Most of India's state owned enterprises are currently on life support. Even by conservative estimates, these contribute at least 15% of the country's GDP. Hence there is little to explain on the critical state of India's economic health. The Indian government has left no stone unturned to ensure that the profitable PSUs bleed as much as unprofitable ones. As a result, not just the railways and state electricity boards, but also listed companies are piling up losses. Companies across sectors have not minced words about their dire state of affairs. Be it energy major Oil and Natural Gas Corporation Ltd. (ONGC), power major National Thermal Power Corporation (NTPC) or banking major State Bank of India (SBI). However, blinded by its political compulsions, the government sees little option than destroying public wealth.
But one quick fix solution that the government has adopted over the past few years has become the cancer for the economy's health. It answers to the name of debt 'restructuring'. Loans taken to fund agricultural losses, bleeding PSUs and loss making infrastructure projects have had this single remedy. The financers have been allowed to 'classify' the loans as standard as against writing them off as NPAs. Being just an accounting gimmick it allows the government to project all parties being financially sound. The loss making PSUs and the banks that have lent to them get away without taking the losses upfront. Moreover the PSUs get to borrow more despite their dire state of finances. If this was not allowed, several electricity boards, PSUs in oil, aviation and financial sectors would have declared bankruptcy by now.
But despite the risks of such a malpractice the government is set to put its seal on yet another 'restructuring' initiative. As per Bloomberg, a draft proposal by power ministry has sought to restructure US$ 35 bn (Rs 1.9 trillion) worth of loans. Held by power utilities, restructuring of these borrowings by banks will supposedly avert a power crisis in the country. Part of the loans will be transferred to state governments as well. Not that the financial condition of the state governments is any better. But with cash losses having widened 15 times over three years to Rs 288 bn, the state electricity boards are unlikely to find any lenders otherwise. The state governments are equally to blame for their stoic approach to raising power tariffs for years. As a result, the difference between the average cost of supplying electricity and the average tariff has almost doubled in last 11 years. Meanwhile transmission and distribution losses remained stagnant at 27%.
We believe that by offering an easy lifeline to such incompetent entities, the government is sealing the future of Indian PSUs. It is only a matter of time before the 'restructuring' bug devours what is left amongst India's so called 'navratnas'.