of India Ltd.
For instance, between 2008 and 2011, NTPC entered into joint ventures with other PSUs to expand power generation. By the end of 2010, its installed capacity had crossed 31,000 MW. SAIL similarly spent over Rs 70,000 crore starting 2008-09 in modernising and expanding its plants.
However, the problem, say, analysts, is that capacity expansion funded by borrowings could mean a huge payout burden. In times of a steel market downturn, high-cost borrowing could see profits turn into losses. By FY 2015-16, SAIL was reporting a net loss of Rs 4,021 crore against a net profit of Rs 2,092 crore the previous year.
Though deft management saw the net loss reduced to just Rs 481 crore for the year ended March 2018, the loss-making period left a scar on the company which had suffered a similar downturn in the late 1990s because of large loans it had taken to fund another expansion exercise.
“We have to see how PSU reserves are faring. My understanding is that if they are in a depleted state, we have to be careful about planning future growth. Instead of big bang investments, incremental investments based on surplus cash generated is a wiser way out,” said Roy Choudhury.