Budget 2019: Nirmala Sitharaman's PSU problem
Prosenjit Datta July 3, 2019
Two days before Finance Minister Nirmala Sitharaman presents her maiden Budget, the stream of bad news on the economy is becoming a flood. Rainfalls have been deficient in large parts of the country so far, and farmer distress could go up further. Manufacturing indicators are anaemic. Fresh investment is down to its lowest in 15 years. And consumption slowdown is seen in everything from passenger vehicles to fast moving consumer products. Dozens of industries are reeling under severe distress - from telecom and power production to real estate. The dominant services sector is in doldrums, if you go by the purchasing managers index (PMI) for June. It is showing signs of contraction. Job creation is lower than what is required. Multiple PSUs are in a bad shape; BSNL, MTNL and Air India are just three prominent ones among them.
The Economic Survey, which will be released tomorrow, may or may not talk about these problems in detail. We will have to wait to see if the finance minister dwells on these problems either. But initial signals coming from the government suggest that it is still not in the mood to part with sick PSUs, which are a recurring drag on taxpayer money, and the sale of which could have freed up funds for the government to spend on more important things - such as healthcare, education or infrastructure.
Even as we head for the first Budget of Prime Minister Modi's second term, news is coming out that the government is planning to help Air India and telecom PSU siblings, BSNL and MTNL, raise massive debt in order to keep them running - and ostensibly reform them. Thus, a sum of almost Rs 75,000 crore of fresh debt is being talked about for BSNL and MTNL. Meanwhile, Air India is, if news reports are correct, trying to raise an additional debt of Rs 20,000 crore to keep flying.
There are still no reports on how the government plans to help these PSUs cut losses and become more efficient in using some of the money raised for telecom companies to offer VRS and reduce staff. While that is a good enough idea, that alone will not be enough. What the government needs to do, if it is serious about fixing companies, is to bring in new management and give them a free hand and specific targets. The better option is to offer them to the private sector, without riders that can hamper a turnaround.
There has also been no clear indication about how the government plans to make its banks become more efficient. No major reform has been talked about, despite the report of the Banks Board Bureau. And each time there is a big problem or corporate failure, the government pushes PSBs to give out loans or go slow. The continued support to Jet Airways by SBI and others (even when it had become abundantly clear that Naresh Goyal was the wrong person to run it), until the problem could not be staved off any longer, shows that the government has not really freed up public sector lenders to act freely. The new announcements about doubling the amount that a small businessman can take as Mudra loan, without having to give collateral, is another such indicator. Enough economic commentators have pointed out that Mudra loan NPAs are going up.
The government should realise that it has got a second chance because much of the past problems were blamed on policies (or lack of them) of its predecessor. This time, there is no such excuse. If the government continues to make same mistakes it made in its first term, the economy will slide further down.