Profit and Loss – Does this concept exist with the Government of India?

On 18 Jun 2016, Punjab National Bank declared a quarterly loss of 5367 crores. One of the most striking comments over this was, What sort of a business model is this, where there is a huge loss and no one is either answerable or accountable? The real question, then, is this. What are we doing to correct this mess, where losses like this are piling up and common citizens are forced to foot the bill for mistakes of some?

Looking at the trends, what we are seeing is that any public sector entity which has got a competition in private sector and is not a department of donkey load is taking a severe beating in the market.

PSU bank share in market stays because they are supposed to hold government money and it is not viable for any private sector firm to deal with all these micro accounts(note India’s average income is 88 rupees per day). Rather than targeting the 125 crore population, targeting the top 1% will give them a better profit model. Even after all this, PSU banks hit a loss as like PNB because of all those non-performing loans. A big industrialist defaults and it’s the bank which takes the load. A private sector entity is supposed to be less affected because of lack of pressure on the management to act. Farm loan waivers, where everyone gets a piece of the loss is applicable only for PSU banks.

Same goes for LIC but General Insurace(Oriental Insurance, National Insurance etc) are taking a beating because it is mostly industrial money – less players and more money. And in this sort of working environment, the entity with a better business model rules. This is the same story with Air India, BSNL, MTNL which are more to do with privileged customers than common populace.

Exceptions exist, like NTPC, BPCL or SAIL which are too big to take down. They have got an added advantage, viz, the raw material is available to them at a fraction of what a private player gets for.

Next are behemoths like Electricity Boards or Indian Railways which act as agents for government populism. To attract the vote banks, they are forced to operate in losses. For example, Indian Railways operates on a loss of above 30000 crores on passenger segment because increasing rates is politically uncomfortable. In the same way, TANGEDCO(Tamil Nadu State Electricity Department) hit a loss of 8500 crores(2016) simply because the government wants to give subsidized power to please it’s electorate.

Next are departments like Postal Department which are used for donkey work. For example, LIC posts a bulk parcel of 50000 letters and pays a pittance as against 5 rupees per item – a total of 1.25 lakhs. Here, we are seeing that of the profit shown by LIC, 1.25 lakh is actually a loss against Postal Department – net sum zero.

On a similar line was these two episodes –

1.     LIC bought 11000 crore worth of shares from ONGC in open market in 2012. What is the business model of operation where a government entity buys the shares of another government entity above the market price? The declared floor price was Rs 290 per share while LIC paid Rs 293.5 per share – an additional 78 crores considering the 5% discount similar to the given as a part of Coal India divestment. But in reality, LIC should have got it at a much cheaper rate. What did the government achieve by transferring money from one entity to other, that too, at a loss to one, except to manage the accounts?

2.     10% of Coal India Limited was divested in 2015. The government got 22,500 crores in return. Does this mean the government doesn’t have money and is trying to get something additional to run the show/reduce the fiscal deficit? If this is the real scenario, where is the humongous amount of tax money and other sources of income going to?

The concept here is simple. If any department involves in business, it should be maintaining a P&L account. Profit should be commended and loss should be frowned upon.

1.     Identify loss making businesses and find ways to trim it down.

2.     Split a department into sub-departments or separate entities, removing profit making entities from the behemoth. For the behemoth, the balance needs to be managed either to it’s closure or to it’s turnaround.

3.     Identify overstaffed departments and prune them

4.     Regular upgrade of tariffs. For example, the fine to pull chain in India is 500 rupees and it stayed the same for more than two decades. When salaries increased and when fares increased, is there any reason to keep the fines constant?

5.     Use of technology and better business model. What is the reason why is ICICI Lombard eating into the share of Oriental Insurance or National Insurance and not the way otherwise?

6.     Let there be a performance pay and accountability for the decision – either you will get a pay cut or you will get a pay hike or you will be booted out. After all, there is no reason for me to give pay hike to an entity like BSNL or Air India or NIC which are slowly losing out their market share to someone else.

A company collapsing is not a big deal. But, a company which funds a considerable part of a country like Railways or the main National Bank collapses, it will bring down the complete country along with it. It, thus, becomes mandatory to control the rot before it eats the complete system.