Has the Union government’s approach to its public-sector undertakings (PSUs) changed? The Union Budget for 2025-26, presented early this month, provides a few pointers. However, in order to assess how the approach to PSUs has changed or remained the same, it will be useful to set the latest budget numbers in a historical context.
Let us start this exercise by first looking at 2019-20, the first year of the Narendra Modi government’s second term and before Covid struck the Indian economy. From a financial-performance perspective, this was not a good year for PSUs under the government.
Dividend from PSUs fell sharply by 19 per cent to ~0.35 trillion. Not surprisingly, their capital outlay in 2019-20 rose by just about 2 per cent to ~8.51 trillion. That was also because their ability to generate internal and extra-budgetary resources (IEBR) to finance their capital outlay was constrained because they rose by just 5 per cent to ~6.4 trillion.
Even the government had become a little tight-fisted about the PSUs, proved by the fact that it slashed its contribution to the PSUs’ capital outlay, which consists of their IEBR and government support by way of equity and loans. The government’s budgetary support to the PSUs’ capital outlay fell by 7 per cent to ~2.1 trillion. The share of such government equity and loans in the capital outlay of these PSUs fell to 25 per cent. On the other hand, the government’s plan for disinvesting its equity in PSUs also slowed in 2019-20, with disinvestment receipts plunging by 47 per cent to ~0.5 trillion.
The trend in the following five years ending 2024-25 was hardly encouraging. Capital outlay by the PSUs recorded a compound annual growth rate (CAGR) of less than 2 per cent. The PSUs’ own resources, or IEBR, fell by about 10 per cent. Certainly, the pandemic must have played havoc with the finances of these PSUs. But engagement between the PSUs and their majority shareholder, the government, saw a significant change.
In spite of their relative financial adversity, annual dividend transferred to the Centre in these five years increased at a CAGR of 9.5 per cent. The government also returned the compliment by raising its contribution to the PSUs’ capital outlay schemes by a CAGR of 21 per cent. Indeed, the share of the government’s budgetary support to PSUs’ capital outlay rose to 59 per cent in 2024-25 from 25 per cent five years earlier.
But the most significant change in the government-PSU equation was in disinvestment, which saw a fall of about 8 per cent over this period of five years. In other words, there was a marked slowdown in the pace of the government’s sale of equity in PSUs.
More importantly, the last five years were quite different from the previous five years. During that period, roughly coinciding with the Modi government’s first term, PSUs were providing more for their capital outlay (a CAGR of 23 per cent) and generating more IEBR (a CAGR of 26 per cent). The PSUs were paying less dividend, with a CAGR of just about 2 per cent. But the Centre was garnering more disinvestment receipts from the sale of its equity in these PSUs (a CAGR of about 9 per cent), even as it was pumping in more equity and loans into them (a CAGR of 26 per cent).
So, why did the approach change in the last five years? The irony of the slowdown in the pace of disinvestment was that it took place against the backdrop of a government announcement of a policy on strategic disinvestment in early 2021. This was a policy that envisaged privatisation and stake sales in PSUs in a manner that sick and unviable units would be closed down and the presence of government enterprises would be limited to only a few in strategic areas, while the government would exit from those PSUs that operate in non-strategic areas.
The Budget for 2021-22 even listed many PSUs that would be privatised. But barring just three cases — Air India, Neelachal Ispat, and Ferro Scrap Nigam — privatisation has almost disappeared and disinvestment has made a hasty retreat. On the contrary, there have been instances of the government reinvesting in beleaguered PSUs to revive them, reversing a decision taken earlier on their privatisation.
What has also become apparent is that the government’s recent argument of viewing PSUs as a source of value creation does not seem to hold water. In the last five years, there has been no improvement in the PSUs’ dividend-paying ability or their capacity to generate higher IEBR to fund their capital outlay. Their dependence on the government’s budgetary support has only increased. Indeed, as the recent case of state-controlled Mahanagar Telephone Nigam Ltd showed, even the idea of banks taking a haircut in settling its debt liabilities can adversely impact the Centre’s track record. So, why hold on to the PSUs, with the Centre not seeing any significant rise in dividend from them, even as it invests more in PSU equity and refrains from mobilising more revenue from disinvestment?
This is a puzzle that the Budget for 2025-26 does not solve. Its numbers show that the Centre’s approach to PSUs has largely remained unchanged. The Centre hopes to garner higher dividend from PSUs but its disinvestment receipts project only a marginal increase, relying more on realisation from asset monetisation, instead of asset sales.
In a departure from the past many years, its contribution to the PSUs’ capital outlay by way of equity and loans will decline. And on their own, PSUs are hoping to generate higher IEBR to fund their capital outlay and they will rely less on the government’s budgetary support to fund their capital outlay. This is perhaps the only significant directional change noticeable in the government’s Budget for PSUs for 2025-26.
But is there a signal on a return to a more focused pursuit of its stated policy on strategic disinvestment of PSUs? Not really. The same ambivalence continues. And if the capital markets continue to remain choppy as they have been in the last few months, expect no course correction.
AK Bhattacharya is the Editorial Director, Business Standard. He tweets @AshokAkaybee. Views are personal.