While the current government is credited by many for its progressive regulatory push or makeover in PSU management (refer to the paragraph on the directional shift), it has also not been found lacking in action when it had to counter the allegation that it is driving PSUs to a dead end. This, incidentally, has been a common allegation against all governments in the past – that mismanagement has made the golden goose less productive, and many PSUs have become irrelevant due to the reforms which upped the competition ante in the marketplace.

Nobody will have forgotten the regular jibes by the senior Congress leader and now Leader of the Opposition in the Lok Sabha, Rahul Gandhi, that the fate of leading units like Life Insurance Corporation (LIC) or Hindustan Aeronautics Limited (HAL) was in the doldrums and that their collapse was imminent due to the government's incorrect policies. However, with their recent performance indicating otherwise, Prime Minister Narendra Modi issued a strong rebuttal, speaking almost like a financial advisor. “Invest in the PSUs that the opposition condemns. Look at HAL, LIC,” he asserted. It stumped many, and his detractors accused him of talking like a stockbroker from the floors of the august house. Incidentally, a selective group of brokers also started talking about a distinctive ‘Modi stock category’ in the market, primarily comprising PSU stocks.

Modi continued his assertion on PSUs' turnaround in the pre-election phase this year and was particularly keen to underscore his government’s achievements while addressing gatherings of economic stakeholders. “Most of the PSUs have been delivering robust returns to investors due to our effective governance. Investors are now confident in PSUs. The profit of PSUs has surged over two times in the last 10 years.

The net worth of PSUs has touched Rs70 lakh crore against Rs9.5 lakh crore a decade ago. You will get such results when you think about the nation first. Companies like Hindustan Aeronautics Limited (HAL) are generating record revenue, and insurance behemoth Life Insurance Corporation (LIC) is also getting stronger,” he maintained at a high-profile media conclave before the country went to the polls.

Presenting a strong picture of PSUs' revival has also been a key pursuit of his senior cabinet colleagues. In one of her most noted tweets on PSUs, Seetharaman maintained that under PM Modi’s leadership, “PSUs are thriving, benefiting significantly from the culture of professionalism infused in them along with increased operational freedom and the government’s focus on capital expenditure.”

The political tug-of-war centred around the performance of the PSUs (being pushed to disarray vs significant revival arguments) has played out for quite some time. With repeated good performance, the government seems to have developed an upper hand. “There’s a growing emphasis on improving efficiency and competitiveness within PSUs. Modernisation, professional management practices, and greater operational autonomy are key focus areas. The goal is to make these entities more agile and market-driven, shedding the bureaucratic baggage that has long been their Achilles’ heel,” says noted marketing guru Dilip Cherian

Directional shift

But gaining an edge in a perception game is usually a function of underlying factors – not only the exact performance but also the strategic changes that may have triggered that improved output. Talk to Neeraj Gupta, the first secretary of DIPAM (now retired), and he presents valuable insights on the transformation story.

“The management of Central PSUs, in the Union Budget 2016, saw a paradigm shift from ‘disinvestment’ to ‘investment and public asset management,’ with the main objective of creating and unlocking the value of Government investments in these enterprises. DIPAM (Department of Investment & Public Asset Management) was announced in the Budget and was made responsible for the efficient management of all Government investments in public or private sector enterprises. Disinvestment became a subset of a larger economic function,” he says.

The budget announcement was followed by a slew of policy measures which reinforced the point that the government’s strategic approach to dealing with PSUs had a much larger ambit this time. “The government deserved credit for bringing out a comprehensive policy for the efficient management of investment in CPSEs in May 2016, which captured various aspects of capital and financial restructuring to ensure optimum return on these investments. It captured concepts of leveraging surplus free reserves through buybacks, capitalising them through the issue of bonus shares, encouraging the splitting of shares for efficient trading, declaring optimum dividends, and encouraging achieving normative leveraging/borrowing for higher capex,” Gupta adds. The policy made provisions for the listing of large PSUs to unlock the value of investment through the market and make management more efficient and compliant as a listed entity.

“The government recognises its investment in CPSEs as an important asset for accelerating economic growth and is committed to the efficient use of these resources to achieve optimum return,” a government note issued later underlined, while adding that the efficient management of investment in CPSEs is to be ensured through the rationalisation of the decision-making process for all related issues and seamless interdepartmental coordination in the matter. The policy paper had specific prescriptions on the disinvestment front which marked a directional shift and took the process to a different realm.

It prescribed multiple options, beginning with disinvestment through minority stake sale to facilitating unlisted CPSEs with no accumulated losses and a profit record in the three preceding consecutive years with the provision to enlist. The ‘Offer for Sale’ (OFS) provision was introduced in a big way, and the government in recent times has successfully diluted stakes with equity sales in Coal India, HAL, HUDCO, RVNL, IRCON, SJVN, and NHPC. The new policy also opened the window for considering follow-on public offers on a case-by-case basis.

Another major highlight of the project, which seems to have skipped the attention of many, including the media which is always keen to know developments in meeting the annual target, was: replacing the annual disinvestment plan with rolling plans. Furthermore, the disinvestment programme was made more inclusive by reserving 20 per cent of shares in PSUs-OFS transactions for retail investors on a case-by-case basis.

According to Gupta, more measures were announced in 2017 which added punch to the government’s intent to significantly improve public sector performance. “A policy on mergers, consolidation, and acquisitions, with the economic rationale to create investment value in CPSEs, was announced in the budget. Keeping in view the need for channelling large investment to the equity market and the interest of retail investors, the new ETF-Bharat 22 was constructed. It consists of a basket of 22 stocks from 6 sectors, including 16 CPSEs, 3 banks, namely, SBI, Bank of Baroda, and Indian Bank, and 3 private companies' stocks held by SUUTI, namely, ITC, L&T, and Axis Bank,” he underlines. The ETF scheme has now been discontinued, but OFS is going great guns.

PSU universe & uptick pattern

Statistics suggest that this directional shift seems to have turned around the fortune of PSUs. But first, here is a look at the basic structural edifice of the government-owned companies. As per the PSE survey 2022-23, there are a total of 254 operating CPSEs, and their cumulative turnover stood at Rs37.90 lakh crore. More than 60 per cent of them are small to medium-sized units with reported incomes of less than Rs1,000 crore. However, 56 CPSEs have earnings in the range of Rs1,000-Rs5,000 crore, and 9 CPSEs reported earnings between Rs5,000-Rs10,000 crore.

We now come to the basic revenue structure of the big ones. About 22 CPSEs earned anything between Rs10,000-Rs25,000 crore, and 8 CPSEs between Rs25,000-Rs1,00,000 crore. There are 9 CPSEs with annual incomes exceeding Rs1,00,000 crore. Cumulatively, the big players in the Indian PSU universe account for 75.28 per cent of the total gross turnover of all operating CPSEs.

As per the survey report, the Indian PSU universe comprises four sectors: agriculture, mining & exploration, manufacturing, processing and generation, and services, and is further classified into 20 cognate groups. The manufacturing category has the highest number of sub-sectors, whereas services have the highest number of operational entities. The most remarkable aspect is the performance of the PSUs in the last 5-6 years, reflecting a major uptick. In this period, the gross revenue of operating CPSEs increased from Rs25.46 lakh crore in FY2018-19 to Rs37.90 lakh crore in FY23. This is a staggering jump, with manufacturing, processing, and generating PSUs having a dominant share of around 70 per cent, followed by services and mining and exploration.

The top ten profit-making CPSEs (ONGC, NTPC, Power Grid, Coal India, Mahanadi Coalfields, Power Finance Corporation, REC, Indian Oil, Northern Coalfields, and Oil India) delivered a profit of Rs1.45 lakh crore, which was close to 60 per cent of the total profit earned by CPSEs. In the same year, about 18 CPSEs returned to profitability, including Eastern Coalfield, MMTC, Konkan Railways, The Jute Corporation, and Bharat Broadband. However, 57 loss-making CPSEs reported a cumulative loss of about Rs29,000 crore, primarily contributed by four major enterprises: Hindustan Petroleum Corporation Ltd (Rs8,974.03 crore), Bharat Sanchar Nigam Ltd (Rs8,161.56 crore), Mahanagar Telephone Nigam Ltd (Rs2,910.74 crore), and Rashtriya Ispat Nigam Ltd (Rs2,858.74 crore).

Between 2018-19 and 2022-23, financial investments in CPSEs also registered a major spike, increasing from Rs17.83 lakh crore to Rs25.35 lakh crore in FY2022-23, growing at an almost double-digit CAGR (9.19 per cent).

CPSEs' contribution to the central exchequer (by way of corporate taxes, dividends, duties, etc) remained an important source of development financing for the government, amounting to Rs4.58 lakh crore. In 2019-20, they had contributed Rs3.79 lakh crore. The maximum contribution came from the petroleum (refinery & marketing) sector (56 per cent), followed by coal (11 per cent), crude oil (9 per cent), power generation (4 per cent), steel (4 per cent), and others (16 per cent).

A report by the leading brokerage firm Motilal Oswal, evaluating the performance of PSUs (released this June), presents some interesting insights. “After a decade of underperformance, the Indian PSUs have made an admirable comeback. They have marked FY24 as the year of clear outperformance. This was evident in the sharp run-up of PSU companies and their index outperformance compared to the Nifty-50 in the previous year,” says the report. It highlights several key points indicating the PSUs' fast ascendancy in recent times.

These include a surge in the PSU index by around 113 per cent in the last two years and more than doubling the market capitalisation of the BSE PSU index (2.1x) to Rs69.1 lakh crore from Rs32.5 lakh crore between December 2022 and June 2024. The same market cap metrics show a spike of over six times since 2019, following a decade of stagnation. During FY19-24, PSUs have outperformed the private sector on earnings growth metrics. The earnings of PSUs reported a 33.8 per cent CAGR, compared to 18.6 per cent for the private sector.

Within the PSU basket, the performance of two sectors stands out the most: banking and railways. The latest data for PSU banks suggest stellar performance in the last fiscal year, with their cumulative profit crossing Rs1.04,000 crore, an impressive jump of over 35 per cent compared to the previous fiscal's number. Analysts attribute this exceptional performance to a host of government initiatives over the last decade: a decline in NPAs, better recovery mechanisms, expanding the banking sector’s ambit to make it more inclusive, recapitalisation, and more.

In the railways sector, firms like RVNL and IRFC have grown at a dizzying pace on all performance metrics, not just stock market valuation. Observers believe the sector is benefiting from the government's renewed attention. “Railways, having a 90 per cent-plus operating ratio, had hardly any funds to invest for capital expenditure to enhance capacity and meet growing demand in the past. The capital expenditure on railways of over Rs10 lakh crore in the last 5 years through general budgets has enabled growth,” says Vinod Asthana, former Director, IRCTC and Ex-MD, Central Railside Warehousing Corporation.

 Big ticket ambition & the road ahead

Considering the recent performance trends, PSUs are now clearly looking at taking this momentum to the next level. During the course of this decade, the leading ones are targeting massive growth. “CPSEs have an annual capex trajectory of over Rs3 lakh crore now. And mind you, it is outside of the government’s expenditure plans. They are investing on their own,” points out Tuhin Kanta Pandey, Secretary, DIPAM, who has been spearheading the department for the last 5 years.

It is no surprise then that the showstoppers of the Indian PSU stage are promising to carry more swagger in the near to medium term than they have ever shown before. With the current government setting the target of breaking into the top 3 countries' list in terms of GDP size during this decade, the leading PSUs have set new milestones to further consolidate their positions for that scenario.

For instance, oil sector behemoth ONGC aspires to increase its share in India’s hydrocarbon consumption from the current 22 per cent to 27 per cent by 2030. Furthermore, it has set a target to double its oil and gas production, from both domestic and overseas fields, by 2040. Steel major SAIL has received a nod from the board and the ministry to undertake an extensive Rs1,00,000 crore expansion plan, which would dramatically enhance its capacity by 75 per cent to 35 million tonnes per annum by 2030.

Recently, while disclosing Q1 results in Delhi, REC CMD VK Dewangan made several ambitious announcements. “We have made a comprehensive business strategy to double our loan book to over Rs10 lakh crore by 2030,” he said. The company has seen a whopping 219 per cent rise in its market cap in the last year and is the key agency to coordinate PM Solar Yojana.

Housing sector PSU giant HUDCO (Housing and Urban Development Corporation), which has recently been conferred Navaratna status, is no less ambitious. “We are optimistic about achieving our goal of increasing our balance sheet to Rs1.50 lakh crore by FY26 and Rs3 lakh crore by FY30, up from the current level of about Rs92,500 crore. We are focusing on diversifying our resource base and optimising costs to enhance our competitive edge in lending operations,” says its CMD Sanjay Kulshreshtha. 

According to Amitava Mukherjee, CMD of mining major NMDC, recent years have seen the company making rapid strides in capacity building. “From a production capacity of around 27 MTPA in the early 2010s, we have scaled up to target 50 MTPA by FY25 and an ambitious 100 MTPA by FY30,” he says. According to him, the company is significantly expanding to diversify its mineral portfolio and exploring opportunities outside India. “We are exploring Africa, Australia, South East Asia, and South America for mining opportunities for lithium, copper, gold, cobalt, nickel, iron ore, and coking coal,” he adds.

There is a practically endless range of scale-building initiatives that PSUs have introduced to become significantly larger and more impactful, driven by recent trends and increased opportunities, particularly in light of the government’s focus on infrastructure development and establishing manufacturing hubs. While observers acknowledge the potential, there are key issues that warrant consideration. For instance, the working environment and operational freedom, compared to previous conditions and the private sector, are crucial points of discussion. Current stakeholders assert that improvements have been substantial. However, those with experience in the PSU sector believe that critical gaps remain. “Board appointments need to be entirely impartial. After all, it is the boards that guide the company through long-term growth,” says a senior official from a leading PSU. “Having worked across various PSEs in services, manufacturing, and mega project EPC sectors, I have seen first-hand the dedication and capabilities of public sector managers. With the right governance structures, policies, role clarity, and performance freedom, I am confident that PSEs can achieve great success,” adds Nalin Shinghal, former CMD of BHEL.

In an increasingly digitalised age, technology adoption is on the rise, including in PSUs. “The inquiries for our solutions from government-owned companies have certainly been on the rise. They seem to be ready minds now to adopt the latest solutions,” says Thunaiselvam Ramasamy, Head, Architecture and Engineering, APJC Partners, Cisco.

“One of the most exciting developments in PSUs is the integration of AI. Companies like Indian Oil, BPCL, NTPC, and ONGC are already leveraging AI to improve demand forecasting, while machine learning is optimising energy consumption in utilities. PSUs are discovering innovative AI use cases to enhance efficiency and decision-making. This adoption of AI streamlines processes and positions PSUs as technology adoption leaders,” adds Rajiv Kumar, Founder and CEO, Proactive Data Systems.

However, there are mixed feelings on the technology front. Some observers believe that, exceptions notwithstanding, the public sector lags behind its private counterpart in terms of harnessing technology. “There are three critical pillars to judge PSUs' performance – financial, operational, and technological. In financial terms, there is a marked improvement as many of them have become more market-oriented. Operational primarily deals with bringing down production and other costs. Here, the result seems mixed. On the technology front, they still have a lot of catching up to do. And I am saying this in an overall sense,” points out an analyst.

Considering the rising capital expenditure from the public sector, observers believe that government-owned leading firms are well-positioned to explore new, capital-intensive domains crucial for the country’s future growth. “PSUs must be at the forefront of driving these new initiatives, which will, in turn, encourage private counterparts to join once a solid foundation is established. The $10 billion semiconductor mission, along with the AI and quantum missions, represent significant economic opportunities. Additionally, the mega Bharat Net programme aims to provide connectivity for all. PSUs should lead the way in leveraging these transformative programmes,” suggests Alkesh Sharma, Former Electronics Secretary and former MD, Delhi-Mumbai Industrial Corridor.

 The next frontier for public sector units (PSUs) involves multiple elements today. Clear indications from government quarters suggest that non-strategic PSUs may be offloaded at some stage, or perhaps a significant consolidation drive will be initiated to maximise their potential, in line with the broader framework of PSU management introduced to bring about drastic changes in the last decade. The anticipation of these developments creates a very interesting landscape, where expectations from PSUs are now much higher compared to past decades, when they were often seen as white elephants.