View: Fiscal troubles may be silver lining for PSU investors

Tired bond investors are beginning to worry even more, thanks to Moody’s negative outlook on the sovereign - and red flags about the ballooning government debt. But that may be a silver lining for those invested in government owned companies.

No other segment has been untouched by the economic reforms that have swept the country in the past three decades as the public sector companies are, barring a brief privatisation phase under Prime Minister Vajpayee at the turn of the century.

There have been many false dawns for investors who bet on state-run companies with great strengths, but tied to bureaucracy. Years of disappointment have left them unloved as investors who had faith in the governments to reform them lost all hope.

Suddenly their fortunes appear to be turning. The BSE PSU Index is among the best performers with a gain of 27 percent year to date while the benchmark Sensex is down 2 percent.

The question is will it be different this time? While the equity market euphoria may end up, whenever it ends, in a similar way as it had in the past, the public sector landscape may be poised for a change. Not that the government of the day is committed to freeing up taxpayer money for social welfare, but the broken finances of the state provide it little option.

A sovereign rating downgrade is looming irrespective of whether the finances are stretched because of the Covid – 19 related expenses or otherwise.

Moody’s Investor Services has sounded alarm bells. India’s fiscal deficit position is deteriorating and is the worst among peer nations though it is able to browbeat domestic savers and borrow.

``We expect India's general government debt burden to reach around 90% of GDP in 2021 from about 89% in 2020 and 72% in 2019,’’ says Moody’s. ``India's debt burden remains significantly higher than the Baa-rated peer median forecast of about 64% in 2021. Over the medium term, prospects for the debt burden to decline have diminished.’’

That's as good as saying the situation is hopeless. Post the pandemic, the burden of spending on improving healthcare and other infrastructure would only rise. Raising the tax rates may not be an option given the desperate need to revive the economy.

Banking system is key to fund economic growth, but given that 60 percent of the system is still owned by the state, they may not be a reliable option with stretched state finances. The bad loans piled up a decade before are still weighing them down.

``Most of PSBs' stressed assets emerged from loans to businesses related to infrastructure, power and steel, originating between 2009-12,’’ says Moody’s.

``The severe economic shock from the pandemic is likely to drive NPLs higher across the banking sector again.’’ The government's modest Rs. 20,000 crores capitalisation would be a drop in the ocean.

When India opened up in 1991 it was not that a political party with a reform agenda swept to power and implemented with the zeal of a Margaret Thatcher or a Ronald Reagan. It was a coalition with no common ideal but only a compulsion to live the next day.

Prime Minister Narendra Modi may have spoken about the need for less government and more governance, but there’s hardly anything to show in terms of privatisation. Before the second Covid wave he declared that the government has no role in business.

Some privatisation candidates have been lined up – Bharat Petroleum Corp., Shipping Corp of India and others. But few other departments have such a dismal record as the privatisation ministry in failing to meet targets.

Shares in steel maker SAIL, BEL, MSTC, and BHEL have run up on hopes of a privatisation. But doubts linger. They are still at a huge discount to their private peers. State run SAIL trades at 6.5 times its earnings while Tata Steel is at 10.2 times.

Are investors betting on the government’s commitment or its compulsions? Whichever way it is, this time may be different.