Modi govt's equity guzzlers

The govt provided more equity to Air India and public-sector banks than UPA-II, raising questions on efficient use of resources

Five years of the Narendra Modi government have seen a significant rise in the capital outlay for public sector undertakings (PSUs). But as explained in an earlier piece in Business Standard [“PSU resources: Future tense” (February 13)], in spite of the rise in the outlay for PSUs, internal resources generation by these state-controlled enterprises was relatively slow and the government continued to increase its reliance on PSU dividends in these five years. 

A key indicator of the government’s engagement with the PSUs is the level of Budgetary support it provides to these enterprises. Even in this respect, the Modi government provided much higher Budgetary support, whose share in the total Budget expenditure more than doubled in five years to over 9 per cent. However, a closer examination of this increase reveals a fundamental weakness in the Modi government’s policy approach to state-controlled enterprises. 

Over 90 per cent of the government’s Budgetary support comes by way of equity to the PSUs, with the remaining coming as loans. In the five years of the Modi government, an estimated amount of Rs 6.26 trillion was infused into PSUs by way of equity. But over 94 per cent of this amount was consumed by just four groups of PSU entities — Rs 2.53 trillion for state-owned banks, Rs 2.07 trillion for the Indian Railways, Rs 1.14 trillion for the National Highways Authority of India (NHAI) and Rs 17,320 crore for Air India. 

 

There should be no quarrel over the government providing the much-needed equity capital to the Indian Railways or to the NHAI. Of course, the government must ensure that the capital provided to them is used efficiently, thereby giving adequate returns as also leading to expansion of capacity in railways and roads. But there is no denying that the government must always provide adequate resources to these two critical infrastructure sectors. 

Indeed, the Modi government’s equity contribution to the Indian Railways in five years was almost double of what was provided by the Manmohan Singh government’s second term from 2009-10 to 2013-14 or the United Progressive Alliance-II (UPA-II). And the equity allocation for NHAI during the Modi regime was almost one-and-a-half times higher than during the five years of Manmohan Singh. 

But questions will arise over the huge increase in the equity allocation for public-sector banks — these spiked from Rs 45,517 crore during 2009-14 to Rs 2.53 trillion during 2014-19. The sharp rise in equity allocation was obviously triggered by the need for higher capital adequacy for public-sector banks, as their non-performing assets kept growing at an alarming rate. Was sufficient thought given to determine which deserving state-controlled banks should get such equity capital? Or were they given to every state-controlled bank irrespective of its performance? This is a huge amount. Should the government have used this money more gainfully by focusing only on the efficient banks and allowing the inefficient ones to wind down their operations over a predetermined timeline? 

More worrying has been the equity allocation for Air India during the five years of the Modi regime. An estimated Rs 17,320 crore was infused into Air India between 2014 and 2019. The government did start the process of a strategic sale of Air India. But various factors, including political opposition and a flawed approach to privatisation, made sure that Air India continued to appear like the proverbial albatross around the neck of the government. 

In the process, Air India has continued to bleed the central exchequer. In fact, at Rs 17,320 crore, the Modi regime had to provide for more equity for Air India than UPA-II, which had spent about Rs 15,200 crore during its five years. Interestingly, there is no equity allocation provision for Air India in the Interim Budget for 2019-20. Does this mean that the government would be able to finalise the strategic sale of Air India during 2019-20? 

As of now, this looks very unlikely. And, therefore, the provisioning for equity for PSUs reflects an underestimation. A similar underestimation is seen with respect to equity allocation for public-sector banks. Only about Rs 2 lakh has been provided for public-sector banks’ equity infusion in 2019-20, though the public-sector banks’ need for more capital is yet to be fully met. Hopefully, these underestimations would be corrected in the full Budget that is likely to be presented in July 2019. 

But the Modi government’s story of five years with regard to equity allocation for PSUs shows that it may have allowed a large part of its resources meant for equity to be wasted. This is also a worrying reflection of the government’s inability to take hard decisions — whether they pertain to privatisation or forcing weak public-sector banks to wind down their operations.