In recent years, Public Sector Undertakings (PSUs) have performed exceptionally well in the Indian stock market. This is evident as the BSE PSU Index has delivered a return of approximately 43.71% this year and about 187.29% over the past three years.
However, the real issue is whether this growth is actually good news for the Indian economy. What does this situation mean for the future of the Indian economy? Let’s delve into this topic.
What’s Happening?
There is no doubt that PSU companies are performing well, but most of these PSUs are in sunset industries such as fossil fuels and old transportation. These government-owned companies are reinvesting within themselves, while private sector investment remains worryingly low.
The question arises: Is the performance of PSU companies slowing down growth and investment in the private sector? Many PSUs hold monopolistic positions or near-monopolies in their respective industries, which is not necessarily beneficial for the sector’s overall health.
This indicates that the strong performance of the government sector is not necessarily a positive sign for the entire economy.
Decline in Private Sector Investment
The Indian economy is facing a unique situation. While government companies (PSUs) are profitable, the private sector is struggling. In 2023-24, there was a decline of over 15% in new investments from the private sector, with a particularly sharp 40% drop in the manufacturing sector.
Some argue that domestic demand is not strong enough, leading to reduced investment flows in the private sector. Others believe that there hasn’t been a significant increase in manufacturing productivity, resulting in a lack of new capital. Additionally, there is a consensus that business reforms are not as adequate as they should be.
Reliance on the Government Sector
Another fundamental problem is that over the past two terms, the Modi government has developed an economic growth strategy that does not prominently involve the private sector. It has been observed that the government invests domestic savings into the public sector.
In terms of GDP, government expenditure has increased rapidly, along with India’s debt. The Finance Ministry’s think tank estimates that the growth rate in the coming year is likely to be around 7.1-7.4%, primarily driven by capital expenditure in the public sector.
What Does This Mean for Investors?
A slowdown in the private sector translates to fewer job opportunities and slower economic growth. Investors are the backbone of the economy; their investments lead to new businesses and job creation. The struggle of the private sector can directly impact the stock market, as we have seen in recent years with the returns from private companies compared to government companies.
What’s Next?
Bloomberg suggests that this strategy will not modernise India’s economy by moving away from sunset industries or boosting productivity. Simply put, it is not economically sustainable. With each Union Budget, government investment has increased. Therefore, the government needs to adopt a different strategy, as public sector companies cannot be the foundation of a modern and productive economy.
That’s it for today. We hope you’ve found this article informative. Remember to spread the word among your friends. Until we meet again, stay curious!
*The article is for information purposes only. This is not an investment advice.
*Disclaimer: Teji Mandi Disclaimer
