China Crisis Offers India a Chance to Reform and Revamp Its PSUs

India may be insulated from the China crisis for now, but it needs to work on systemic problems marring its economy.

Investors monitor a display showing the Shanghai Composite Index at a brokerage in Beijing, August 31, 2015. (Photo: AP)

With the global economy showing no signs of recovery and with the Chinese economy turning out to be weaker than previously expected, Prime Minister Narendra Modi had a well publicised meeting of the usual suspects to discuss lifting the economy out of the morass it finds itself in. He had a bevy of top private sector honchos, some sarkari economists, some FinMin bureaucrats and a handful of PSU bosses and the RBI governor.

From what has been reported, the meeting went the usual way. Such meetings usually end up seeking magic wand solutions and the one most in demand was an interest rate cut. To be sure some others wanted tax cuts and more exemptions ostensibly to make them more competitive. Businessmen will be businessmen and success to them comes by not passing up any opportunity for a little gain. But there are no magic wand solutions to our predicament.

Brewing Crisis

India’s crisis has been in the making for a very long time now.  Our GDP has acquired the profile of a post-industrial economy, which is excessively skewed towards the service sector, in turn giving our economy a post-industrial look despite not having industrialised in any significant way. 52% of China’s GDP comes from industry, while it is exactly half that for India. Agriculture employs 58% of our workforce and now contributes about 15% of our GDP.

In absolute terms the number of people in agriculture has doubled since the advent of reforms in 1991. It just means that in relative terms more people got poorer. This is not to suggest that the reform process was wrong. On the other hand the reform process never really got underway.

All those who became spectacularly rich after 1991 mostly became so due to public assets, whether under the ground or in the skies, being allocated to them at ridiculously low rates. The logic that these surpluses will be invested back in the economy didn’t work, because capital flows to where it is easier deployed, meaning abroad.

Lessons for India

• India’s GDP has acquired the profile of a post industrial economy despite not having industrialised in any significant way
• India might be well insulated from the current crisis in China, it does not suggest strength but primitiveness of our economy
• Our crises are more systemic in nature and need a long-term solution
• First challenge is to create 12 million new jobs each year, to make the demographic dividend an economic dividend
• Prime Minister had talked about plans to privatise state-run firms and free them from bureaucracy

All’s Not Well

That India was not significantly buffeted by the crisis of 2008 and seems equally well insulated from the current crisis, does not suggest strength but primitiveness of the economy. China’s economy is thrice as big as India’s and it is twice as integrated into the world economy than ours. China’s foreign trade-to-GDP ratio is now over 70% and twice as much as ours and hence when the sea rolls harder it needs to absorb more shock. So we need not be sanguine about our situation. But these macro issues would not have been discussed.

Not surprisingly India doesn’t face anywhere as near an immediate crisis as China does. Our crises are more systemic in nature and need a long-term perspective. Our first great challenge is to create 12 million new jobs each year, to make the demographic dividend an economic dividend. We are nowhere near that.

To be able to create millions of more jobs, we need to make huge capital investments. This can only come from the state. The question now is whether there was any advice forthcoming from the participants on how the government should go about improving its investment-to-GDP ratio, which in turn depends on the savings-to-GDP ratio?

A Burden Called PSUs

The state of the Central Government’s Public Sector Undertakings (CPSUs) is pathetic. The private sector manages to hold its head above water by better management of the environment and its resources, and also by constantly rolling over debt. But it is the public sector that is a bigger part of our industrial economy.

In 2014, the total capital employed in the 383 CPSUs is a huge Rs 330, 626 crore, with an additional Rs 881, 774 crore as long-term loans, almost all of it from government financial institutions and from the central government directly. These companies together have a market capitalisation of Rs 1, 106,657 crore. They generate a turnover of Rs 14, 13,992 crore or about 10% of our GDP.

Of these CPSUs, 202 were profitable registering a cumulative profit of Rs 153, 907 crore, and 124 had losses amounting to Rs 49, 612 crore. The 41 PSUs in the oil, coal and power three sectors together provided Rs 100, 369 crore or 65.22% of PSU profits. If you keep these three sectors aside, the rest of the PSUs together earned about Rs 1,000 crore. This is a sorry state of affairs.

Soon after he assumed office, Narendra Modi indicated plans to do more with state-controlled companies than use them as piggy banks to break into whenever the government needed a revenue boost. He said he had plans, the government had plans to privatise state-run firms and unfetter them from the clutches of the middle bureaucracy of deputy and joint secretaries. There is no sign of any of these happening.

(The author is chairman and founder of Centre for Policy Alternatives)