PSUs holding it up from the other end

Public sector enterprises (PSEs) are leading the rally in Indian equities, riding on a government push to clean up the balance sheets of state-owned banks and an expansion of its capital expenditure. Public sector banks have built up an adequate cushion after a period of capital infusion by GoI to clean up their bad loans. They have been aggressively feeding a revival in retail credit as consumption surged with the lifting of Covid-19 restrictions. Another section of PSEs has gained from swollen government orders on account of increased infrastructure spending and defence procurement. Energy companies have had to absorb some of the oil shock since the outbreak of the Russia-Ukraine war, otherwise, the contribution of the public sector to market capitalisation gains could have been higher. The state-owned pack is also catching up with the fancier valuations of private competitors as investors seek opportunities in a rising market.

Some of these drivers are self-liquidating, though. Credit-led consumption is cooling off rapidly and the central bank has sought higher provisioning for retail loans to avoid concentration. GoI’s capex cycle will likewise taper off, having crowded in private investment. This will have an effect on the public sector’s capex plans alongside a greater demand for credit from the private sector. Public sector banks will also have to become more aggressive with deposit mobilisation, which may divert some of the household savings that are flowing into the stock market.

The public sector has delivered during an economic downturn by reinforcing higher government spending. It has used the extended slowdown in demand for commercial credit to its advantage. Improved valuation pushes this advantage further through enhanced access to credit. As the investment cycle turns, the critical role played by state-owned enterprises may be diluted. But that does not detract from their role as economic ballast, a role they can fulfil better with improved corporate governance. The dividends from a strong public sector are substantial.