Why are PSUs so bad?

Should the government be in the business of doing business? or should they leave that to profit minded individuals and companies that might be better at it? What happens when the government tries to run a company and why does it so often go so horribly wrong?

This episode takes you back to the history of Public Sector Undertakings or PSUs in the country and why they fail so often. Is there another way?

Show Notes

All clips and voices used in this podcast are owned by the original creators

Links to clips used in this episode —

• Arun Jaitley on Air India – Aaj Tak – https://www.youtube.com/watch?v=ZMsOrf3Ajpg

Full Transcript of Episode 20 –

Doston, imagine this: A huge fertilizer company is set up. Every day, more than a 1000 employees walk into the company. They do their work, and in the evening, go home. Every month, they get their salary. They even get promotions and bonuses. This continues for 12 years.

Sounds perfectly normal, right?

But over 12 years, no good quality fertilizer is produced. The machines don’t work properly. However, salaries keep getting deposited.

This may sound like an unusual business model, but this is a reality for many companies in our country. 

The story I told you is of Hindustan Fertilizer Corporation Limited, a fertilizer company that shut down in 2002. Many such companies, including Hindustan Fertilizer, have either been shut down, sold or are making losses. I’m talking about Public Sector Undertakings, or PSUs. 

It’s no coincidence that so many PSUs are making losses. We’ll get to that part of the story, of course, but let’s start at the beginning. 

What are Public Sector Undertakings?

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In simple words, a company that is owned by the Government is called a Public Sector Undertaking. Here, owned means that the government should have 51% of more of the company stock. This can be the central or the state government. For instance, the Oil and Natural Gas Corporation, ONGC is a Public Sector Undertaking owned by the Central Government. When we say ‘government companies’, this is what we mean.

The government not only has ownership and investments in these companies, but it also decides how these companies function. Think about the decisions made in any company — the employees that should be hired, the method used for manufacturing, how much should you produce — in a PSU, all these decisions are made by the government. And just like any other business, these companies sell products to us at market rates or at subsidized prices.

Now, there are a few categories of public sector undertakings. Strictly, when we say PSU, we mean companies that are owned and managed completely by the government. This includes services such as the railways, post and defence. Here, the products are often sold a low cost, because the government is not looking to make profit. The aim is to provide essential services to the public. 

Public Sector Enterprises is a kind of PSU where the government appoints a chairperson and a Managing Director. Representatives from the government are members of the board of the PSE. These companies usually compete with the private sector companies in the market. 

The last kind of PSUs are the public sector banks. The Reserve Bank of India, State Bank of India, Bank of Baroda, Punjab National Bank — these are all Public Sector Banks, owned by the government. What’s different about these banks? Public Sector Banks have the usual functions of any other bank, like giving out loans and helping with transactions. But apart from this, they also carry out government schemes, such as providing bank accounts to people in rural areas. One of their objectives is to increase financial development (aarthik vikas) in the country as banks. 

Some PSUs are huge companies that are a strong player in the market. These companies are given financial autonomy by the government, and they are allowed to take certain investment decisions on their own. Of course, there are also smaller PSUs which do not have such autonomy. In fact, there are four categories to determine this: Maharatna, Navratna, Miniratna-1 and Miniratna-2. The Maharatna PSUs can invest up to 5000 crores. The smallest PSUs, in Miniratna-2 category, can invest up to 300 crores. 

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So, we know that PSUs, though owned and run by the government, function like any normal company in the industry. Then the question is, why is the government involved at all? It’s not as if there is a shortage of investors for companies. 

There is definitely no shortage of investors or private companies in the market — but the government owns these companies and provides us services because India is a mixed economy. This means that the Indian economy is a combination of markets. In this economy, private companies are allowed to make profits, but also — the government is allowed to interfere and ensure social welfare of the people.

A little confusing, right? Let’s understand this a little better. 

When the British left India in 1947, the economy of our country was in shambles (tehes-nehes). India was mainly an agrarian economy — matlab, a large population of the country was employed in agriculture.  The British government made profits from the Indian industry of Cotton and Jute, but this profit didn’t come to the Indian population. Our industries were weak. 

This was, in fact, one of the most important issues that our leaders had thought about even before independence. In 1943, a group of industrialists – including J.R.D. Tata and G.D. Birla — drafted the Bombay Plan. It talked about the economy that India would adopt after independence.

The question was: what kind of economy would India have? One of our options was a capitalist economy. This would mean that individuals could own businesses in the market and make profits. The production and price of the goods would be determined by their demand and supply. The government cannot interfere in the market. 

One of the other options was a socialist economy. Here, the production and distribution of goods doesn’t depend on demand or supply. The government produces goods for the use of the citizens and not for profits. To go into detail about this will require another episode by itself — but I hope you get the idea. Which system sounds better for a newly-formed India? Our leaders decided that India can benefit from both systems. This is why the Bombay Plan suggested a ‘mixed economy’ – a system that is a combination of the capitalist and socialist systems. While private companies are allowed to function, a part of the economy is controlled by the government. This is the part that we call, ‘public sector’. 

After Independence, the question of India’s economy became even more important.

Based on the Bombay Plan, the government introduced the first Industrial Policy Resolution in 1948. This policy included the provision for Public Sector Undertakings. This was the same year that India’s first PSU was established — Indian Telephone Industries or ITI in Bangalore!

In 1950, Pt. Jawaharlal Nehru set up the planning commission. Every five years, this commission would focus on an element of development in India. The second five year plan, from 1956-61, focused on the public sector and industrialization. This plan focused on the development of Public Sector Undertakings. Through these PSUs, the government aimed to ensure public welfare in a mixed economy. 

How?

Think about the sectors where most PSUs exist. Finance, electricity, railways, mining. PSUs like NTPC provide electricity at subsidized rates. IRCTC is another PSU which offers services at lower rates. These are essential services. If private companies take over these sectors, what do you think would happen? They would fight for profit, and the cost of these services will rise. Private companies may even establish a monopoly — a few rich businessmen would have all the power. The government wanted to avoid this. 

Also, right after independence, there was vast unemployment in India. Setting up PSUs would lead not only to industrial growth, but also an increase in employment. PSUs were set up in several sectors, like chemical and fertilizers, telecom and banking industry. 

Doston, PSUs were introduced with great hope! It was believed that this would be the beginning of industrial development. In fact, Pandit Nehru called Public Sector Undertakings the “Temples of Modern India.”

But a complete turnaround for India’s industry was a difficult task, even with PSUs. 

In the very beginning, PSUs had to import equipment to manufacture goods. They also required heavy investment from the government. The Public Sector was not performing, and made heavy losses in the 1960s. 

But in the late 1960s, there was a change. A company called Madras Fertilizer was being set up and it wanted to import a boiler. This is when V. Krishnamurthy, a general manager at the PSU Bharat Heavy Electrical Limited, offered to make and supply the boiler. No one believed he could do it — the then-finance minister, Morarji Desai even mocked Krishnamurthy and said PSUs have never delivered. Krishnamurthy put his job at stake and said: we’ll make the boiler or I’ll quit! In the end, BHEL was able to make and deliver a boiler to Madras Fertilizer in time.

Prime Minister Indira Gandhi picked Krishnamurthy to head BHEL. This was a turning point for PSUs in India. Krishnamurthy turned BHEL into a profit-making PSU. And this was not the only PSU. He made sure that Maruti Udyog started the culture of affordable cars in India. He also led the success of the Steel Authority of India Limited. The public sector in India was flourishing. 

It’s no surprise that V. Krishnamurthy is known as the father of Public Sector Undertakings in India. 

But recently, the government has been trying to sell off PSUs to private companies. Many companies are in debt. PSUs like Hindustan Fertilizer have shut down. What happened? What changed, in all these years? 

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Let me give you a familiar example.

[We hear a news report about Air India]

The story of Air India’s downfall has stayed with us because of its glorious (shaandar) history. Air India, established as Tata Airlines by J.R.D. Tata, was a highly respected airline in India, even before independence. After independence, it was the first airline to introduce an international flight to London, which cost Rs. 1720! In 1948, Tata Airlines was bought by the government and renamed as Air India — Air India was a Public Sector Undertaking. It continued to be one of India’s premiere (pradhaan) airlines.

In 1994, the government allowed private airlines to enter the market. Air India, which is a PSU, now had competition from airlines such as Jet Airways and Sahara Airlines. Air India started losing customers and making losses. This continued for many years.

It was up to the government to save this company. In 2007,when Air India had a debt of more than 500 crores, the government merged Air India and Indian Airlines. At this point, Air India had about 256 employees for every flight, whereas the required number is 100. Air India continued international flights, which burned a hole in its pocket. It was overstaffed and in debt. The government tried to keep Air India afloat – but it was criticized for it. 

[We hear the Arun Jaitley talking about Government funds and Air India]

That was Arun Jaitley, speaking about the government’s management of Air India. In 2018, the government decided to sell 76% stake in Air India, but failed. In 2019, it made a new offer: 

[We hear a news report about the government’s decision to sell Air India]

Now, we will only have to wait if the government is successful in selling Air India — and who buys it. 

But, this is not a story of only Air India. An enquiry showed that in 2019, BSNL made losses of more than 90,000 crore — and it hasn’t even been able to pay its employees. 

Why these PSUs are so bad — as the title of this episode asks — can be understood from the story of these companies. After Air India started making losses, instead of cutting back on expenses, the government continued to invest more and hire more employees. This has been happening with several other PSUs. The government keeps pumping money into loss-making companies. In 2019, the government offered a 8500-crore retirement scheme for the employees of BSNL and MTNL, which are making losses. 

Perhaps it is the government’s intervention into a company’s working that causes problems. Let’s take the example of ONGC. ONGC has been a profit-making PSU for many years. But this year, for the first time, ONGC registered losses in their quarterly report. But, this is not sudden news. 

Over the last four years, the government has used cash reserves from ONGC and other PSUs to pay for fiscal deficits. Moreover, the government asked ONGC and other fuel sector PSUs to sell fuel at subsidized rates. In 2014, ONGC had to pay a subsidy of over 50,000 crore. Not only this, but ONGC also had to buy 80% stake in Gujarat State Petroleum Corporation and pay off its debt. This also added pressure on the company.

Of course, there are many other factors that lead to failing PSUs. Think about why a company would fail — at the end of the day, PSUs are businesses. In smaller PSUs, there is almost no autonomy. This limits creativity and motivation in employees. This, along with the lack of investment into technology and new infrastructure leads to low output of goods. 

In other cases, companies fall behind because of strong competitors from the private sector. Again, Air India was an example of this. 

As economists have said before, “the government should stop the business of doing business.”

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It is not that the government hasn’t taken note of the slow but continuous failure of PSUs. 

So, what is the government doing?

[We hear a couple of news reports about the government disinvesting in PSUs]

That’s right. Slowly, the government is trying to disinvest in PSUs. It is also trying to privatize them. What is the difference?

Here, disinvestment means that the government sells a certain percentage of the PSUs to private owners. This percentage is usually less than 50% — so that the government can still retain control over the company. Privatization on the other hand refers to a complete transfer of ownership to the private sector. 

As you heard, the government announces its plan to disinvest in five major PSUs. It also aims to privatize Air India. In fact, in March, the government announced that except 4 PSUs in strategic sectors, all Private Sector Undertakings will be privatized soon.

You can see how this might reduce the huge debt (karza) on the government. 

But is complete privatization the right move?

The answer is not simple. We saw that PSUs have increased government debt in recent years. Perhaps, many of these companies can be run much better by private owners. Many economists also agree with this. Greater investment and better technology from private investors will come as a benefit to the industry. 

Another argument will remind you of why PSUs were established in the first place. Government interference is an important element of the public sector. The question is, without PSUs, will there be a monopoly in the industry? Will there be space for public interest? 

These are some questions that I’ll leave you with. The debate of whether or not India should move toward privatization is for another day — but for now, I hope that we were able to learn more about how PSUs function in India, and what went wrong. 

I’ll be back next week with a brand new episode of Maha Bharat!