india

Cues for growth

Only way to unlock value of PSUs is liberation from government control. Growth will continue to be consumption-led.

The Sensex tumbling below 50,000 points, after having scaled that psychological barrier earlier this month, is an occasion for reflection. Not the least because the stock markets’ relentless rise till now was itself seemingly incongruous with a stagnating, if not contracting, economy. Even after the recent fall, the benchmark index, at Monday’s closing of 49,744 points, is over a fifth higher than at the start of 2020. It raises the question: What are the stocks that have gained from the just-ended bull run and what does it suggest for the broader economy? To start with, public sector undertaking (PSU) stocks were not part of the extended rally. The S&P BSE PSU index today is, in fact, below its January 1, 2020 level. Indian Oil Corporation is the country’s top company by revenues, but its current market capitalisation of Rs 90,046 crore is a fraction of Reliance Industries’ Rs 12,72,579 crore. There are only three PSUs, the market values of whose shares exceed Rs 1,00,000 crore: SBI, ONGC and Power Grid Corporation. Even SBI’s market cap is lower than that of HDFC Bank, ICICI Bank and Kotak Mahindra. The same goes for that of Power Grid or NTPC vis-à-vis Adani Green Energy.

The inference is simple: Being India’s biggest oil marketer, lender or power generator and transmitter might seem a big deal to many, but not to the markets that value performance more than size. PSUs are seen to deliver value not to shareholders — in this case, taxpayers — but to ministers and bureaucrats. While the markets aren’t always right, it’s clear that the only way to unlock the hidden value of PSUs is by liberating them from government control. The latest Union Budget has referred to a new disinvestment policy that aims at privatising all PSUs and limiting them to a “bare minimum presence” even in so-called strategic sectors. But given the Narendra Modi government’s record of statism in both social and economic affairs, how much it walks the talk remains to be seen.

But it isn’t just PSU versus private. The markets are also valuing consumer-facing firms more than those in engineering and capital goods. Thus, the market cap of Hindustan Unilever (Rs 5,09,208 crore) or Asian Paints (Rs 2,28,975 crore) exceeds L&T’s (Rs 2,03,959 crore). Even more revealing are the numbers for Page Industries (Rs 30,739 crore) and Jubilant FoodWorks (Rs 41,089 crore), compared to SAIL (Rs 27,692 crore) and BHEL (Rs 13,824 crore). If the makers of Jockey innerwear and Domino’s pizza are valued more than steel and power equipment manufacturers, it points to two things. India’s growth will continue to be consumption- and not investment-led. Secondly, demonetisation, GST and lockdown may have killed the informal sector. But organised and branded product players have grabbed a bigger share of the pie, which itself has perhaps shrunk. The next market rally is likely to only consolidate these trends.

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