Workers Play Cards at Indian Factories as Asset Sales Flounder
September 05, 2011, 12:07 AM EDTBy Andrew MacAskill and Kartikay Mehrotra
Sept. 5 (Bloomberg) -- Each day, about 2,800 workers punch their time-cards in and out of Hindustan Cables Ltd.’s factories in India. They get paid, receive the occasional raise and eat in subsidized canteens, even though they produce nothing.
The state-owned company, based in Kolkata, hasn’t made any cable since 2004 and has lost $549 million after cellular technology made its telephone wiring obsolete. Labor laws which the World Bank says are among the most restrictive anywhere and tortuous bankruptcy procedures, a legacy of India’s Soviet-era plan economy, mean the government can’t fire idle employees or sell assets such as machinery or land.
While tolerance of unprofitable companies sits at odds with India’s status as the world’s second-fastest growing major economy, Prime Minister Manmohan Singh’s government, rocked by a spate of corruption scandals, may be wary of changing rules that keep many in jobs. About a third of India’s 249 state-owned firms that make everything from condoms to steel are losing money -- $3.4 billion in the most recent financial year -- just as the government misses a goal of raising $8.7 billion this year selling stakes in companies such as Oil & Natural Gas Corp., the nation’s biggest explorer.
“It is utterly crazy and everyone knows it’s crazy but there is nothing the government can do because of the labor laws,” said M. Govinda Rao, one of four members of India’s Economic Advisory Council to the Prime Minister, a panel which produces periodic reports for Singh’s administration. “The government is literally throwing money away.”
Kishore Rungta, chairman and managing director of Hindustan Cables, declined to comment.
Playing Cards
While the government has stopped production at many state- owned companies, it won’t close the plants. Any firm with more than 100 employees must gain approval from the labor department to shutter a factory. Permission has been granted 21 times for state companies, according to the 2010 Public Enterprises Survey, yet none have been liquidated.
“At some of these companies people are sitting around playing cards,” said Nitish Sengupta, chairman of the Board for Reconstruction of Public Sector Enterprises, which recommends remedies for unprofitable government units. “Closing a company is the last measure we take after exhausting every option to revive it.”
Singh’s coalition government should amend the rules to make it easier for money-losing firms to close down, though it’s unlikely to do this any time soon because of concerns about lob losses, said Surjit Singh Bhalla, chairman of New Delhi-based Oxus Fund Management. In addition, politicians often won’t agree to close firms in constituencies they treat as personal fiefdoms, he said.
Miss Target
India’s policy since 1991 has been to sell down stakes in state-owned firms while retaining a controlling interest and managerial powers, a process the government calls disinvestment.
A slump in stock markets around the world is hindering the plan. On Aug. 19, Finance Minister Pranab Mukherjee told parliament that India may miss its target for selling stock this year as it cannot sell assets “in a market situation where we won’t get the adequate prices.”
A U.S. credit-rating downgrade, the deepening sovereign- debt crisis in Europe and speculation about another global recession wiped out more than $4 trillion in stock market value in August, according to data compiled by Bloomberg. The benchmark Bombay Stock Exchange Sensitive Index has slumped 18 percent this year.
Bailouts, Salaries
In the years after India gained independence in 1947, it put key industries in the hands of state-run monopolies in the mold of the Soviet Union. While the country’s top 10 state-owned companies earned a combined net profit of $13.6 billion last year -- Coal India Ltd., the largest producer of the fuel, briefly became the country’s most valuable by market value on Aug. 18 -- many others still depend on state funds for bailouts, salaries and running costs.
National carrier Air India, which loses more cash than any government-owned company, asked for a 175 billion-rupee ($3.8 billion) bailout this year. That is equivalent to about two- thirds of the amount spent on health care in the world’s second- most populous country.
Public companies have assets worth $199 billion, which last year gave an average return on capital of about 4.3 percent. The government could earn about twice as much putting the money in a one-year fixed term deposit with State Bank of India, the nation’s largest lender.
Laid Off
At state-run Hindustan Fertilizers Co. Ltd.’s Haldia factory in West Bengal, no fertilizer has been produced since it was assembled in 1979. Built on a small budget, inexperienced engineers bought parts from the Soviet Union, Czechoslovakia, Hungary and Japan, which when bolted together didn’t work.
It took 24 years for most of the company’s 1,700 employees to be laid off. About 100 security guards and managers are still paid to look after the factory as the government debates whether to revive or sell it. The company has lost about $319 million since 2002.
“I’ve lost a lot of hair over the last 20 years trying to work out why governments continue to throw money at these companies,” says Oxus Fund Management’s Bhalla.
Hindustan Cables’ factories near Kolkata and Hyderabad are littered with moss-covered debris. Workers leave their subsidized housing to punch time cards in and out twice a day before returning home or seeking out alternate sources of income.
Employees such as P. Nageshwar Rao, 46, who has worked at the company’s Hyderabad plant since 1995, say they are unlikely to find new jobs after years of inactivity at the government’s expense.
“It’s been painful to be unwanted and unproductive,” said Rao. “Nobody likes to sit idle, even if you are paid for it.”
--With assistance from Sharang Limaye in Hyderabad and Pradipta Mukherjee in Kolkata. Editors: Mark Williams, Sam Nagarajan
To contact the reporters on this story: Andrew Macaskill in New Delhi at amacaskill@bloomberg.net; Kartikay Mehrotra in New Delhi at kmehrotra2@bloomberg.net
To contact the editor responsible for this story: Peter Hirschberg in Hong Kong at phirschberg@bloomberg.net
