One of the big success stories of Narendra Modi’s second term is the gradual, and sometimes even spectacular, rise in the fortunes of the public sector.
In 2014, most public sector shares were in the dumps. The airline and telecom companies were beyond redemption; the oil sector behemoths were in a mess, kept alive only by massive government subsidies.
The banking sector was just about to sail into a sea of red ink, thanks to the mindless lending splurge during United Progressive Alliance-1 (UPA-1), and the government’s failure to rescue them with infusions of capital.
Today, if there is one segment that is outperforming the overall rise in the stock market, it is listed public sector companies, led by banks. The market valuation of public sector companies hit a four-year high in September, and despite the correction since then, they continue to ride high.
Listed public sector undertaking (PSU) shares now account for 11 per cent of the Bombay Stock Exchange’s overall market capitalisation.
Public sector banks are in rude good health, and the collective valuations of listed bank stocks is over Rs 11 lakh crore — of which the State Bank of India alone accounted for Rs 5 lakh crore as on 27 November.
Nor has this performance been limited to only some sectors. According to one report, four out of five PSUs have seen increases in the range of 10-85 per cent in their valuations, and the total market capitalisation of the 55 PSU companies in the BSE PSU Index is over Rs 41 lakh crore.
And this performance is no flash in the pan. It has been driven by a sharp rise in profitability, with these 55 companies reporting more than a 150 per cent jump in net profits between 2018-19 and 2022-23 to over Rs 3.5 lakh crore.
One can, of course, uncharitably suggest that this revival in public sector fortunes may just be cyclical, and large segments continue to languish. A case in point is telecom, where Mahanagar Telephone Nigam has gone kaput, and Bharat Sanchar Nigam has been given three massive doles of capital equivalent to over Rs 3.2 lakh crore in order to revive itself and at least become fully 5G and 4G-enabled.
But if one considers the massive losses of Vodafone Idea, the third largest private telecoms player, BSNL does not look half as bad, especially since most of the money went to finance a voluntary retirement scheme for labour.
Clearly, the rise of Reliance Jio with its VoIP-based services has made the telecom sector a duopoly, with Vodafone and BSNL slugging it out to remain relevant as the third or fourth players.
And with Air India being sold to the Tatas, at least one perennial drain on the exchequer is now no longer a taxpayer concern.
What enabled this turnaround in public sector stocks? One must, however, note that in 2010, the year when UPA’s irrational exuberance was at its peak and lending was going through the roof even to dubious parties, the public sector’s share of market cap was three times as much as it is now.
There are three reasons why.
One, the big post-2008 rally in private sector valuations was yet to emerge. Reliance Jio, Reliance Retail and the Adani stocks were not yet on the horizon, and big private sector banks and the infotech companies were yet to recover from the global financial crash in stocks. Once that recovery happened, the public sector’s share duly dropped like a stone.
Two, during the UPA years, the scars on PSU bank balance-sheets were kept well hidden by financial legerdemain.
It was only after the National Democratic Alliance (NDA) legislated the Insolvency and Bankruptcy Code, and the Reserve Bank forced public sector banks to reveal their bad loans portfolio, that the rot was really exposed to the market’s scrutiny. That is when the PSU share of market cap started tumbling dramatically.
Three, the largest share of NDA investments went to infrastructure, where the net beneficiaries were more likely to be private sector companies, not public sector. It is only now that the slogan of Atmanirbhar Bharat is pushing investments into public sector railways, defence and other companies.
Clearly, the Modi government has done something right in the public sector. These include:
One, the merger of public sector banks into more competitive and vibrant market-driven entities has helped valuations.
Two, the big push towards indigenisation of defence manufacture, and new investments in railways, is making a difference.
Three, the insolvency code has enabled banks, especially public sector banks, to recover some of their bad loans.
Four, and possibly the biggest change, is the reduction in politically-influenced decisions on bank lending, or favours made to private parties at the cost of public sector entities. No one can underestimate the impact of this change in the professionalisation of PSU decision-making and the resultant change in their fortunes.
In retrospect, this could be one of the Modi government’s best contributions to the economy — a reduction in the drain of taxpayer resources in order to keep public sector white elephants afloat.
Jagannathan is Editorial Director, Swarajya. He tweets at @TheJaggi.
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