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Reuters/Amit Dave
Counting losses.
LOSING IT

India’s state-owned firms are saddled with losses larger than Zimbabwe’s GDP

India’s government-owned firms are bleeding.

About 157 central public sector enterprises have accumulated losses worth Rs1.1 lakh crore ($16.5 billion) as of 2014-15, according to an audit report (pdf) by the Comptroller and Auditor General of India (CAG). This amount is larger than Zimbabwe’s GDP in 2014, and bigger than the economies of at least 65 countries.

It doesn’t end at the losses. Out of the 157 firms, which have accumulated losses, the net worth of 64 companies is completely eroded. This means they’re essentially worth nothing. Net worth is the difference between the value of a company’s assets and liabilities.

“The aggregate net worth of these companies had become negative to the extent of Rs74,100 crore as on March 31, 2015. Only seven companies out of 64 companies earned profit of Rs304 crore during 2014-15,” the report added. The CAG received annual accounts for the 2014-15 fiscal from 483 state-owned companies, of which 277 were audited.

Here’s a snapshot of the losses:

What’s going on?

Before India opened up its economy, public sector enterprises had a strong foothold, with many holding near-monopolies in their respective industries. But after India began opening up its economy in the 1990s, a number of these companies—in the airlines and telecom sectors, for instance—just could not keep up (pdf) with competition from private and foreign firms. And in recent decades, many of India’s public sector enterprises have become riled with operational issues, high cost and debt.

A classic example is Air India, India’s national carrier, which was once the star of the aviation sector. But as the sector opened up, the airline kept losing its business to new airlines. It was also went on a borrowing spree, and is now saddled with debt of around Rs50,000 crore. In the 2015-16 fiscal, Air India is finally set to make an operating profit after nine consecutive years of making losses.

But Air India is perhaps one of the better performers. There are still numerous loss making entities owned by the government. Here are the firms that made losses of more than Rs1,000 crore in 2014-15:

One solution to clean up this mess quickly is privatisation. But the Narendra Modi government has shown little interest to privatise public sector firms. Instead, the government reportedly wants to create a holding company with all public sector enterprises in order to make selling stakes in them easier.

Governance issues

Meanwhile, the CAG audit also found that many government firms don’t comply with regulations. For instance, 29 firms did not have the required number of independent directors as of 2014-15. Some 16 companies did not have independent directors at all.

The Companies Act 2013 stipulates that every firm with a net worth of Rs500 crore or more, and revenue of at least Rs1000 crore or a minimum profit of Rs5 crore, should have three or more directors on its board. Out of these, at least one should be an independent director.

That’s not the only regulatory lapse by public sector firms. Four firms—Shipping Corporation of India, Power Grid Corporation of India, GAIL India and NTPC—didn’t adhere to rules and failed to pay a dividend in 2014-15, despite having enough profits, according to CAG.

Currently, all profit making, listed public sector firms are required to pay a dividend which is equal to 20% of their profit or equity, whichever is higher. For oil, petroleum, chemical and infrastructure firms, this number is 30%. Between 2012 and 2015, out of the 36 listed state-owned firms, 30 paid a total dividend of Rs1.27 lakh crore, the report said.

Perhaps the Modi government needs to watch its own firms more closely.

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