SHOULD PUBLIC SECTORS BE ALLOWED TO INVEST IN MUTUAL FUNDS?

NAVARATNA; YOU HAVE STILL A VITAL ROLE TO PLAY

The Cabinet committee on economic affairs (CCEA) discussed and gave its nod for giving extension till further order on the scheme in which Navratana PSUs had been allowed to invest 30% of their profit in Mutual Funds. The decision to this effect had been taken in 2007 subject to annul review; the period had expired on 1st August, 2008 therefore required review.

This decision is said to have been taken in order to revive the MF field, which is in recession due to the global economic slowdown. Figure available with the ministry of finance suggests that the assets under management of MF has dwindled from Rs/ 5.50 lakh crore in 2007 to 4 lakh crore only in 2008.

IS THIS DECISION WISE?

The decision needs to be analysed in the present context of worldwide recession. If we look at the causes which led to failure of Banks in America and many parts of Europe, we can have an idea that why these banks failed and went bankrupt. American Banking as an institution is said to have started in 1865, when National Banking Act was passed in this year. It was initially based on British model, which prohibits banks from making investments in stock markets. There was another model, called German model which allowed Banks for making investment in the stock markets. 

As far as the present global economic crisis in American banking industries in concerned, its genesis was laid in 1999, when one Graham Leech Blibley Act was passed by Bill Clinton and allowed the banks to make investment in the stock markets. This marked the end of British model of banking and gave these financial institutions unfettered and excessive financial leverage. The infamous ‘housing bubble’ was created thereafter due to subprime lending, which ultimately culminated into burst of housing bubble and subsequently depression.

HOW ARE NAVARATNAS DIFFERENT FROM OTHER COMMERCIAL ESTABLISHMENTS-

The govt is going to commit the same kind of mistake by allowing the Navaratna to go for investment in MFs; which is not a safe business,as American did in allowing the banks to go for investments in stock markets after Graham leech blibley Act of 1999. Public Sector Undertakings (PSUs) are the ‘commanding heights’ of our economy, which Nehru used to boasts off. These PSUs are not typical business and industrial houses because they have been transfused with the bloods of billions of Indians. The value of their assets of lands, plants and machineries, govt budgetary supports etc cannot be calculated in terms of money. These assets are the repository of billions of Indians. The assets obviously are not of the board of directors or the management of these companies; but of the billions of the Indians. One can disagree on this on pretext of being too emotional, but it is not an emotional argument against this proposal; rather it is base on ‘pure economics’ also. The govt is committing the same set of mistakes which the Americans and a host of European countries did and are thereby facing the wrath of millions of their citizens.

How can a set of people sitting in board rooms, decide the fate of the assets of billions of tax payer Indians by allowing them to invest the profits in the MFs. The capital market, we know, are played into the hands of profiteers and speculators despite regulatory regime of SEBI and ministries. We have had experiences like this in the past and hence cannot deny the fowl game if played in future. If it happens, it would be disastrous and catastrophic both in terms of financially and sentimentally.

WHAT SHOULD BE DONE FOR THE PROFITS OF PSUs-

It is true that the profits earned by these PSUs have swelled over years. In fact some sort of insulated affects of global recession on Indian economy are also due the spectacular performances by these Navaratanas. If we look at the fiscal performances by these units in the fiscal year 2007-08, they are magnificent. For example following are the net profits of some of the navaratans in crores during the said financial years are as:

NTPC- 7,12,930 for 2006-07

ONGC- 167016 for 2006-07

BHEL- 2,859 for 2006-07

IOC- 6963 for 2007-08

SAIL - 7,536.78 for 2007-08

MTNL - 110 for 2007-08

GAIL - 2601 for 2007-08

BPCL - 121O.20 for 2007-08

HPCL - 13460 for 2007-08

The million dollar questions are that have the capital of govt of India been repaid? Have these PSUs paid back the values of govt lands which had been given to them free of cost when they were being constructed? Are we not exposing these PSUs to unhygienic financial speculative markets? These questions need answers before we go into this venture of investing into MFs.

Is it wise to invest 30% of these hard earned profits into MFs, which is a risk oriented investment? Can we not use these profits in a more safe and developmental areas?

The govt must use this profit in a wider perspective. The govt can create a separate fund called ‘public sector creation fund’ and use money from this fund for creating and construction new Public sector units. With the opening up of the economy in 1990s, the construction of new public sector units was almost stopped. Now when it has been proved beyond doubt that the PSUs have helped our nation achieve ‘growth with justice’ over a period of time, we can seriously think in terms of creating more PSUs on lines of navaratana. After all govt is not an organisation which is based on making profits only, rather it has to do business blended with social justice and economic equalities. These public sector had have helped a lot in achieving this goal. 

With the passage of time we are faced with a lot of new challenges. We need to have more energy based on non-conventional source. We can create National Solar Power Corporation like company and tap unlimited solar energy. There are other areas also where we can construct new companies. These huge profits can also be used in modernisation and diversification of these PSUs. After all every crisis led us to innovation; innovation led to betterment and subsequently prosperity.