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Less PSUs, less imports: Private peers beat PSUs in raising output.

Date: 22-10-2018
Subject: Less PSUs, less imports: Private peers beat PSUs in raising output
cAs the government mulls ways to substitute certain commodity imports through higher local production, it will do well to undertake a comprehensive review of the performance of key public-sector units (PSUs) vis-a-vis their private-sector peers over a long period. A sharp jump in the production of certain PSUs like Balco and Hindustan Zinc after their privatisation also holds lessons on how below-par output and government ownership often go hand in hand in India.

A glimpse of segments like steel, iron ore, aluminium, copper and crude oil suggests private companies beat the PSUs fair and square in production. For instance, while JSW’s steel output jumped over four times in the decade through 2017-18, state-run SAIL’s rose only 7.3% (see the chart). The production of certain PSUs even fell over
the past decade, in a stark contrast to their private-sector competitors, despite the policy environment clearly favouring the state-run units.

Cairn India, for instance, raised its crude oil output by over three times to 9.35 million tonnes between FY08 and FY17, while state-run ONGC’s production dipped 14.3% during this period. This was despite the fact that Cairn was asked to pay 10 percentage points more of its profits to the government if it wanted its lease to be extended so that it could extract more oil.

As such, the government already takes away 70% of profits of oil companies by way of royalties, cesses and revenue-shares, even excluding corporate taxes. India imported almost 83% of its crude oil requirement in FY18, 5.5 percentage points higher than in FY14 just before the NDA came to power.

Similarly, iron ore output of public-sector NMDC declined 15.6% between FY08 and FY11 before curbs on mining started to be imposed in key producing states, while that of Sesa Goa (a part of Vedanta) jumped almost two-and-a-half times.

In case of coal, which has seen a 28% spurt in import this fiscal, demand surged by 83% in the decade through FY18, while Coal India’s output went up by only 49%. This is despite the fact that commercial mining wasn’t allowed (an announcement in February 2018 to permit it hasn’t taken off), which basically means the state-run firm didn’t really have private-sector competitors all these years for a fair assessment of its performance. While Coal India’s output in 2007-08 stood 379 million tonnes, against demand of 492 million tonnes (as assessed by the Planning Commission then), its production last fiscal touched 567 million tonnes, compared with an estimated demand of 900 million tonnes. Inadequate supplies have hurt investments worth several lakh crore rupees in the thermal power sector, a key consumer of coal.

The performance of companies before and after their privatisation is also telling. The aluminium production of Balco, among the firsts to have been divested to Vedanta in 2001-02 by the Vajpayee government, jumped more than six times in all these years—from just 89,164 tonnes in FY01 to 5,69,000 tonnes in FY18. Similarly, Hindustan Zinc’s output of the base metal climbed over four times from only 1.76 lakh tonnes in FY02 to 7.91 lakh tonnes in FY18.

While import substitution hasn’t worked over several decades, as FE has pointed out, a more meaningful strategy to trim purchases from overseas would be to privatise inefficient PSUs and remove the monopoly for them. Since minerals excluding oil account for 30% of India’s import bill (with oil, it makes up for over 52%), the cost of the below-par performance of certain PSUs is quite high. Coal India’s annual output rose by just 4.6% over the last five years. Nalco’s alumina and aluminium production inched up by just 3.1% and 1%, respectively, compared with Hindalco’s 17.4% and 21.1% in these five years.

An inter-ministerial panel under commerce and industry minister Suresh Prabhu has asked 15 import-sensitive ministries/departments to come up with specific suggestions urgently to increase local production within two-three months. The idea is to achieve greater trade and current account balance by curtailing imports at a time when the rupee is weakening against the US dollar. The move comes at a time when the International Monetary Fund has warned that the country’s current account deficit could worsen to 3% of GDP in FY19, against 1.9% a year before.

The exercise involves departments, including petroleum, industry, chemicals, heavy industries, IT and electronics, economic affairs, telecoms and coal. Products which come under these 15 departments accounted for close to 80% of the country’s annual imports over the past five years.

Source: financialexpress.com

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