India’s Public Sector Companies — Where are we at today?
Central Public Sector Enterprises (CPSE) Reforms — 2018–2021
On April 9 2018, the Department of Public Enterprises conducted the “Central Public Sector Enterprises¹ Conclave”, which was attended by the Prime Minister of India, Shri. Narendra Modi. The main agenda of the conclave was to present the vision for CPSEs in 2022 and to highlight the transformative reforms identified under the vision.
The conclave’s introductory video started with a Vedic mantra that describes how one must earn like one has a hundred hands, and distribute the wealth to others as though one has a thousand hands. This, in essence, is the way to attain the full fruit of one’s skills and labor.²
शत॑हस्त स॒माह॑र॒ सह॑स्रहस्त॒ सं कि॑र।
कृ॒तस्य॑ का॒र्य॑स्य चे॒ह स्फा॒तिं स॒माव॑ह ॥
-Śaunaka saṃhitā of Atharva vedaḥ (Third kāṇḍa, Twenty Fourth sūkta, Fifth mantra)
[Click on the link to listen to the recitation of the sūkta]
This mantra, according to the video, captured the long history of India’s focus on wealth for all, and how CPSEs are a bastion of this value. I agree that this mantra succinctly yet efficiently captures the normative purpose of CPSEs.
Normatively, the idea of CPSEs is to prioritize India’s national security and the overall well-being of citizens. Hence, CPSEs have to play a pivotal role in strategic sectors such as communications, defense production, energy & power, minerals, financial services, space exploration, and transportation to ensure that national security and the overall welfare of people (in terms of access and costs) are not compromised. Hence, as described in the mantra, the expectation from CPSEs is to be efficient and resourceful (i.e., earn with a hundred hands), but not mind taking losses, if it would serve the greater national cause (i.e., distribute with a thousand hands).
As a step in this normative direction, the government released the ‘Public Sector Enterprise Policy for Atmanirbhar Bharat’³ in 2021, to restrict CPSE presence to the bare minimum in the aforementioned strategic sectors, and to completely divest/exit from non-strategic sectors. I had written at length about this in an earlier article of mine, where I also delved into the history of India’s public sector.
It is important to note that just prior to this announcement, the government (in 2020) had also opened up key sectors to private players (at varying degrees of private participation). This includes the landmark decision to introduce commercial mining of coal, ending the government’s monopoly.
These reforms arguably meant a major realignment in India’s economic principles (since the reforms in 1991). The reforms naturally garnered staunch opposition, with some claiming that these measures are ‘ruining’ public sector companies. Is there any truth to these claims? How have CPSEs fared recently?
To answer this, I look at recent trends in six major dimensions of CPSEs: (1) Revenue (Turnover), (2) Profitability, (3) Employment, (4) Dividend, (5) Debt , and (6) Contribution to Business Ecosystem (via Research and Development (R&D) investments and procurement from Micro, Small, and Medium Enterprises (MSME)).
The remainder of this article provides an analysis of each of the dimensions, using data from the past five Public Enterprises Surveys (2017–18, 2018–19, 2019–20, 2020–21, and 2021–22).
Trends in Revenue⁴
Firstly, I look at each sector’s share of aggregate revenue/gross turnover. The petroleum companies have the highest share, contributing to 53% of aggregate CPSE revenue.
Petroleum, power generation, and coal sector CPSEs play a crucial role in ensuring the energy security of India. Hence, it makes sense that they are the largest in terms of revenue. In specific, Indian Oil is the largest CPSE (in terms of revenue), contributing to 23% of aggregate revenue across CPSEs.
In terms of trends, the revenue of CPSEs have grown at a compounded annual growth rate of around 5%. The growth rate of Petroleum and non-petroleum CPSEs, are quite comparable, though the petroleum sector grew at a higher rate (7%) than the rest of CPSEs (4%).
The worst hit sector was the textiles sectors (-28%). This fall was primarily caused due to the reduction in revenue of National Textile Corporation (NTC) Limited. Over 78 mills of NTC have been closed since 2002,⁵ as the mills have been quite unviable. Textiles is not a sector similar to energy or telecommunications, where national security is directly involved. Further, there is sufficient private sector capacity in this sector, hence there is no real justification for supporting the sustenance of NTC.
It is important to note that NTC’s founding purpose was to run mills nationalized by the government under the “Sick Textile Undertakings (Nationalisation) Act, 1974”. Over 100 mills were nationalized under the Act. The purpose and context under which this Act was written is long outdated and public sector mills are an anachronism in today’s day and age.
Largely, in the strategic sectors, revenue trends do not seem to be a problem. In fact, in 2020–21, HLL Lifecare Limited witnessed a 600% increase in revenue from the previous year as the company started to sell “Emergency supplies for COVID-19” (which included rapid diagnostic kits).⁶ This was an example of a CPSE stepping into a national security/greater good role.
Trends in Profitability
In terms of profitability, the number of profitable CPSEs (as a proportion of total CPSEs) has increased with time, despite COVID-19.
The petroleum, coal, power generation, crude oil, financial services, and power transmission sectors contribute the most to the aggregate profits between 2015–16 and 2021–22.
In terms of losses, Telecommunication and Information Technology sector is the worst performing. Industrial and consumer goods, trading and marketing, textiles, and agro-based industries also recorded aggregate losses in the period between 2015–16 to 2021–22, however at a much lower magnitude.
In terms of trends, there has been a substantial growth in profits. Overall, the average net profits (aggregated across all CPSEs) between 2019–2022 was 15% higher than the average profits between 2015–2019 (after accounting for inflation).
In terms of the loss-making sectors, the telecommunications and information technology sector’s losses climbed from INR 92 billion in 2015–16 to INR 102 billion in 2021–22, a 1.1x increase (both values are in 2023 prices, adjusted for inflation). The textile sector’s losses climbed from INR 1.2 billion in 2015–16 to INR 4.4 billion in 2021–22, a 3.5x increase (both values are in 2023 prices, adjusted for inflation).
While the decline in the textile sector would be inevitable, given the unviability of the business, the government is focused on reviving the telecom sector. In specific, Bharat Sanchar Nigam Limited (BSNL) has received a revival package of INR 890 billion to support the organization in providing pan India 4G and 5G services. As India increasingly digitizes, BSNL’s role in ensuring access to 4G/5G technology would be pivotal, both for economic development and national security. The timely implementation of pan India 4G/5G technology would be crucial to ensure India can further accelerate its economic growth.
Again, even when looking at profitability, most CPSEs are profitable, and are in fact increasing their profits. The CPSEs in strategic sectors that are struggling, such as telecom, have been provided with support for their revival. Hence, there does not seem to be any evidence of a downfall in CPSE profitability.
Trends in Employment
CPSEs employed around 839,000 people, as of 2021–22. The Coal and Heavy & Medium Engineering CPSEs contribute to around 42% of the employment provided by CPSEs. BSNL is the largest CPSE (in terms of employment), with over 62,000 employees.
In terms of trends, there has been a significant decrease in employment (CAGR of ~6%), between 2015–16 and 2021–22. This is expected with the streamlining of CPSEs. However, it is essential to support the outgoing CPSE workers transition to jobs in the private sector (with upskilling support).
Trends in Dividends
Contribution to the government typically includes taxes and dividends. However, given that we are interested in the business side of CPSEs, I focus primarily on the dividends. The dividend return is highest for the Coal sector which provides around INR 6 per rupee of paid-up capital. Textiles, Chemicals, Agro, and Telecom are at the lowest, which is not a surprise, as these sectors are also not profitable.
Overall, the dividend payout is around INR 1.3 per rupee of paid-up capital. There is considerable dividend payout (when compared to the paid-up capital), hence this aspect is also not a cause for concern.
Trends in Loans
The quantum of outstanding short-term loans has decreased, while long-term loans has increased.⁷ An important aspect is that around 95% of the long-term loans come from non-government sources. This reflects the market’s trust in CPSEs, as a reliable borrower. This again is a positive sign.
Trends in R&D and MSME Procurement
While R&D expense has increased by 1.5 times between 2015–16 and 2021–22, the procurement from MSMEs has decreased in 2021–22 to just 66% of the procurement value in 2017–18. Simplification of the tendering process along with increased transparency in evaluation of tenders should address this issue. It is important to note that key sectors such as Petroleum and Heavy & Medium Engineering are playing a substantial role in supporting R&D and in engaging MSMEs, which is a welcome sign.
Conclusion
From the above analysis, it is evident that the CPSEs (at a broad level) are quite healthy. A revival package has been put in place for the telecom sector, which is perhaps the only sector that requires urgent attention. The revival package, along with India’s indigenous 5G stack, and institutional reform should put the sector back on track. In conclusion, there is no conclusive empirical evidence to support the claim of CPSEs being in ‘ruin’.
Footnotes
[1]: “The term Central Government Public Sector Enterprises (CPSEs) encompasses the Union Government owned companies set up under the Companies Act, 2013 (Section 2 (71) ) and Statutory Corporations set up under the statutes enacted by the Parliament”. See CAG and Companies Act.
[2] Based on translations from the following website - https://vedicscriptures.in/atharvaveda/3/24/0/5
[3]: Office Memorandum dated 4th February 2021, Department of Investment and Public Asset Management, Ministry of Finance, Government of India. №3/3/2020-DIPAM-II-B-(E).
[4]: “Gross Turnover/Revenue means the revenue from operations including sale of products (interest income in case of Financial Enterprises), sale of services and other operating revenue (revenue from other financial services in case of financial enterprises) and includes excise duty.” — Definition as per the survey.
[5] Data sourced from 2019–20 Annual Report of National Textiles Corporation — http://www.ntcltd.org/Writereaddata/Financial/52nd%20NTC_Annual%20Report_2019-20_English.pdf
[6] Data sourced from 2021–22 Annual Report of HLL Lifecare Limited — https://www.lifecarehll.com/file/download/reference/0b896b55f96acbc46c6a443acd5da879hYGFe30
[7] Inflation is not accounted for here.
Author: Akshay Natteri Mangadu — All views are personal.
