Sell the family jewels before they lose their lustre

Market value of all the PSU banks today is less than book value, at around $70billion. If PSU banks had performed in line with the private sector banks, they would have been worth $250 billion. While statutory obligations for priority sector lending, SLR, CRR are all similar for public and private sector banks, PSU banks had natural advantage for having inherited a huge branch network, credibility of government ownership and dominant share of PSU enterprises' banking business.

Jul 12, 2017 11:07 IST others Nirmal Jain |

All of us know about the 2G scam in telecom and Supreme Court's damning order based on a notional loss of Rs 1.7 lakh crore. Let me give you an example of a much bigger actual loss in the same sector for which there has been no hearing. 
 
MTNL was valued at Rs 15,000 crore in March 2000. It was a blue chip company, institutional investors' favourite and had monopolistic position in world's fastest-growing market. If it had performed in line with other blue chips or say a company like Maruti Suzuki, its market valuation would have been in the range of Rs 7 lakh crore, i.e. 4 times 2G scam's notional loss. Today, MTNL's market value is a measly Rs 1,375 crore and doesn't have money to pay the wages. Worse is the story of PSU banks. Market value of all the PSU banks today is less than book value, at around $70billion. If PSU banks had performed in line with the private sector banks, they would have been worth $250 billion. While statutory obligations for priority sector lending, SLR, CRR are all similar for public and private sector banks, PSU banks had natural advantage for having inherited a huge branch network, credibility of government ownership and dominant share of PSU enterprises' banking business. 
 
To be fair, PSUs underperform primarily because they are com pelled to fulfil social objectives. Their pricing, segments of customers and geographies are not entirely driven by profit motive. In other words, the government uses PSUs to fulfil its social objectives such as loans to the under-privileged, operations in backward areas etc. When the government uses its dominant shareholding in listed companies to make them bear this burden and take it off the fiscal budget, is it not similar to a promoter charging his personal expense to the company? 
 
So what if personal expenses are for a philanthropic cause. Does this mean that minority shareholders lose? Nope. The paradox is that promoters charging personal expenses destroy their own wealth many times more than minority shareholders, who would make a quiet exit. 
 
Our politicians have shown emotional attachment to PSUs, calling them `family jewels'. It's public wealth, a source of power for public servants and politicians alike, and has long been used to bulge the balance in `Vote Bank' as well as `Swiss Bank'. Which family would like to keep `jewels' in closet when its children are starving on the farm? What would be in the best interest of country is, `loving detach ment' rather than `morbid attachment' to PSUs. We need a two-pronged strategy . 
 
One, sell the family jewels (PSUs) before they lose all their lustre. Government has at last put Air India on block with Rs 50,000 crore of debt and annual losses of Rs 3,500 crore. One Opposition leader wrote in a newspaper column that Air India is worth Rs 5 lakh crore. The fact is it could have been if it were to be run like a business, sine qua non for which is profits. It's time that government exits all businesses save the strategic ones. In PSU banks, where time bomb is kicking louder by the day , I would suggest consolidate them into 3 or 4 and bring down equity immediately to 51%, announcing a time-bound programme to reduce it even lower, a la Maruti Suzuki. This will fetch better price and can sail through politically today , given positive sentiment and tailwind behind reforms post successful GST. 
 
Two, learn capitalism from China. A country perceived socialistic, has used weapons of capitalism for upliftment of masses. China's GDP was lower than India's in 1981 and is more than 5 times now. China's government owned bank ICBC (counterpart of SBI) is valued at $261 billion, more than all Indian banks, private and public ones, put together. Another Chinese company Alibaba is valued at $365 billion. I guess Jack Ma is no match to our Gujarati entrepreneurs (pun intended). We just need to unleash them. World's problem with availability of capital has changed from `scarcity' to `abundance'. There are trillions of dollars of liquidity in the global financial system, seeking good investment. India needs trillions of dollars to catch up with the developed world. 
 
A radical mindset change is required from `optimal utilisation of scare capital' to `quick progress with large capital' even if not optimally used. Let me take an illustration of Indian Railways. Our minister with good intention will balance social objectives and financial prudence. 
 
He will ration capital investment and stagger over time to match resources. Contrast this with China's investment of $500 billion during 2011-15, building over 30,000km of high-speed rail network, shortening average travel time to a third. Indian Railways is a behemoth, travels 1 trillion km every year, carries 1 billion tonnes of freight, employs over 1 million people and has revenue in excess of $20 billion. Corporatise the undertaking, run it like a business and raise $100 billion by divesting a minority stake. 
 
There are many such opportunities from LIC to BSNL to ports to shipyards. These are raw diamonds; polish and embed them in jewellery for the world. Similarly, our ministers for road, port, aviation, power, agriculture etc should think and plan big to take advantage of the benign global liquidity and India's ability to absorb investment in an unorthodox way to put the country on double-digit growth path.
 
(This column appeared in The Economic Times on July 12, 2017)

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