What explains Indian public sector enterprises' anaemic capex record?

Instead of public sector enterprises making capex decisions, they have declared dividends in the last few years. The capex decisions have therefore been abrogated to itself by the Centre

The remarkable rise in capital investment by the government of India over the past few years has not been matched by a corresponding increase in capex by the central public sector enterprises (PSE). 

In Budget FY24, Finance Minister Nirmala Sitharaman has projected she will spend Rs 10 trillion, following up on a spend of Rs 7.28 trillion in FY23. Taken from FY15, this is an over ten times rise, the most massive jump ever for any item in Indian public finance.

In contrast, as the table shows, the capex by all the 255 operational PSE has hardly risen. In the same ten-year period, the spending has increased by only 47.3 per cent. Their average annual capex has been just Rs 1.14 trillion. 

Compare this anaemic record with the pace of private sector capital expenditure. There has been justifiable concern about the slow pace of capital build-up in the private sector. After releasing the Economic Survey 2022-23, V Anantha Nageswaran noted in an interview with Business Standard, "in the last several years the private sector was reluctant to borrow and invest because it was nursing its balance sheet and banks had become cautious". 

An analysis by Axis Bank notes that Rs 3.3 trillion of private capex has taken place in the first half of FY23. It is an impressive 37.5 per cent more than Rs 2.4 trillion that was spent in the previous financial year, from April to September. In a note in the Survey, it was argued that the exuberance of private sector investment in the first decade of this century was financed by easy bank loans. In the second decade, its effect showed up as a twin balance sheet problem, with excessive leverage in the borrowers and high NPAs in the banks. 

While there has been justifiable concern about the slow pace of capex in the private sector, the deeper sluggishness in the PSE data has been somewhat covered by the impressively increasing pace of capex spending by the government. 

There are reasons why the PSE actual capex has been sluggish for a decade and more. While the department of public enterprise notes that of the 255 operating PSEs, as many as 177 CPSEs showed profit during 2020-21, most of these companies have been barely profitable. The net profit of all PSEs was just Rs 1.89 trillion in FY21. It was Rs 2.64 trillion in FY22, showing an increase of 39.85 per cent. The five CPSEs with the highest net profits are ONGC Ltd, Indian Oil Corporation Ltd, Power Grid Corporation of India, NTPC Ltd & Steel Authority of India Ltd. These companies account for nearly a third of the total profits. The oil and gas group accounted for a fourth of the profit earned. 

So the aggregate investment in the economy or lack of it by the cohort of PSEs is primarily a function of the lack of willingness by the boards of these companies to scout for productive opportunities. For instance, it is expected that the oil marketing companies will soon invest about Rs 1 trillion to modernise 18 refineries. 

Without any significant capex plans, the other PSEs have ploughed their profits into reserves and surplus. Their reserves and surplus were Rs 12.4 trillion on March 31, 2022. Just in one year, compared with FY21, the sum had bloated by 9.25 per cent. 

This might cause some surprise since the government also releases data on the internal and extra-budgetary resources or IEBR of these PSEs in each budget. This data, sometimes used as a surrogate for actual capex by PSEs, can be misleading.  

This is because while the government of India in its annual budget and some of the states in their respective budgets make provision for the PSEs to raise those resources, there are reasons for the wide divergence, as seen in the table. First, only some of the IEBRs these companies raise are meant to finance capital expenditure though it is expected. Money raised does not automatically translate into money spent for capex. Second, despite the headroom offered by the governments, most PSEs do not undertake the promised finance raising effort. In other words, the space given to them to raise resources in most years often goes unutilised. 

As the table shows, there is a huge divergence between the IEBR and the capital expenditure by the PSEs, every year. 

There is an interesting sidelight to this exercise. Until the financial year FY19, the PSEs as a group did not use the term capex or capital expenditure to describe their investment exercise. The authoritative data on the performance of PSEs, released annually by the department of public enterprises, used the term "gross block" to describe what it called "performance in real investment" by these companies. The term capex, as understood in the financial sector, has made its way into public sector phraseology only in the past three years. 

The data on the gross block of the PSEs shows the year-by-year performance has been highly erratic and often apathetic. In the ten years from FY13 till FY22 (the latest reported year), there has also been a year, FY16, when there was a negative growth in capex. According to the Public Enterprises Survey for the year: the primary reason for this decrease is the implementation of Ind AS in central PSEs. 

This means just reconciling the public sector balance sheets with the rules of updated financial statements showed that over Rs 2.41 trillion of what these companies termed capex was overstated.   

The Centre is well aware of this problem. It has resorted to extracting a fat dividend from these companies year after year. The Public Enterprise Survey notes that the dividend declared by these PSEs in FY22 was Rs 1.15 trillion. Instead of these companies deciding to make investments, the Centre has abrogated to itself the role of making capex decisions. The strategy has worked.