The burden of Govt Equity in PSUs

News: From the analysis of PSU investments by different governments in the last two decades, the result shows that their share in total government expenditure increased rapidly since 2014. 

What has been the disinvestment and Privatisation trajectory in the last decade? 

Although the government in the time period ranging from 2009-2014 dropped the total equity it infused in the PSUs, however it collected huge amount from disinvestment receipts. 

From the period of 2014-2019: government was far more focused on disinvestment, and pursued privatisation cautiously. 

The current government believes in privatisation in principle and goes in for aggressive disinvestment. However still it infused huge amount in PSUs equity. 

Why has the govt increased equity infusion despite following an aggressive privatisation policy? 

Government followed a policy to support the banking sector through capital infusion and investing more in key infrastructure areas controlled by a few state-owned enterprises. 

What were the key themes that government focussed on while this capital infusion? 

Government focussed on state-controlled enterprises in banking, railways and in construction of highways. 

Banking: Government supported this sector because the non-performing assets situation in the public-sector banking system worsened which required higher capital infusion. 

Equity infusion into the Indian Railways and the National Highways Authority of India (NHAI) more than doubled. This was because government was committed to investing more in the infrastructure sector at a time when private-sector investment flows had slowed. Higher government investments were needed to crowd in private investments and keep the growth momentum intact. 

What has been the current trend? 

Although this trend has continued even during the present government but composition of such equity infusion has also undergone a significant change. The biggest increase has taken place with respect to equity contribution to the NHAI. 

Recapitalisation of public-sector banks can see a decline as their financial condition is improving with lower non-performing assets. 

What were the reasons for increased PSU investments by governments from about middle of last decade? 

The financial health of PSUs had got worse over time requiring increased equity infusion. 

Growing investment needs for the country’s transport sector, largely controlled by the government-owned enterprises, has to be met. 

What is the way forward? 

As has been seen Infrastructure sector that is taking away a larger share of government equity infused into PSUs. 

So in the long term government should focus on bringing in private sector to carry the load of infrastructure building in the economy. As if the demand for more equity in PSUs is not managed well, it could become a financial burden on the government. 

Source: This post is based on the article “The burden of Govt Equity in PSUs” published in Business Standard on 9th Mar 2022.