Should tax payers keep bailing out PSUs?

Thu, 8 Aug Pre-Open

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Whenever any economy witnesses a slowdown, the government announces various stimulus packages and bailouts in order to bring about a revival. The government provides these bailout boosters to various ailing companies and/or banks in order to shore up their financial condition.

There are bailouts everywhere. Bailout packages are being discussed for countries that have mountains of debt. Companies are being bailed out to prevent them from going under. Banks are being bailed out. The word has been associated with nearly everything. India is no exception to this. A lot of bailout packages have been announced in recent times. And most of the companies being bailed out are PSUs.

But do these bailouts really work? Well they haven't worked for US at least. Remember mortgage financers Fannie Mae and Freddie Mac? They were bailed out with US$ 187 bn of US taxpayer backed money in 2008. But very recently, US president Barack Obama has proposed winding up of the two companies as they continue to make losses. So evidence would suggest that bailouts don't really work. Not unless there is a substantial overhauling of the entire system running the company.

But India seems to be missing the point completely. As such in India PSUs have little to worry about. The government's protection has resulted in a laidback attitude for most of the PSU managements. This in turn has resulted in inefficient output and returns. A classic example of this is Air India. The airline worked its way into a mountain of debt and losses. Eventually when things got out of hand it approached government. And what did the government do? It bailed Air India out. But did it turn the company around? Not really. The pilots went on a strike and losses continued.

And now the government is considering to give debt waiver to the state run telecom operators Mahanagar Telephone Nigam (MTNL) and Bharat Sanchar Nigam Ltd (BSNL). As at the end of April 2013 the total debt of both these companies stood at Rs 110 bn. Both these PSUs have been facing difficulties due to the cut throat competition from various private players. As such they have been facing various financial issues. And now they expect the government to bail them out. And naturally the government is more than willing to help.

But from where does the money for such bailouts come? Our taxes obviously!!!

But despite the huge amounts being poured into these inefficient PSUs, the question is will these bailouts bring about a difference? The chances of this are negligible. The fact is that neither the management nor the employees seem to be keen on changing their erroneous ways of working. And unless they do, things are not going to turn around for the better.

So why should the government spend the taxpayers hard earned money for such unproductive units. Instead of spending thousand crores on such undertakings which would not really fetch any return, the same amount can be better utilized in other productive areas.

Around the world governments are finding it increasingly difficult to simply keep bailing sick units out. Some like the US government are looking at ways to replace the current system. And put in place a system that would not put additional burden on the government and ultimately on the taxpayers. In our opinion if a unit is sick it is best to let it go under so that it can either come out much stronger or can be replaced by a more productive unit. It is high time the Indian government puts a serious thought to this issue. Rather than continuing to bailout its own sick units and draining out tax payers had earned money.