PSUs may go slow on new projects in FY18

Budget Estimates show 5% dip in resource generation

The Budget proposals could lead to a further slowdown in capital expenditure by central public sector enterprises (CPSEs), delaying the investment revival in the economy. The Union Budget 2017-18 projected a five per cent decline in resource generation by public enterprises in FY18, including internal accruals.
 

It estimated all central PSEs to generate Rs 3.85 lakh crore worth of resources in FY18, down from Rs 4.06 lakh crore in the current financial year. In comparison, government capital expenditure is budgeted to grow by 1.3 per cent in FY18. 

The combined capital expenditure, including that of projects in progress by non-bank listed CPSEs, grew by 5.9 per cent in FY16, down from 10.5 per cent growth in the previous year. This was the slowest growth in 10 years. In comparison, the combined capital expenditure of CPSEs grew at an average annual rate of 16 per cent between FY06 and FY14. 

Experts say it is likely to result in further slowdown of fresh capital expenditure by PSEs, following tepid growth in recent years. 

“We can expect lower capex by CPSEs in the next financial year, unless many of them go beyond the Budget Estimates and raise additional resources from the markets,” said Madan Sabnavis, chief economist, CARE Ratings. This could have a bearing on overall investment growth in the economy, given the CPSEs’ share in corporate India. In FY15-16, 32 listed non-financial PSEs accounted for around 26 per cent of the combined fixed assets of all BSE 500 companies (excluding banks and financials). 

This puts the onus on the private sector to revive investment. “Earlier there was an expectation that the public sector would drive capex in the economy as it could afford to take financial risks, which the private sector generally avoids taking during a slowdown,” says Dhananjay Sinha, head, institutional research, Emkay Global Financial Services.

However, the private sector has also witnessed a sharp slowdown in fresh capital expenditure in recent years due to poor profitability and weak demand growth across industries. Fresh capital expenditure, including capital work in progress for non-CPSE companies that are part of the BSE 500 index (excluding banks and financials), was up 8.1 per cent, marginally up from 7.7 per cent a year ago, but shows a sharp slowdown compared to the average annual growth of 20 per cent in the previous five years.

Besides demand slowdown and a decline in capacity utilisation, CPSEs’ capex has also been impacted by a sharp rise in their dividend outgo and reduction in their cash reserves. In FY16, non-financial CPSEs in the Business Standard sample paid 58.3 per cent of their current profits year as dividends. The corresponding ratio was 33.3 per cent for non-government-owned companies on the BSE. The 10-year average payout ratio for PSUs is around 37 per cent. This led to a decline in their retained profits, reducing their investible surplus. After paying for the equity dividend, PSUs retained around Rs 33,000 crore worth net profit against Rs 44,100 crore in FY15 and a decade-high of Rs 62,500 crore in FY11. 

The combined cash and bank balances of 32 non-bank and non-financial CPSUs were down 20 per cent during the first half of FY17 over FY16 as dividend pay-out was up by 21 per cent in the last fiscal, despite a four per cent year-on-year decline in CPSUs combined net profits. In all CPSUs, cash reserves are down 34 per cent during the first two and a half years of the current National Democratic Alliance government.

Others however say that there no one-to-one correlation between budgetary allocation and capex by government-owned companies. “Things may change greatly over the course of the year. If an opportunity arrives nothing stops government-owned companies from doing a fresh project or acquiring assets even if it has not been accounted for in the Budget. After all, the Budget numbers are just projections and there is no finality about them,” said Devendra Pant, chief economist, India Ratings. 
 

Sabnavis, too, put the onus on the external business environment: “External demand conditions, especially commodity prices, play a much bigger role in CPSEs investment decisions than budgetary allocations.”