Why is it that governments do not learn from the mistakes made by others and, instead, make the same mistakes? Venezuelan President Hugo Chavez made the mistake of milking State-owned upstream oil company, PDVSA, using its resources to pay for all his schemes, instead of investing for future production. Venezuela, which has the world’s largest reserves of crude oil, is now bankrupt, as is PDVSA, which does not have the money to extract oil reserves which are there. The competent people have left PDVSA and have emigrated, causing production of crude oil to fall sharply. Since crude is the main source of real revenue and foreign currency for a badly hit economy, Venezuela is facing hyper inflation, food shortages and a worthless currency. Crude oil accounts for 95 per cent of foreign currency revenue.

A recent article in www.zerohedge.com talks about oil production in Venezuela dropping to 1 m b/d by end 2018, down from 3 m.b/d in 2011. [6] This would further raise crude oil prices and dent India’s CAD.

Well, India has not learnt lessons from Venezuela. The Government has been dipping into the cash reserves of ONGC, the largest State owned upstream oil company. Last year it compelled ONGC to buy its stake in PSU refiner HPCL, in order to show a lower fiscal deficit. It then arm twisted the management to declare a high dividend. ONGC cash reserves have reportedly dropped 90% from the $ 4.3 b. it once had [1].

And now the Government is contemplating compelling ONGC to subsidise petrol/diesel! This is an appalling misuse of a PSU company’s resources. Unless stopped, it would result, one day, in a fate similar to PDVSA, which now has no money to invest in production of crude oil for the future.

The Government can’t dip into the coffers of PSU companies whenever it wants to; these companies have minority, public shareholders. Decisions relating to use of surplus cash resources ought to be left to the Boards of Directors of the PSU companies. Such actions negatively affect the valuations of the PSUs.

Or look at how it utilises funds of LIC, India’s largest, state owned, insurance company. There is a proposal to sell its 86% stake in bankrupt IDBI Bank to LIC! [3] Well, excuse me!! The surplus funds with LIC belong to its policy holders and are not to be dipped into to buy failed banks! This is the worst kind of governance, a harebrained idea that ought to be thrown out, along with the person who suggested it.

There was a similar hare brained plan to sell Government’s residual stake in Air India (after its plan to sell 76% to a private buyer) to LIC! Why on earth should LIC hold stock in a failed airline? The decision must be left to the LIC management and not to paper pushing bureaucrats with no experience in running airlines, insurance companies, upstream oil companies or others. [4]

The Government got no expressions of interest from private airlines to buy its 76% stake in Air India because of conditions attached to the sale. These included retention of (surplus) employees, assumption of (unviable) debt and the continuation of a 24% stake by Government. The Government has now, rightly, decided to sell a 100% stake in the airline [5] which is good (also for LIC policyholders) but insufficient. The overhang of excessive employees and debt also needs to be corrected by the Government prior to sale, if it wants genuine interest.

In global developments there were two important ones last week. One was the G7 meet, post which US President Trump tried to break a very old and solid friendship with Canada, its largest trading partner, and also threatens to go after multilateral trade agreements with a hammer. That would be disastrous for the global economy, and hence for stockmarkets.

The second was his meeting with Kim Jong Il of North Korea, a very old and solid enmity which Trump is seeking to mend. One hopes that the joint statement signed by both results in a diminished threat to global peace.

Indian stockmarkets are steady, based largely on continuing funds flow from retail investors. In the short term this flow might be impacted, perhaps from a global event but over the longer term the prospects look good.

Of course, governance needs to improve and PSU’s ought not to be a milch cow for sticky political fingers.

(The writer is India Head — Finance Asia/Haymarket. The views are personal.)

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