PSEs are buying into each other to fund government, the trend raises confusion over state ownership

Who is the owner of Hindustan Petroleum (HPCL) — ONGC Limited or the government? Public sector oil refiner and distributor Hindustan Petroleum Corp Ltd continues not to recognise ONGC, its majority owner, as its present promoter company, despite Oil Minister Dharmendra Pradhan's assertion that it belongs to ONGC after the later took over the government’s controlling stake in HPCL. In its stock exchange filing of the company's shareholding pattern at the end of September, HPCL listed the "President of India" as its promoter with "zero" percent shareholding.

That’s not funny. It might have been intended to convey its displeasure about the way the government chose to transfer its equity ownership in favour of ONGC. Also, HPCL may not be wrong to list the ‘President of India’ as its promoter since ONGC, its current official promoter by dint of shareholding, belongs to the Government of India. HPCL listed ONGC as "public shareholder", owning "77.88 crores” of shares or "51.11 per cent" of the company’s equity. A long-time public sector marketplace rival, HPCL became a ONGC subsidiary, following the government disinvestment to reduce the latter’s annual budget deficit. Originally, HPCL was known as ESSO, a US oil company, before it was hurriedly nationalised by the government after the Bangladesh liberation war.

Incidentally, HPCL is not the only public sector enterprise in which the government has sold its stake — partly or substantially — in favour of another public sector company to fund its budget expenditure. Thanks to lukewarm stock market interest in buying government shares in PSEs at a premium, the government is practically forcing high net worth state enterprises participate in its disinvestment programmes.

Even state-owned financial institutions such as Life Insurance Corporation of India (LIC) have been induced to lift government shares in PSEs. Unfortunately, the practice is severely impacting the public sector’s capital expenditure programmes for want of enough ‘free reserves’ which are built through transfer of net profits after dividend payments. Such reserves often come handy to expand capacities, diversify the product range, make acquisitions and invest in forward or backward integration activities to make the enterprise stronger in terms of financial strength and market presence.

For instance,  ONGC had to borrow as much as ₹24,876 crore for the HPCL acquisition that helped the government meet its disinvestment target for the 2017-18 fiscal. ONGC’s total cost of government stake acquisition was ₹36,915 crore. Earlier, Indian Oil Corporation (IOC) was made to buy the government stakes in Kolkata headquartered IBP and Chennai Petroleum Corporation. Worse still, FCI was reportedly forced to borrow ₹2 lakh crore as the government failed to pay its bills.

Investments by PSEs are expected to grow at a much slower pace in 2019-20, as capital outlay by public sector enterprises is expected to remain at almost the same level as 2018-19, while capital spending by the Centre is budgeted to grow at a much slower pace next year. Companies such as NHAI, ONGC, IOC and HPCL are expected to make the bulk of the spending in the coming financial year. PSE investments in the power sector are expected to decline to ₹44,332 crore in FY20, from ₹59,925 crore in FY18. National Thermal Power Corporation and Power Grid Corporation are likely to account for the bulk of investments in this sector. The pressure from the government stake sale, indirect funding of government credit and supporting government expenditures and diktats such as ‘buy Indian’, support SMEs, are weakening PSEs’ finances. As many as 35 PSEs are lined up for strategic sale. According to reports, they include Air India, Air India subsidiary AIATSL, Dredging Corporation, BEML, Bharat Pumps Compressors, and Bhadrawati, Salem and Alloy Steels Plant (ASP) units of steel major SAIL, Hindustan Fluorocarbon, Hindustan Newsprint, HLL Life Care, Central Electronics, Bridge & Roof India, Nagarnar Steel plant of NMDC and units of Cement Corporation of India and ITDC.

The selling of non-performing or low-performing assets of PSEs to strong private bidders is understandable. The government is not expected to nurse loss-making, unviable, non-strategic public enterprises for ever. It may be justified to exit from such enterprises. However, in a growing economy such as India, the government, the key investor in the core sector and infrastructure, need to support such enterprises even if they are not performing as well as they are expected. In the absence of large private sector investment in India’s core sectors and infrastructure, the government has to play a more aggressive role to strengthen the domestic foundation of industry. There is a lot to learn from China, France, Italy and Spain, in this regard.

Such reports as the share of national highways in the road fund being reduced to accommodate investments in telecom and healthcare are far from comforting. The government has changed the nature of the central road fund and renamed it the Central Road and Infrastructure Fund (CRIF) through an amendment to the Central Road Fund Act, 2000. The kitty of ₹1.28 trillion for 2019-20 is now said to have been spread thinly across as many as 12 sectors. The amendment prescribes the road cess be first credited to the Consolidated Fund of India and later, after adjusting for the cost of tax collection, should go to the CRIF. Such a measure may not bring the desired benefit to each of the beneficiaries. Large government spending in core and infrastructure sectors will strengthen economic growth and open fresh employment opportunities. At the current stage of economy, the government should be more concerned about investment in core and infrastructure sector PSEs than compelling stake sale in them