Gresham's law

As an economist, Dr Manmohan Singh is no doubt familiar with the concept of throwing good money after bad, but he has gone and reiterated the government's commitment to establishing a Board for Reconstruction of Public Sector Enterprises (BRPSE).

This is despite the fact that around Rs 40,000 crore of revival schemes over the past couple of decades have resulted in almost no change in the loss-making status of PSUs""indeed, the number of loss-making centrally-owned PSUs has risen from 100 to 107 over the last five years.

So far this year, after the revival schemes announced for two PSUs in the Budget, the government has more or less decided to bail out another three PSUs.

Votaries of PSUs, and they are not a scarce commodity, will tell you this is being done to protect employment. But since manufacturing PSUs employ just 1.3 million people, out of a total of around 30 million in the organised sector (and of the country's total employment strength of 350 million), the impact on saving jobs is at best limited.

In any case, far more jobs would be created if private investment were to find the environment more attractive""private manufacturing, by contrast, employs around 5 million people.

And before the previous government's privatisation policy is blamed for the decline of PSU employment, it is useful to keep in mind that employment in the manufacturing PSU sector declined from 1.8 million in 1991 to 1.6 million in 1998, before falling to the current level of 1.3 million.

The reason for the decline in employment was simply that, since the PSUs were not profitable, they could not expand. To cite the instance of Braithwaite & Co, one of the PSUs to be bailed out afresh, it has seen its income fall from Rs 113 crore in 2000-01 to Rs 42 crore in 2002-03, profits of Rs 1.7 crore give way to a loss of Rs 33.5 crore, and employment reduce from 2,357 people to 1,180.

The Congress party and the United Progressive Alliance have sought to change the nature of the debate by talking of profit-making PSUs. But while it is true that PSU profitability has gone up, 70 per cent of PSU profits come from the oil sector, which, apart from being a virtual PSU monopoly, gets a 50-60 per cent effective protection thanks to high import duties.

In aggregate terms, the PSU profit-to- turnover ratio in 2002-03 was 5.9 per cent, but if oil PSUs are removed, this became 4.3 per cent. In the case of another erstwhile monopolist PSU, Bharat Sanchar Nigam Limited, its 2002-03 profits fell by 77 per cent, an indication of what the introduction of competition can do to profitable PSUs.

Parameters like the ratio of operating profit to net sales, for instance, show PSUs to be less efficient than private sector firms""this ratio was 4.9 per cent in 2002-03 for PSUs, and 8.5 per cent for the private sector. This was in a year in which there was a surge in oil sector profits. These are figures to which Dr Singh needs to pay some attention.