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Delhi doubled subsidies to 234 centrally run public sector units (PSUs) over three years to about Rs 1.73 lakh crore ($30 billion), but a new analysis of their finances indicates a 4% fall in profits at constant prices and—with inflation factored in—zero growth.

The subsidies are enough to fund the Mahatma Gandhi National Rural Employment Guarantee scheme (MGNREGA) for six financial years or pay for India's defence purchases for three years.

A “close examination and churning” of these companies is necessary, as many of them have displayed “dismal performance,” said an annual survey released by the Department of Public Enterprise (DPE), pointing out a decline in various financial indicators. The survey helps government take policy decisions.

PSUs may sicken and lose out to private competitors, but they continue to be born—contrary to the general expectation that government should not be in businesses where existing private businesses are doing well: As many as 56 centrally run PSUs are being set up in different sectors, according to the survey.

Unlike its previous policy on disinvestment during its six-year regime beginning 1998, the 2014 poll manifesto of the BJP does not say anything about public-sector disinvestment or privatisation.

Some key findings of the DPE survey:

  • Profit increased at an annual average rate of 6%, from Rs 60,000 crore to Rs 1.3 lakh crore($10 billion to $22 billion —after deducting losses suffered by 71 PSUs, amounting to about Rs 20,000 crore ($3.5 billion)—between 2006-07 and 2013-14. But profit in terms of constant prices dropped 4%, according to government data on 234 operating PSUs.

    • Source: Department of Public Enterprises

  • There has been a slump on all important financial ratios over the last seven years, with declining ratios of net profits to revenue and sales to capital employed, indicators of a company’s financial health. Higher ratios indicate a healthier company.

  • Turnover of 234 centrally run PSUs rose 100%, from Rs 9.6 lakh crore to Rs 20 lakh crore ($160 billion to $330 billion) during the financial year 2013-14, but at constant market prices, the turnover growth is zero.

    • Source: Department of Public Enterprises

  • Net profit as a percentage of total revenue dropped from 8.4% in 2006-07 to 6.26% in 2013-14. This ratio is a useful tool to measure the overall profitability of the business. A high ratio indicates the efficient management of the affairs of business.

  • During the same period, total sales as a percentage of capital employed declined by almost 25%. This ratio measures the firm's ability to generate sales by utilizing assets. A higher ratio is preferable.All other financial ratios too have declined.

    • Source: Department of Public Enterprises

How the empire grew—and the fortune it requires to stay solvent

In comparison to the subsidies given to these centrally run PSUs, their returns are low.

“There are many reasons for low profitability, and PSU alone cannot be blamed for decreasing efficiency,” said Raghavendra Prasad, Assistant Professor with the Gates Institute of Technology, Andhra Pradesh. Prasad studies the workings of PSUs.

Since public companies have many other responsibilities besides making profit, it would be unfair to judge them based on profitability, said Prasad. During the 2008 global sub-prime crisis, when private companies were sacking employees, PSU not only provided employment but also hiked salaries, he said.

In 2013-14, these PSUs received Rs 1.73 lakh crore ($30 billion) as subsidies in the form of product/services (subsidy paid per unit produced or service rendered by the government), cash, interest and other contributions from the government.

Source: Department of Public Enterprises

Financial investment (equity plus long term loans) in all centrally run PSUs, as on March 31, 2014, stood at about Rs 10 lakh crore.

These CPSUs need to become more professional,as they are a considerable revenue source, about 35% of non-tax revenue for the government.

From seven CPSUs in 1950, the central government today owns more than 234 companies.

Source: Department of Public Enterprises

Central public-sector enterprises (CPSEs) were set up to serve the broad macro-economic objectives of higher economic growth, including self-sufficiency in production of goods and services, equilibrium in balance of payments and stable prices.

After economic liberalisation in 1991, many sectors that were set aside for the public sector enterprises were opened to the private sector. The move led to stiff competition from private players, and those PSUs that failed to cope have particularly suffered.

The fix: Two companies account for 60% of losses

Two companies—BSNL and Air India—account for more than 60% of the Rs 20,000-crore loss showed by 71 PSUs in 2013-14.

Source: Department of Public Enterprises

Reviving these companies would greatly reduce the loss to the exchequer.

Source: Department of Public Enterprises

The share of the loss by these two companies has been constant for three years. In the following two parts of this series, IndiaSpend will explain what went wrong with these mega public sector companies.

This is the first of a three-part series. Tomorrow: BSNL: Big Losses, But Can India Live Without It?.

(Patil is a New Delhi-based freelance journalist. He has worked with The Economic Times, DNA and The New Indian Express.)

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Gangadhar S Patil