The public sector realty

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Why do we distrust the private sector? Despite evidence of inefficiency, why do we still support the public sector? These questions have been elegantly analysed in the Economic Survey 2016-17. But how does this pathology impact investors?
India’s enhanced market orientation since 1991 is evident. The economy has opened up is are thriving both quantitatively and qualitatively. The Economic Survey provides four pieces of statistics to support this argument. First, from a country that preferred import substitution and self-sufficiency, we have now transformed into a trading nation.Second, we receive a strong inflow of global capital, despite some controls still being in place. Third, the share of public sector enterprises has reduced, as large private enterprises have grown in market cap, assets and profitability . Fourth, the share of government expenditure is quite low, indicating that the market drives economic growth.

The preference for markets over government should have led to more trust in the efficiency of the private sector, but it hasn’t. In a World Value Survey of 60 countries about citizens’ attitude towards the private sector, we rank 55th.The popular opinion is that the state must run businesses, dictate prices and distribution, be the primary provider of employment and redistribute resources.

We behave differently as consumers.When there is strong evidence of efficiency and better service delivery, we choose the private sector over the public, as in the case of telecom, travel and housing. The government’s failure to provide basic education and health facilities has led to a proliferation of private service providers, who are patronised by consumers despite high prices, quality issues and exploitative practices.

If consumers prefer private businesses, the government should have vacated its ownership. But the government does not sell off public sector enterprises to the private sector, even where evidence of better performance is abundant.The recent Budget continues to provide for the government-run airline, hoping to turn it around; and it continues to seek capitalisation and rejuvenation of the NPA saddled PSUbanking sector. We do not `privatise’ our PSUs, but only resort to selling stakes in a `disinvestment’ process whose objective is to mobilise some revenue for the Union Budget.

This mixed picture of a market-oriented consumers of goods and services and a popular distaste for dismantling government control of business has led to poor investment choices. Over 70% of our deposits and loans continue to be with PSU banks, despite concerns about balance sheet health and asset quality.Our retirement corpus is managed conservatively and subject to prudential guidelines that are detrimental to longterm value growth. Our insurance markets are dominated by governmentowned enterprises whose products and practices are not optimal for the investor.

From time to time, the government comes up with products aimed at the retail investor, sold primarily with the tag of government ownership that masks the underlying risks. When the government launches its next CPSE ETF, it can be expected that the practice of discounted pricing to entice subscription will persist. More dangerously , the performance of the earlier CPSE ETF will come under focus. The high return aided by the lower crude oil prices will not be seen as tough to replicate. Nor will the obvious sector concentration in that portfolio, erroneously perceived as large cap, be brought out. Without any evidence to prove sustainable linkages between government ownership and investment return, these products will be preferentially priced and distributed, because the underlying businesses are PSUs.

The product bouquet extends to the bond markets, where it is more entrenched. Infrastructure status is provided to businesses, only because they are owned by the government. Tax exempt status is provided to bonds, because they are issued by PSUs. Investors are warned about every possible risk when they buy any private sector product, but products that include PSUs are positioned in the same market as benevolent and safe, given the incentives and concessions that accompany their launch.

Product choices in other contexts are also skewed to favour PSUs. Sift through the list of `approved’ products in which innocuous entities such as endowments, trusts, societies, and a long list of institutional investors can invest their surplus funds. They primarily hold PSU bank deposits, PSU bonds and PSU issues. PSU banks prefer not to distribute third party products issued by private entities, eben if they have merit. There is no reason why investment choices of the common investor should be skewed in favour of lower quality issuers, only because they are PSUs.

Policy action around economic reform that dismantles government ownership of business may take a long time to come, given vested interests and electoral politics. But investment choices in a free market cannot be skewed to favour PSU businesses. This level playing field is long overdue.

The author is Chairperson, Centre for Investment Education and Learning