Month: September 2014 | Page 3

16 September, 2014

Vinod Rai has had the last laugh on Coalgate. Here’s why

Vivek Kaul

In an interview with the Business Standard in September 2013, Jairam Ramesh was asked why the Congress party was losing ground so badly in urban India. “Because of the bhumihar from Ghazipur,” Ramesh replied. He was referring to the former Comptroller and Auditor General (CAG) of India, Vinod Rai, who had retired from his post in May 2013. The CAG in a series of reports had exposed the wrongdoings of the government.
As Rai writes in Not Just an Accountant—The Diary of the Nation’s Conscience Keeper “Jairam Ramesh was a regular visitor to the CAG headquarters for discussions on the audit of the national rural employment guarantee programme. His discussions did indeed lend value. In one of the conversations with me, he asked why N.K.Singh, the Rajya Sabha MP representing the Janata Dal(United), used to refer to me not only as a bhumihar but as a ‘bhumihar from Ghazipur’. I told him I did know what it meant.” Rai further writes that even his caste was brought into prominence, “and this after sixty-seven years of independence.”
Ramesh’s quip against Rai was a part of a series of statements made by leaders of the Congress party to discredit him. This after, the CAG had meticulously gone about exposing wrongdoings of the government in the telecom, coal, sports and aviation sectors.
Manish Tewari, the Congress leader who can speak on just about anything, said that the “R-virus has infected the Indian growth story. The R-virus stands for a phenomenon were responsible individuals decide to become loose cannons.” On another occasion Tewari said “When individuals decide to go rogue, institutions suffer. That possibly has the most detrimental effect on the India growth story.” Sharad Pawar, who is a part of the UPA, and was the food and agriculture minister in the UPA government said “CAG has taken certain decisions that have created a different atmosphere in the country… I haven’t seen anything like this in the forty-five years of my career as a politician.” Montek Singh Ahluwalia, the deputy chairman of the Planning Commission, went on to claim that “untrained staff [is] auditing CAG reports.” The business lobby ASSOCHAM even went to the extent of releasing advertisements which said that CAG reports were sending wrong messages. The advertisement went on to state “The CAG’s conclusions over the 57 coal block allotment appear to have been arrived at without taking all facts into consideration. Only one of the 57 blocks has gone into production.”
The then finance minister P Chidambaram even went to the extent of saying that the government had faced no loss from giving away coal blocks free to private and public sector companies. “If coal is not mined, where is the loss? The loss will only occur if coal is sold at a certain price or undervalued,”Chidambaram had said.
In order to understand this statement we need to go back to the early 1990s. The government at that point of time realized that enough coal was not being produced. The Coal Mines(Nationalisation) Act was amended with effect from June 9, 1993. This was done largely on account of the inability of Coal India Ltd (CIL), which produces most of India’s coal, to produce enough coal.
The coal production in 1993-94 was 246.04 million tonnes, up by 3.3% from the previous year. This rate was not going to increase any time soon as newer projects had been hit by delays and cost over-runs, as still often happens in India. As the Economic Survey of 1994-95 pointed out “As on December 31, 1994, out of 71 projects under implementation in the coal sector, 22 projects are bedevilled by time and cost over-runs. On an average, the time over-run per project is about 38 months. There is urgent need to improve project implementation in the coal sector.”
The idea, as the Economic Survey of 1994-1995 pointed out, was to “encourage private sector investment in the coal sector, the Coal Mines (Nationalisation) Act, 1973, was amended with effect from June 9, 1993, for operation of captive coal mines by companies engaged in the production of iron and steel, power generation and washing of coal in the private sector.”
The amendment to the Coal Mines (Nationalisation) Act 1973 allowed companies which were in the business of producing power and iron and steel, to own coal mines for their captive use. Hence, the coal that these companies produced in these mines was to be used to feed into the production of power and iron and steel. Any excess coal was to be handed over to the local subsidiary of the Coal India Ltd.
Between 1993 and 2011, 195 coal blocks were given away for free to public and private sector companies for captive use. Most of these free coal blocks were given away between 2004 and 2011. Nevertheless even by 2011-2012, these coal blocks produced only 36.9 million tonnes of coal. This amounted to around 6.8% of the total production of 539.94 million tonnes during the course of that year.
And because very little coal was being produced in these captive mines, this led Chidambaram and the industry lobby Assocham to put forward the argument that since coal was not being mined how did the government face any losses? This was a really stupid argument to make. The government handed over a natural asset free to private and public sector players. They, in turn, were not able to mine coal from it quickly enough. How does that mean that the government did not face any losses? It does not change the fact that coal blocks were essentially handed over for free.
As Rai puts it in his book: “I thought any prudent and concerned industry body would have questioned the urgency to allot when the allottees had not even commenced mining. But then, since every person who wanted to display his loyalty to the government was hastening to take potshots at the CAG, why not an industry body?”
Interestingly, Manmohan Singh explained the inability of the private coal producers to start producing coal quickly enough by saying “it is true that the private parties that were allocated captive coal blocks could not achieve their production targets. This could be partly due to the cumbersome processes involved in getting statutory clearances.”
This Rai says is a defeatist argument. As he writes “This does appear to be a defeatist argument; if the government is aware that the processes are cumbersome and accords the process urgency, it is incumbent on the government to take steps to ensure speedy clearances.”
The CAG came in for heavy criticism for coming up with a loss figure of Rs 1,86,000 crore for these coal blocks being given away free by the government. In his book, Rai explains with great clarity how this number was arrived at. The CAG worked with most conservative estimates while coming up with this number. While calculating the loss the CAG did not take into account the coal blocks given to the public sector companies. Only blocks given to private sector companies were taken into account.
The total geological reserves of the coal blocks given away for free amounted to around 44.8 billion tonnes. The total amount of coal in a block is referred to as geological reserve. But not all of it can be extracted. Open cast mining of coal typically goes to a depth of around 250 metres below the ground whereas underground mining goes to a depth of around 600-700 metres. Beyond this, it is difficult to extract coal.
The portion of the geological reserves that can be extracted are referred to as extractable reserves. The CAG worked with fairly conservative estimates on this front as well. Typically extractable reserves are around 80-95% of geological reserves. As Rai writes “Audit based its computation on [the] conservative estimate of 73 million tonnes for every 100 million tonnes given in the GR [geological reserve]…Can audit be faulted if its computation was based on a conservative estimate of 73 per cent?…The extractable reserves…based on the aforementioned method, was found by the CAG to be 6282.5 million tonnes, which is mentioned in the report.”
So only 6282.5 million tonnes of the 44.8 billion tonnes of geological reserves was assumed as extractable reserves while calculating the losses of the government due to giving away coal blocks for free.
After establishing the extractable reserves the CAG needed to establish the price at which this coal could be sold as well as the cost of production of this coal. For establishing the price at which the coal cold be cold, the CAG considered three possible options.
“The first was by imports. The average import price of non-coking coal sourced from Indonesia during 2010-2011 was Rs 3,678 per tonne (Indonesia supplied most of our non-coking coal imports). The second source was the coal sold in e-auction by Northern Coalfields Limited, a subsidiary of CIL [Coal India Ltd] based in Singrauli. The third and major source of coal supply in the country was that which was mined and supplied by CIL. Audit utilized the only creditable data available in the public domain—that of CIL. CIL is regularly audited by the CAG, so its accounts and other details can be taken as authentic. From the audited accounts of 2010-2011, the average sales price of all grades of coal sold by CIL was taken as Rs 1,028 per tonne. This was the most conservative price too,” writes Rai.
After this, the cost of production of coal needed to be established. For this, the CAG again went back to CIL, which produces most of the coal in the country. As Rai writes “The average cost of coal mined by CIL was found to be Rs 583 per tonne. The MoC has indicated, after due verification, that the financing cost ranged from Rs 100 to Rs 150 per tonne. To be on the safe and conservative side, audit assumed it to be at Rs 150. Thus, while the average sale price was Rs 1,028, the average cost was Rs 583 plus Rs 150, namely Rs 733,” writes Rai.
Manmohan Singh later criticized this calculation by saying “the cost of production of coal varies significantly from mine to mine even for CIL due to varying geo-mining conditions, method of extraction, surface features, number of settlements, availability of infrastructure etc.”
By taking the average cost of production these are exactly the factors that CAG was taking into account. And this left Rs 295 per tonne (Rs 1028 minus Rs 733) as the financial benefit. So Rs 295 of financial benefit per tonne was multiplied with 6282.5 million tonnes of extractable reserves and a loss figure of close to Rs 1,86,000 crore was arrived at.
As you can clearly see the most conservative estimates had been used to arrive at a loss number. If the CAG had not used these conservative estimates it could have easily put out a much bigger number for these losses.
Another criticism that the CAG came in for was that the loss calculation did not take the concept of net present value(NPV) into account. “Even if discounting had been done to arrive at the NPV, we would have possibly projected an annual increase of 10 per cent in cost/sale price, and we would then have discounted, at, say, a discount factor of 10 per cent. We would have got to an NPV of financial gain of Rs 2.40 lakh crore, at 11 per cent of Rs 1.86 lakh crore and at 12 per cent of Rs 1.49 lakh crore. There is no substantial difference. Hence, why all the ire?”
In the end, Vinod Rai has had the last laugh. The Supreme Court in a recent decision deemed the allocation of coal blocks to be illegal. And for those who are still not convinced about the way Rai operated as the CAG, it is time they read his book.
The article appeared on www.FirstBiz.com on Sep 16, 2014

(Vivek Kaul is the author of Easy Money. He tweets @kaul_vivek)

15 September, 2014

What Vinod Rai's book proves: History will not be kind to Manmohan Singh

Vivek Kaul

In January 2014, towards the end of his second term, Manmohan Singh spoke to the media for the third time in a decade. On this occasion he said “I honestly believe that history will be kinder to me than the contemporary media.”
While speaking to the media Singh also said “I feel somewhat sad, because I was the one who insisted that spectrum allocation should be transparent, it should be fair, it should be equitable. I was the one who insisted that coal blocks should be allocated on the basis of auctions. These facts are forgotten.”
If that was the case then why did the allocation of 2G(second generation) telecom licenses and coal blocks end up in a mess? This Singh did not elaborate on during the course of his interaction with the media in January, earlier this year. Neither has he chosen to elaborate on these points since then.
Vinod Rai, the former Comptroller and Auditor General (CAG), analyses both these issues and the role Singh played in them, threadbare, in his new book Not Just an Accountant—The Diary of the Nation’s Conscience Keeper. In this piece we shall look at the mess that the issuance of 2G telecom licenses ended up in and leave the discussion on what came to be called coalgate, for sometime later this week.
Rai in his book through a series of documented evidence shows how Singh was fully aware of what was going on, but still chose to not to do anything about it. Instead, he even went to the extent of distancing himself from the decisions made by the communications minister A Raja.
As Rai writes “You [Manmohan Singh] engaged in a routine and ‘distanced’ handling of the entire allocation process, in spite of the fact that the then communications minister A Raja, had indicated to you, in writing, the action he proposed to take. Insistence on the process being fair could have prevented the course of events during which canons of financial propriety were overlooked, unleashing what probably is the biggest scam in the history of Independent India.”
Before we get into the details of what probably led Rai to make such a strong statement, we need to take a brief look at how the Indian telecom sector evolved from the 1990s.
The telecom sector was opened up to the private players in a phased manner after the announcement of the National Telecom Policy (NTP) in 1994. Licenses were initially allotted to private companies in 1995, through the competitive bidding route. These licenses allowed private companies to launch mobile phone telephony in India.
The policy was revised in 1999 and existing mobile phone operators were allowed to migrate to a revenue sharing regime with the government. “The upfront payment was an entry fee, with the annual license fee to be paid separately. The entry fee was fixed on the basis of the highest bid received in the 2001 auction of licenses. It was Rs 1,651 crore for pan-India licenses,” writes Rai. The then prime minister Atal Bihari Vajpayee constituted a group of ministers on telecom in September 2003. The recommendations of this group were added to the National Telecom Policy of 1999. The existing system of issuing licenses were replaced by an automatic authorization regime.
A Raja took over as the communications minister in May 2007. He decided to continue with the first-come-first served(FCFS) policy for allocation of licenses to telecom companies. On September 25, 2007, a press release was issued and applications were invited for telecom licenses. The last date was set to October 1, 2007, a week later.
In total 575 applications for 22 service areas were received by the communications ministry. This led to the ministry of communications writing to the law ministry and sought its opinion on how to deal with the situation of so many applicants. The law ministry suggested that the issue be referred to the empowered group of ministers(eGOM). Raja did not like this suggestion and on November 1, 2007, wrote a letter to Manmohan Singh.
In this letter Raja complained that the suggestion of the law ministry “is totally out of context”. He then went on to coolly inform the prime minister that he had decided to advance the cut off date for licenses to September 25,2007, the date on which the press release was issued for the allocation of licenses, instead of October 1, 2007.
Raja further told Singh that “the procedure for processing the remaining applications will be decided at a later date, if any spectrum is left available after processing the applications received up to September 25, 2007.”
The rules of the game were changed after it had started. Singh responded immediately on the same day. In his letter, Singh seemed to be concerned over the fact that a large number of applications for new licenses had been received. Given the fact that the spectrum was limited, it would not be possible to give spectrum to all of them, even over the next few years, Singh wrote. He further pointed out that the National Telecom Policy of 1999 had specifically stated that the new licenses be issued subject to the availability of spectrum.
In this scenario, Singh suggested that the communications ministry consider the introduction of a transparent methodology of auction, wherever it was legally and technically feasible. This needed to be done in order to ensure that spectrum was used efficiently.
Also, the entry fee for these licenses was the same as in 2001, i.e. Rs 1,651 crore. Hence, Singh suggested that the entry fee be revised. This was a logical suggestion to make given that six years had passed since 2001 and if not anything at least inflation had to be taken into account.
Raja responded within hours of receiving this letter from Singh. He ruled out an auction stating that “the issue of auction of spectrum was considered by TRAI[the telecom regulator] and the telecom commission and was not recommended as the existing license holders..have got it without any spectrum charge.” Raja went on to add that the holding an auction would thus be “unfair, discriminatory, arbitrary and capricious”.
Meanwhile, Kamal Nath, wrote to Singh on November 3, 2007, and suggested that a group of ministers should be asked to comprehensively study all the issues facing the telecom sector. Raja responded to this on November 15, and said that the Indian telecom industry was doing very well and was adding seven million new customers every month. The shares of the telecom companies listed on the stock market were also doing very well. And given these reasons the suggestion of Kamal Nath of setting up a group of ministers was again “out of context,” as had been the case with the law ministry earlier.
Singh responded on November 21, by sending what former CAG Rai calls a “template response”. In this letter Singh acknowledged that he had received Raja’s recent letter on the recent developments in the telecom sector. Raja wrote to the prime minister again on December 26, 2007. Singh again responded with the same templated response on January 3,2008.
All that has been discussed till now raises a series of questions. As Rai writes “[Manmohan Singh] failed to direct his minister[i.e. A Raja] to follow his advice…Why under what compulsion, did the prime minister allow Raja to have his way, which permitted a finite national resource [i.e. the telecom spectrum] to be gifted at throwaway price to private companies—private companies that, going by the minister’s own admission, were ‘enjoying the best results […] which was also reflected in their increasing share prices?”
Also, why was the entry price fixed at Rs 1,651 crore, which was a price set way back in 2001. As mentioned earlier this price should have at least taken inflation into account. The telecom market had also expanded since 2001. The National Telecom Policy of 1999 had set a teledensity target of providing 15 telephone connections per 100 of population. The teledensity in 2001 had stood at 3.58. In September 2007, a teledensity of 18.22 had been reached. “Was this data not available with the government..to counter Raja’s consistent and constant refrain?” asks Rai.
Further, even if increasing teledensity was the main goal, given that the spectrum is finite, didn’t it call for a “balance between revenue generation and achieving social objectives?” In fact, the tenth plan document clearly mentions this, when it comes to spectrum allocation: “pricing needs to be based on relative demand and supply over space and time in a dynamic manner, [with] opportunity cost to reflect relative scarcity of the resource in a given situation.”
Also, why was the cut-off date for the last date to receive applications arbitrarily advanced from October 1, 2007 to September 25,2007? As Rai writes “Though Raja clearly indicated this to the prime minister in his letter of 2 November 2007, the PMO chose not to object. Why it chose not to, remains unclear.”
Interestingly, thirteen applicants seem to have known of this change in date, in advance. How else do you explain the fact that certain applicants appeared with demand drafts amounting to thousands of crore, which had been issued even before the press release inviting applications for telecom licenses was put out on September 25, 2007.
Then there is the question of first-come-first served. It essentially means those who applied for a license first, would be given a license first. But that wasn’t the case. “One would be surprised to learn that even this procedure, which was repeatedly reiterated to the prime minister by Raja, was given the go-by, and all applications submitted between March 26 and 25 September 2007 were considered together,” writes Rai.
Pulok Chatterjee, a bureaucrat known to be close to the Gandhi family, was an additional secretary in the prime minister’s office at that point of time. In a note that was presented to prime minister Singh on January 6, 2008, Chatterjee concluded that “ideally in a situation where the spectrum is scarce it should be auctioned”. But by that time the licenses had already been issued.
Joint secretary Vini Mahajan recorded that the prime minister wanted Chaterjee’s note to be only “informally shared within the Dept”. She further noted that the prime minister “does not want a formal communication and wants PMO to be at arm’s length.” As Rai asks “How can the office of the prime minister distance itself from such major decisions? Arm’s length from the action of his own government?”
Also, it needs to be noted here that Raja suggested that TRAI was against auction of telecom spectrum. This is untrue. In August 2007, the telecom regulator had clearly stated that: “In today’s dynamism and unprecedented growth of telecom sector, the entry fee determined in 2001 is also not the realistic price of obtaining a license. Perhaps it needs to be reassessed by a market mechanism.”
The companies which got these licenses cheap, cashed in on it almost immediately. “In case of Unitech, which had no previous experience in the telecom business, Telenor, a Norwegian company, agreed to acquire 67.25 per cent stake for Rs 6,120 crore. Tata Teleservices sold 27.31 per cent stake to NTT Docomo at a value of Rs 12,924 crore. Even Swan Telecom sold 44.73 per cent stake to Etisalat International at Rs 3,217 crore. Is that not clearly indicative of the value the market attached to the 2G spectrum license. Even a cursory back-of-the-envelope calculation will indicate that licenses which could have fetched between Rs 8,000 to Rs 9,000 crore were priced at Rs 1,658,” writes Rai.
On February 2, 2012, the Supreme Court cancelled all the licenses that had been issued by A Raja.
On a slightly different note, Rai also points out it was a ruling party MP (Rai does not give out his name in the book) who seems to have first suggested that losses that the government faced from giving out licenses cheaply, needed to be calculated.
As Rai puts it “He [i.e. the MP] went on to reiterate that it was obvious how much the government of India could have secured by transparent bidding and asserted that even a section officer in the government would be able to make this computation.” In a recent interview Rai revealed that the name of the MP was KS Rao, who has since quit the Congress protesting against the bifurcation of Andhra Pradesh and joined the BJP.
Rai writes that this was one of the reasons why the CAG decided to compute a loss figure arising out of the 2G telecom licenses being issued cheaply. As he writes “Now if an MP, and of the ruling party, makes such a strong assertion, obviously the audit department has to take cognizance of that parameter for computation.”
The CAG used various methods to compute a loss figure and arrived at a four numbers ranging from Rs 57,666 crore to Rs 1,76,645 crore. All this could have been avoided only if Singh had chosen to respond differently and instead said to Raja that “I have received your letter…Please do not precipitate any action till we or the GoM[group of ministers] have discussed this.”
To conclude, on an earlier occasion I had written that if he wants history to treat him kindly, Singh needs to write his autobiography and put forward his side of the story as well. Whether he does that or not, remains to be seen. But Vinod Rai’s thoroughly researched book makes me now believe that whatever Singh might do, history will not be kind to him, his hopes notwithstanding.
The article appeared originally on www.Firstpost.com on Sep 15, 2014

(Vivek Kaul is the author of the Easy Money trilogy. He tweets @kaul_vivek)

14 September, 2014

Trump’s wrong: How the Big Mac burger tells us Mumbai real estate ain’t cheap

Vivek Kaul

In a recent interview to the Forbes India magazine, Donald Trump the billionaire American investor and business tycoon said “Your real estate is unbelievably cheap…Mumbai is a great city and yet it is not priced like other comparable cities. It is priced lower than cities that are less important. That gives investors a tremendous amount of growth potential.” He made similar statements in interviews to several other publications.
This statement needs closer examination. Let’s do that by comparing prices in Mumbai and New York, the largest city in the United States. A July 2014 report in The Times of India quotes Pankaj Kapoor of property research firm Liases Foras as saying “In Mumbai, the average cost of a flat is Rs 1.2 crore.”
In comparison, the price of a median home in New York in July 2014 stood at $524,500. For most of July 2014, one dollar was worth Rs 60. Hence, in rupee terms the price of a median home in New York stood at around Rs 3.15 crore ($524,500 multiplied by Rs 60). While Trump did not go into these details, this is the logic he must have used to say that the real estate prices in Mumbai are cheap, in comparison to other big cities around the world.
The trouble with this calculation is that it has been carried out at the market exchange rate. It doesn’t take the purchasing power of the currencies into account. Purchasing power is essentially a concept which takes into account the fact that how many “units of a country’s currency [are] required to buy the same amount of goods and services in the domestic market[in this case India and the rupee] as a U.S. dollar would buy in the United States.” This is necessary because foreign exchange market determined exchange rates do not always take this into account.
There are several ways of taking purchasing power into account. A quick and dirty way is to consider The Economist’s Big Mac Index. This index compares the price of McDonald’s Big Mac hamburger in various countries around the world. In July 2014, the Big Mac had an average price of $4.80 in the United States. In India it was sold at an average price of $1.75.
Hence, what could be bought at $1.75 in India would need $4.8 in the United States. This means Rs 105 (Rs 60 multiplied by 1.75) is worth $4.8. Or in other words one dollar is worth Rs 21.9 (Rs 105/$4.8), in purchasing power terms.
If one dollar is worth Rs 21.9, then the price of a New York city median home in rupee terms works out to Rs 1.15 crore ($524,500 multiplied by Rs 21.9). In comparison the average cost of a flat in Mumbai is Rs 1.2 crore. Hence, the real estate prices in New York are slightly cheaper than Mumbai once we take the purchasing power into account.
As mentioned earlier, using the Big Mac index was a quick and dirty way of taking purchasing power into account. Data from the World Bank can be used to carry out a more reliable calculation. In case of the Big Mac index we are just taking the price of one particular brand of burger for taking purchasing power into account. As per World Bank data one dollar is worth Rs 16.8, once we take purchasing power into account.
This means that the price of a New York median home in rupee terms is around Rs 88.1 lakh ($524,500 multiplied by Rs 16.8). This is almost 32% cheaper than the price of an average home in Mumbai.
These calculations clearly tell us that real estate in Mumbai is not cheap by any stretch of imagination, irrespective of what Trump would like us to believe. In a recent report brought out by UBS Investment Research analyst Ashish Jagnani estimated that Mumbai had 50 months of unsold inventory of homes. This is the highest among all major cities in India. Gurgaon comes in next with 30 months of unsold inventory.
Another recent research report titled India Real Estate Outlook brought out by real estate consultants Knight Frank points out that the unsold inventory of residential apartments in Mumbai stands at 2,13,742 units. In June 2014, the quarters-to-sell ratio stood at 12.
“Quarters-to-sell(QTS) can be explained as the number of quarters required to exhaust the existing unsold inventory in the market. The existing unsold inventory is divided by the average sales velocity of the preceding eight quarters in order to arrive at the QTS number for that particular quarter,” the report points out.
Further, the “inventory level in the South Mumbai market will take the maximum time of 18 quarters (4.5 years) to sell,” the report points out. Donald Trump had come to India for the launch of the Trump Tower, located in Worli, South Mumbai.
The enormous level of inventory in Mumbai is because people are not buying homes. This has led to an inventory of unsold homes which is at a seven year high across different cities., the UBS report points out. People are not buying homes, because homes have become too expensive. As Jagnani of UBS mildly puts it, there are “affordability concerns amid property prices” going “up 13-30% in key cities over last 2-years.”
The article originally appeared on www.firstbiz.com on Sep 14, 2014
(Vivek Kaul is the author of the Easy Money trilogy. He tweets @kaul_vivek)

13 September, 2014

Lessons for govt from a Mumbai taxi driver: Why inflation is killing growth

Vivek Kaul

Sometimes it takes a small nudge to start doing what might later seem obvious. A few months back I happened to read Nicholas Epley’s Mindwise—How we understand what others Think, Believe, Feel and Want. Epley is a professor of behavioural science at the University of Chicago’s Booth School of Business.
In this book Epley writes that “isolating activities like commuting are some of the least pleasant of any day.” “Not only is isolation unpleasant, it is bad for your health as well.” Hence, he goes on to suggest that it always makes sense to communicate with your fellow commuters or in case of taxicabs, the drivers.
“In fact, the positive effect of talking to one’s taxi driver is particularly large. Perhaps because taxi drivers come from interesting and varied backgrounds, they seem to make especially pleasant conversational partners, at least for the length of your ride…The stories I get are fascinating, the conversations are almost always interesting, and my experience is consistently better than if I had simply stared out of the window instead…Your ability to engage with minds of others is one of your brain’s greatest abilities. You’ll be happier if you actually use it,” writes Epley.
After reading this book I have “nudged” myself in the direction of trying to have a conversation with the taxi-driver, every time I use a taxicab. Late last night I was coming back home after having dinner and starting talking to the driver. Over the last few weeks the conversation usually starts around the recent increase of the minimum cab fare in Mumbai from Rs 19 to Rs 21. And then it goes off in different directions.
Yesterday night was not different from the usual except for the way the driver reacted. He was of the opinion that the decision to increase the minimum fare from Rs 19 to Rs 21 was a stupid one and that the taxi union hadn’t been doing its job properly. The response intrigued me, given that this was the first time I came across someone who did not seem to be happy at the prospect of a higher income in these inflationary times.
I asked him to explain in detail what he meant. “Main to kehta hoon minimum pandrah rupaiye kar dena chahiye, (I think the minimum taxi fare should be reduced to Rs 15),” he immediately responded. This intrigued me further. “Log taxi le nahi rahe hain. Kaafi samay khaali baithe rehna padta hai (People are not taking taxis and for long periods of time I am just sitting idle),” he continued.
And then he went on to explain that at a lower fare he would get more customers, wouldn’t have to sit idle for long periods of time during the day and would in the process end up making more money, even though the amount of money he would make per kilometre would be lower. Sometimes wisdom strikes you at the most unlikely of places. Last night I had that kind of a experience.
High inflation has been the bane of this country over the last five years. And that has hit all kinds of people including the taxi-driver I was talking to last night. When fares are raised, it means a higher price for hiring a cab for the end consumer. And he or she is not always ready to pay for that. Hence, an increase in taxi fare, which is basically inflation for the end consumer, leads to loss of business for the taxi-driver.
The way it works for the taxi-driver at the individual level, also works for the society as whole at a much broader level. As prices rise, people cut down on the consumption of non-essentials. Due to high inflation people have had to spend more money on meeting daily expenditure. Food inflation in particular has been greater than 10% over the last few years, and has only recently started to come down a little.
Given this, people have been postponing all other expenditure and that has had an impact on economic growth. Anyone, with a basic understanding of economics knows that one man’s spending is another man’s income, at the end of the day. When consumers are going slow on purchasing goods, it makes no sense for businesses to manufacture them.
This is reflected in the index of industrial production, which is a measure of the industrial activity within the country. Numbers released yesterday by the Central Statistics Office showed that for the month of July 2014, the index of industrial production grew by a minuscule 0.5% in comparison to July 2013. This was largely on account of a slowdown in manufacturing, which forms nearly three-fourths of the index of industrial production. It contracted by -1%. Many sectors within manufacturing like tobacco, apparels, paper and paper products, communication, publishing, furniture etc, contracted majorly.
This is worrying given that the expansion of the manufacturing sector remains India’s best bet to create jobs at a fast pace, for its semi-skilled workforce. And manufacturing cannot be turned around unless inflation is brought under control, so that consumer demand revives, and in turn encourages businesses to increase production of goods. Interestingly, August 2014 saw a major revival in car sales with sales going up by more than 15%.
Along with the index of industrial production, the Central Statistics Office also released the consumer price inflation number, yesterday. Inflation in August 2014 stood at 7.8%. This was a tad lower in comparison to the inflation in July 2014, which was at 7.96%. The inflation in July 2013 had stood at 9.52%.
While this is clearly good news, the worrying bit is that food inflation continues to remain high at 9.42%. In July 2014 the number had stood at 9.36%. In August last year, the number had stood at 11.11%. “In the case of food articles, price pressures were seen building up in pulses, condiments & spices and milk & milk products. Inflation in each of these categories has been rising for the last 3 months,” Crisil Research pointed out in a research note yesterday.
As I have often pointed out in the past, half of the expenditure of an average household in India is on food. In case of the poor it is 60%. If consumer demand is to be revived then food inflation needs to be brought under control.
Analysts believe that consumer price inflation will continue to fall in the months to come. A major reason for this is the fall in global oil prices. “A significant decline in petrol prices (Rs 5.4 per litre since July in Mumbai) due to lower crude oil prices globally, is also likely to have contributed to the downward price pressures in transport & communication. We expect this to continue going forward as no further hike in diesel prices is expected as long as crude oil prices stay at current levels,” Crisil Research points out.
On the flip side, a weak monsoon has led to the build up of “inflationary expectations” (or the expectations that consumers have of what future inflation is likely to be). And this could play a spoiler in reviving consumer demand.
In the long run, other than bringing down inflation the government needs to carry out structural reforms in order to revive Indian manufacturing. As Crisil Research points out “Incremental policy measures and bureaucratic improvements that the new government has taken in its first 100 days to improve the ease of doing business, has had a positive impact on business sentiments. However, it will take some time for these to translate into growth. While these are critical to lift growth in the short-term, the government needs to move forward with structural policy reforms such as implementation of GST (Goods and services tax), easing labour laws, rationalisation of fiscal subsidies, and amendment of land acquisition norms, to maintain the growth momentum beyond this year.” And that is easier said than done.
The article originally appeared on www.FirstBiz.com on Sep 13, 2014

(Vivek Kaul is the author of the Easy Money trilogy. He tweets @kaul_vivek)

12 September, 2014

Coalgate: Why govt needs to plan for repercussions from SC’s final decision

Vivek Kaul

More than a week back, the Supreme Court declared 218 coal blocks allocations made to private sector and public sector companies since 1993 as illegal. These blocks were allocated by the government over the years through the screening committee route.
The Court found the process of allocation of these blocks to be suffering “from the vice of arbitrariness”. Hence, it went ahead and deemed them to be illegal. On September 9, 2014, it reserved its final decision on the matter.
The attorney general Mukul Rohatgi told the Court that the “illegal allocations must go”. Nevertheless, he also requested that the Court could consider saving 40 coal mines which were already producing coal and six blocks which were on the verge of starting production. “Only a pocket of some 46 units can be saved,” Rohatgi told the Court.
The mines already in operation are expected to produce 53 million tonnes in 2014-2015, or around 9% of the country’s total coal production of around 590 million tonnes. The blocks allocated by the government through the screening committee route are for captive use. Hence, the company owning a mine is allowed to use the coal that it produces for the production of power or steel or cement. Any extra production that is not used needs to be handed over to the local subsidiary of Coal India Ltd.
A report in the Business Standard points out that the coal being produced in the 40 mines already in operation was being used to produce “26,000 Mw of power output and 12 million tonnes of steel.” Hence, it is in the interest of the nation that these mines need to continue production, even after the licenses issued to them are cancelled.
It will not be easy to replace this production by importing coal. Our ports will have a tough time handling this additional quantity of coal that will have to be imported. Over and above that, the Indian Railways is not exactly geared to be able to transport this coal from the ports to different parts of the country where it is required. The added infrastructure that will be required to handle the additional imports cannot be created overnight. Further, sourcing more than 50 million tonnes of coal from the international market will not be easy, and will push up the international price of coal.
And that explains to a large extent why Rohatgi told the Court that these mines need to be saved.
The question to ask here is why are some coal blocks been producing coal and others are not? The straightforward answer is that these blocks were allocated earlier than others and as a result commenced mining coal faster. As Senior counsel Dushyant Dave, appearing for one of the private parties, told the court that if the Court were to distinguish between 46 mines already producing coal or on the verge of producing it and other mines, it “distorts the level playing field”.
The Court will have to keep this factor in mind while making the final decision. If the Court decides to cancel all the coal-blocks then the government needs to ensure that the production in the mines already under operation does not stop. In order to do this Rohatgi suggested to the Court that if all the blocks are cancelled then Coal India should be allowed to operate the mines already under operation. Or the companies which own the block currently should be allowed to operate till the government auctions the mine.
Allowing Coal India to operate seems like a good idea on paper. Nevertheless, a few issues need to be figured out first to help Coal India seamlessly takeover these mines, once their licenses are cancelled. Coal India is a for profit enterprise and hence, it needs to be figured out who will bear the cost of operation during the period Coal India runs these mines. Further, will it be allowed to keep the profits it makes during the period it operates the mines? What if it makes losses on these mines?
As mentioned earlier these mines are captive mines which supply to other units primarily producing coal and power. Hence, during the period Coal India takes over these mines it will have to make arrangements for transporting coal from the mine to the unit where it will be used. These arrangements need to be figured out.
Further, Coal India will have to transfer its own employees to run these mines. Again, a lot of manpower in coal-mines is statutory and cannot be just transferred overnight, until a replacement is found.
Coal India’s production target for 2014-2015 stands at 507 million tonnes. As mentioned earlier, the 40 captive mines already under operation are likely to produce 53 million tonnes in this financial year. This amounts to around 10.5% of Coal India’s production. Hence, the number of employees that Coal India would have to depute to these mines would be a significant number. Given this, if the government is serious about this option, it should start with the groundwork on this front without waiting for the final decision from the Supreme Court. This can help save time and ensure that the production of coal continues.
Over and above this, companies which have been operating the mines have already invested a significant amount of money into these mines. If these mines are taken away from them, it is bound to put financial pressure on them and in turn, on banks which have loaned money to these companies. Nevertheless, if justice is to be delivered, this is something that cannot be avoided.
To conclude, the government needs to start working on a plan on how it will keep the production of coal going, if the Supreme Court decides to cancel all blocks that were allocated through the screening committee route.
The article originally appeared at www.firstbiz.com on September 11, 2014

(Vivek Kaul is the author of the Easy Money trilogy. He tweets @kaul_vivek)