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Power crisis won’t be solved anytime soon: Why it’s difficult to turnaround the coal sector

coalVivek Kaul

In a column in The Indian Express published on September 9, 2014, Neelkanth Mishra, India Equity Strategist for Credit Suisse pointed out that “a large number of your power plants are running with less than four days worth of coal inventory…Even a flash strike would cripple India, let alone a prolonged confrontation.”
This when India has the third largest coal reserves in the world. Despite the enormous reserves we are unable to produce enough coal to meet the demand. During this financial year the demand for coal is expected to be at expected to be at 787 million tonnes. The supply is expected to be at 590 million tonnes.
The government of India had expected this rise in demand and in 1993 decided to give out coal blocks to public sector as well as private sector companies. The idea was that these companies will also produce coal and the country would have enough coal to meet the demand. These coal blocks had geological reserves amounting to 44.8 billion tonnes.
A bulk of these mines were given out starting in 2004, after the Congress led United Progressive Alliance came to power. The Screening Committee route which was used to give away these blocks was deemed to be fairly arbitrary by the Supreme Court in a recent judgement: “The entire exercise of allocation through Screening Committee route…appears to suffer from the vice of arbitrariness and not following any objective criteria in determining as to who is to be selected or who is not to be selected. There is no evaluation of merit and no inter se comparison of the applicants. No chart of evaluation was prepared. The determination of the Screening Committee is apparently subjective as the minutes of the Screening Committee meetings do not show that selection was made after proper assessment. The project preparedness, track record etc., of the applicant company were not objectively kept in view.”
Given this, the Supreme Court deemed these allotments to be “illegal”.
On September 8, 2014, the government told the Supreme Court, that it had no objection if all the 218 coal blocks that were allocated through this route to the public sector as well as private sector companies are cancelled. Around 31 coal blocks that had been allocated currently produce coal.
At close to 53 million tonnes in 2014-2015, these blocks will produce around 9% of the country’s total coal production of around 590 million tonnes. If the licenses given to these blocks are cancelled, there will be a huge coal shortage. In a previous piece I had estimated that importing this coal from Indonesia will cost around Rs 17,300 crore, pushing up the power tariffs further.
One suggestion that has been put forward is that the government owned Coal India Ltd should take over the functioning these coal mines and ensure that the production does not stop. This seems to be a sensible thing to do, once the intricacies of who gets to keep the profits made from the coal being mined out of these mines, is decided.
Further, these coal blocks are likely to be auctioned in the days to come. As the PTI reports “According to sources, the Ministry of Power and Coal is planning to auction the blocks, allocation of which may be scrapped by the apex court, by the end of the fiscal. “The entire process of coal block auction will take at least 6 months,” the source said.””
While theoretically this sounds the best way forward, auctions may not be so easy to carry out. The Coal Block Auction draft guidelines were released on April 4, 2011. And nothing has happened since then. One reason obviously is the lack of work culture that prevailed during the previous Congress led UPA government. But there is more to it than just that.
As Neelkanth Mishra of Credit Suisse wrote in a research note released in March 2014 “The government has been planning to conduct coal block auctions for close to three years now (see link), but despite repeated pronouncements of it being a few weeks/months away, there has been little progress. In our view, the challenge is inadequate prospecting—the ministry may be apprehensive of the winning private bidder in an auction managing to increase reserves estimates within a short time frame. Such a development would create negative press and possibly trigger anti-corruption investigations. Thus, blocks are unlikely to be auctioned till reserves have been updated.”
This needs to be explained in a little more detail. The Geological Survey of India first carries out what is known as promotional drilling. This gives sort of a quick and dirty estimate of the total amount of coal reserves in a block. It is followed by detailed drilling carried out majorly by the Central Mine Planning Design Institute(CMPDI), one of the subsidiaries of Coal India. The Mineral Exploration Corporation also chips in. This round of drilling gives an exact estimate of the quantity of coal in the blocks along with other characteristics like quality, depth, gradient of coal seams, the ash content, volatile matter, water content etc. These parameters are used to prepare the proect report.
CMPDI currently is understaffed to carry out this exercise quickly enough. Experts believe that in order to carry out this exercise completely, it will take many years. Also, without a proper estimate of the amount of coal that can be mined out of a block, it is risky for the government to auction the block, given that it could later lead to litigation. Hence, it is important this exercise be completed properly. The mining of coal from these blocks can take a few more years after the completion of this exercise. Estimates suggest that it takes 10-12 years to get a coal mine going.
In fact, this mess could have been avoided if the coal blocks would have been allotted through competitive bidding, from the very beginning. In August 2004, PC Parakh had proposed to Manmohan Singh (who had taken over as coal minister after Shibu Soren resigned) that the allocation of coal blocks should be done through competitive bidding.
In fact, even before Manmohan Singh had taken over as coal minister from Soren, Parekh had called for open house discussion of the stakeholders in June 2004. This included the business lobbies FICCI, CII and Assocham. Several other ministries whose companies had applied for coal blocks were invited. So were private companies.
Parakh writes that most of the invitees were not in favour of competitive bidding for coal blocks. As he writes in Crusader or Conspirator—Coalgate and Other Truths “not many participants were enthus
iastic about open bidding. Their main argument was that the cost of coal to be mined would go up if coal blocks were auctioned.”
Due to this and other reasons, the coal sector has landed up in a huge mess. And given the lack of supply of coal, power plants are not working to their full capacity. “Plant load factors for thermal power plants have been plummeting, and would be below 60% (i.e. going back to levels seen in the mid-1990s) if one includes capacity completed but not commissioned,” writes Mishra.
It is unlikely that the coal production and hence, power production are going to go up dramatically any time soon. The least that the government can do is to prevent further damage and act quickly to get the sector up and running, over the next five years that it is in power.

The article originally appeared on www.Firstbiz.com on September 10, 2014.

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

Big Retail is no monster: By not allowing FDI, BJP proves it’s a party of traders

WalmartVivek Kaul

In a press conference to mark the 100 days of the Narendra Modi led National Democratic Alliance (NDA) government, commerce minister Nirmala Sitharaman said “We are clear that FDI will not be allowed in multi-brand retail trade….There is no ambiguity. There is no confusion on this.”
This decision makes no sense from multiple angles. The big fear is that all the foreign companies that might come into India through the multi-brand retail route or big retail as it is better known as, will source their products from China.
But the thing is even without the presence of foreign companies in big retail, goods are being sourced from China. If a foreign player in big retail can source products from China, so can Indian companies.“Made in China” is a part of our lives now. The pitchkaris used in Holi and the statues of Lakshmi and Ganesh, without which no Diwali celebration is complete, are also being sourced from China. A lot of the electronic products that we buy are Made in China. Some of India’s biggest mobile phone brands source their products from China, and simply brand it and sell it in India.
As Professor Rajiv Lal of Harvard Business School said in an interview to Forbes India “without the presence of big retail, if Indian companies are already sourcing from China, and the Indian consumer does not mind them sourcing from China, then what are we talking about.”
The other big fear is that foreign players in big retail will destroy the Indian players in the market. Evidence from other emerging markets suggests otherwise. Pankaj Ghemawat, Anselmo Rubiralta Professor of Global Strategy at IESE Business School in Barcelona, Spain, in an interview to Forbes India argued that much of the fear about FDI in retail is exaggerated, because even with full liberalisation, foreign retailers would hardly come to dominate the Indian market.
“Retail is a very local business, where an intimate understanding of customers, real estate markets, and so on, is essential to success,” he said. He cited a recent estimate that 40 foreign players account for only about 20% of organised retail in China, to suggest that foreign and domestic retail could thrive side-by-side in India.
“Foreign retailers don’t always win out against domestic rivals,” he added. “Electronics retailers Best Buy from the US and Media Markt from Germany both shut down their stores in China in the last few years. They just couldn’t compete with local rivals Gome and Suning, which had greater domestic scale and business models more attuned to the Chinese market. Home Depot also exited China in 2012. But Chinese consumers gained anyway – competition against foreign retailers spurred locals to improve customer service, one of their weak points.”
Also, as Ghemawat says retail is a very local business. And this is something that foreign companies trying to build economies of scale do not always take into account. In his book Redefining Global Strategy, Ghemawat points out a very interesting story. “As the former head of the company’s German operations, now shut down, plaintively observed, “We didn’t realise that pillowcases are a different size in Germany.””
The third fear is that the big retail will end up destroying the kirana shops. As Anthony Bianco writes in The Bully of Bentonville – How the High Cost of Wal-Mart’s Everyday Low Prices is Hurting America “It (Wal-Mart) grows by wrestling businesses away from other retailers large and small. In hundreds of towns and cities, Wal-Mart’s entry put ailing …shopping districts into intensive care and then ripped out the life-support-system.”
Nevertheless what is true about the United States cannot be true for the rest of the world as well. The kirana shops in India work on very low margins, something which big retail may not always be able to compete with. As Lal put it in the Forbes India interview “If you look at the kirana stores they operate at a gross margin of 15-18%. Now if you look at the cost structure of an organised retailer it is much more than 15-18%, and unless the organised retail can set themselves up in a way that they can actually do a lot of savings in the supply chain, they cannot compete with the kirana store.” And that explains to a large extent why most of the big Indian retail players have been losing money over the years. They just can’t compete with the cost at which the kirana shop can operate.
As Lal elaborated further “If you look at organised retail, you look at the cost of real estate, electricity, labour ,energy, taxes etc, these are all things that the kirana store does not worry about. If you put that all together it leads to a significant cost structure.” Hence, the fear of big retail destroying kirana shops is overdone.
Ghemawat feels that there is a lot that India can learn from China on the big retail front. The country started opening up its retail sector to FDI in 1992, initially with various restrictions, but ultimately allowed 100% FDI in 2004. This benefited them with foreign players bringing in new management practices along with supporting technology and investment capital. Further, the foreign retailers began sourcing goods from China and exporting them, and helped Chinese exports grow. This is likely to happen in the Indian case as well, if big retail is allowed to set up shop here.
The other big advantage of big retail is that it has the ability to create jobs at a reasonably fast pace. This point becomes even more important given that India hasn’t had a manufacturing revolution. Big retail can create a lot of jobs for the huge amount of semi-skilled work force in the country. As Lal put it “Big retail also employs a lot of people. The bottom line is that I really don’t think organised retail can grow at a speed relative to the economic growth of a country that it can lead to a loss of jobs. And second if you take a look at most of these kirana stores, their children do not want to continue this lifestyle. They want to go to school, get educated and get better jobs. So, the question is whose jobs are we protecting?”
Given these reasons, big retail is not exactly the monster it is often made out to be. Hence, its fear is overdone. To conclude, in the past, the Bhartiya Janata Party has often been categorised as a party of traders (i.e. banias), who are also supposedly the biggest financiers of the party as well. By not allowing FDI in retail the party is essentially living up to that image.

The piece originally appeared on www.FirstBiz.com on September 9, 2014

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

100 days of Modi govt: It’s been ekdum thanda on the economic front

narendra_modiVivek Kaul

In an essay titled Political Leadership (The Oxford Companion to Politics in India edited by Niraja Gopal Jayal and Pratap Bhanu Mehta) historian Ramachandra Guha writes about the various styles of political rhetoric: “The modern idiom is often expressed through a rhetoric of hope—the offer of a better and fuller life, whether expressed in material terms or otherwise. The traditional idiom, on the other hand, privileges a rhetoric of fear—warning the members of a caste, or religion, or region, that they would be swamped by their enemies if they do not bind together.”
Indian politics, over the last seven decades since independence, has largely been fought on what Guha calls the traditional idiom of fear. Given this, Narendra Modi’s campaign in the run up to and during the 16th Lok Sabha elections came as a breath of fresh air. Modi campaigned around the idiom of hope. “Acche din aane waale hain,” was the line that he tried to sell to the voters of this country. And voters bought it lock, stock and barrel, giving an absolute majority to the Modi led Bhartiya Janata Party(BJP). This was the first time that a single party other than the Congress got an absolute majority in the Lok Sabha.
Once the majority was in place, the hope among analysts, economists and everybody who had some sort of an opinion on Modi and his politics, was that he would push big bang economic reforms, like the kind that had happened in 1991, when the Indian economy was thrown open to the world. Nevertheless, nearly 100 days since the Modi government assumed power on May 26, 2014, nothing of that sort seems to have happened. This is not to say that no economic reform has happened. The government allowed 100% foreign direct investment(FDI) in several areas in the railways sector. It notified that the FDI limit in the defence sector would be increased to 49% from the current 26%, through the approval route. At the same time it has cleared the FDI limit in the insurance sector to be increased to 49% from the current 26%. Further, land acquisition laws put in place by the Congress led UPA government are set to undergo a transformation.
But other than the “proposed” change in land acquisition laws these are not big bang reforms exactly. This is minor tinkering at best. The union budget presented by Arun Jaitley lacked a vision of what the Modi government plans on the economic and the financial front over the next five years. Also, it continued with the unrealistic estimates of both revenues and expenditure made by the previous finance minister P Chidambaram.
Given this, it is highly unlikely that the fiscal deficit number projected by Arun Jaitley and his team is a realistic one. In that sense Jaitley has continued the process of projecting lower expenditure and higher revenue, started by Chidambaram.
Also, like Chidambaram, Jaitley has started to suggest that the Reserve Bank of India (RBI) should start to cut interest rates. But as I explain here, there is very little that the RBI can do to cut interest rates. Interest rates will only come down once the government starts to manage its fiscal defict, borrower lesser and leave more money on the table for everyone else to borrow. Fiscal deficit is the difference between what a government earns and what it spends. The government spends it through borrowing money.
Over and above this, there has been almost no talk about what the government plans to do on the Goods and Services Tax(GST) and the Direct Taxes Code (DTC) front. These are two big bang economic whose implementation has been pending over the last few years.
In his independence day speech Modi announced that his government was doing away with the Planning Commission. There is no doubt that it was an institution that had outlived its utility, nevertheless, with what and how does the government plan to replace it. More than two weeks after the independence day speech, there is almost no clarity on this front. As economist Bibek Debroy, wrote a recent column in The Economic Times “We are in end-August. In 2014-15, what happens to the (central assistance) money disbursed to states through the Planning Commission? Will that be released in December 2014 to be spent by March 2015?”
Oil prices have been falling for a while now. Given this, it was widely expected that the government would use this lucky streak to move towards market determined price for diesel and do away with some of the “under-recoveries” that the Oil Marketing Companies have to face everytime they sell diesel, cooking gas and kerosene. It was also expected that the cooking price would be raised by an equal amount every month and the “under-recoveries” on it would be done away with over a period of time. But nothing of that sort has happened.
Also, no moves have been made to sort out the food subsidy mess that the country finds itself in. A recent new report pointed out “Food corporation of India has informed the food ministry that dues on the food subsidy have piled up to Rs 50,000 crore at the end of 2013-14 over the last three-to-four years as it has not been allocated enough funds.” This is something that needs to be sorted out immediately.
A possible explanation for economic reforms being put on the back-burner being bandied around by Modi sympathizers has been that economic reforms will start streaming in after the Maharashtra elections are done with. The government does not want to make any publicly unpopular decisions before the Maharashtra elections are over. The thing is that state assembly elections will keep happening all the time. After there Maharashtra there is Bihar in 2015. And by the time the state assembly elections are over, the next Lok Sabha elections will be upon us. The government, like most other governments in the past, is likely to get into the election mode by 2017, two years before the next Lok Sabha elections are due. So, when will it actually get around to implementing any big-bang economic reforms is a question worth asking? Given this, the explanation does not really make much sense.
If the government is serious about economic reforms, the best time to do it is now. These are the early days for the government and it still has a lot of leeway to push through these reforms. An excuse offered here is that the Modi government does not have a majority in the Rajya Sabha and hence, legislation required to push through these reforms can get stuck there. This is indeed true, but then the government also has the option to call a joint session of Parliament and pushing through these reforms.
To conclude, it is worth pointing out what Guha writes about being the bane of almost all the governments in India over the last 25 years, before the Modi government came to power: “[The] deepening of Indian democracy has come at a cost, namely that there is now no political leader who can really think of or act for the country as a whole. When a single party was dominant at the Centre, it was possible to design long range policies; now, when the government is constituted by a coalition of a dozen or more parties, each representing a specific sectarian interest—these based variously on caste, language, region, or religion—its policies are determinedly short-term, aimed at placating or satisfying one or other of those interests.”
Modi doesn’t have to go through all this. His government has absolute majority on its own and it can use this opportunity to push through economic reforms, which will be beneficial for India in the days and years to come.
The article originally appeared on www.FirstBiz.com on September 1, 2014
(Vivek Kaul is the author of the Easy Money trilogy. He tweets @kaul_vivek)

Why Advani must sometimes wish that he was a Nehru-Gandhi

lk advani

Lal Krishna Advani in his dreams must sometimes wish that he should have belonged to the Nehru-Gandhi family. Irrespective of what happens to the political fortunes of the Congress, the Nehru-Gandhis remain at the top.
Even when the party is not under the control of a Nehru-Gandhi, the Congress politicians keep conspiring endlessly till they have managed to install a Nehru-Gandhi at the helm of affairs. This was clearly the case between 1991-1996, after Rajiv Gandhi was assassinated and his widow Sonia refused to take over. Nevertheless the Congress installed Sonia as the president of the party as soon as she was ready.
As Rasheed Kidwai writes in Sonia – A Biography “Throughout the Narsimha Rao regime, 10 Janpath[where Sonia continues to stay] served as an alternative power centre or listening post against him.” In December 1997, Sonia Gandhi indicated that she wanted to play a more active role in Congress politics. It took the party less than three months to throw out Sitaram Kesri, the then President of the party and put Sonia in charge in his place.
Advani has not been anywhere as lucky as Sonia. In fact, he has constantly been sidelined in the Bhartiya Janata Party (BJP) over the last five years. And unlike Sonia, who continues to enjoy the spoils of the hard-work of her husband’s ancestors, Advani built the BJP right from scratch.
The final nail in the coffin for Advani was the decision by the newly appointed BJP president Amit Shah to drop him from the 12-member Parliamentary Board of the Party. Advani though has been included in the newly created margadarshak mandal, where he is unlikely to have any decision-making powers.
In fact, Advani had to recently go through the ignominy of his nameplate being removed from his room in Parliament (the nameplate was put back later). This after being denied the post of the Lok Sabha Speaker, which he wanted. All this must be too much to handle for a man who is BJP’s senior most active leader, and refuses to retire.
The BJP was formed on April 5-6, 1980, after it broke away from the Janata Party. The Janata Party had been formed a few years earlier in 1977, with the merger of Congress O, Bhartiya Lok Dal, the Socialist Party and the Jana Sangh (the BJP’s earlier avatar), with the idea of taking on Indira Gandhi and her Congress party in the 1977 Lok Sabha elections.
The Janata Party won 295 seats in the elections, with 93 MPs coming from the erstwhile Jana Sangh. But trouble soon broke out and different constituents of the party could not get along with each other. This experiment against the Congress ended in 1980, and the BJP was formed. Atal Bihari Vajpayee became the president of the BJP, and Advani was its general secretary.
Interestingly, the party chose “Gandhian socialism” as its credo. Kingshuk Nag writes in The Saffron Tide—The Rise of the BJP that a “consensus emerged…on Gandhian socialism being the credo of the new party; in other words, it would fashion itself like the Janata Party.”
Advani explains this in his autobiography My Country, My Life: “The stress from the beginning was not on harking back to our Jana Sangh past but on making a new beginning.” The new beginning happened primarily because both Vajpayee and Advani had been influenced a lot by Jaiprakash Narayan, who was the main architect behind the Janata Party.
Also, what did not help was the fact that Indira Gandhi in her second avatar as the Prime Minister had in a way hijacked the “Hindutva” agenda, which the Jan Sangha had stood for. “Indira Gandhi had become religious with vengeance after coming to power in 1980 and began visiting temples with fervour. In public imagination, the impression created was that of a Hindu lady seeking the benefaction of the Gods. The policies in her tenure were also interpreted as being pro Hindu,” writes Nag.
This newly discovered “Gandhian socialism” did not work for the BJP in the Lok Sabha elections that happened in December 1984, after the assassination of Indira Gandhi by her bodyguard. The party won just two seats in this election. A committee was formed to try and understand the reasons for the electoral debacle.
As Nag writes “The committee…found a lot of lacunae in the working of the BJP. The committee also commented on the lack of political training of workers on political, economic, idealogical and organizational matters.” Or as a BJP insider told Nag “Basically, the committee politely said the party was going nowhere.”
Vajpayee resigned in the aftermath of the debacle and Advani took over as the president of the party. With Advani at the helm, the relations with the Rashtriya Swayemsevak Sangh(RSS) also improved significantly. In the years to come, the BJP went back to Hindutva and gradually junked “Gandhian Socialism” as its main credo. In fact, in 1990, Advani launched a rath yatra in which he wanted to travel in a motorized van from Somanth in Gujarat to Ayodhya in Uttar Pradesh.
But before he could enter Uttar Pradesh, Lalu Prasad Yadav got Advani arrested in Bihar. As Advani recounts in his autobiography “My yatra was scheduled to enter Deoria in Uttar Pradesh on 24 October. However, as I had anticipated, it was stopped at Samastipur in Bihar on 23 October and I was arrested by the Janata Dal government in the state then headed by Laloo Prasad Yadav (sic). I was taken to an inspection bungalow of the irrigation department at a place called Massanjore near Dumka on the Bihar-Bengal border [Dumka now comes under the state of Jharkhand].”
Even though Advani could not complete the yatra it was a huge success and Advani was greeted by huge crowds wherever he went. “At some places, charged-up followers applied tilak to the Ram rath while at other places, those moved by the movement smeared dust from the path of the rath on their forehead,” writes Nag.
Advani went around building the party on the ideology of hardcore Hindutva, taking the number of seats that the party had in the Lok Sabha to 85 in 1989 and 120 in the 1991. This fast rise of the party was built on slogans like “saugandh Ram ki khaate hain mandir wohin (i.e. Ayodhya) banayenge” and “ye to kewal jhanki hai Kashi Mathura baaki hai”. As Advani went about his job, Vajpayee took a back-seat for a while.
Nevertheless, Advani soon realized that temple and Hindutva politics could only get the party to a certain level. He also realized that he was looked at as a Hindu hardliner and as long as he led the party, it would never be in a position to form the government. Hence, in November 1995, at the end of his presidential address at the BJP national council meet held in Mumbai, he announced that “We will fight the next elections under the leadership of A.B.Vajpayee and he will be our candiate for a prime minister…For many years, not only our party leaders but also the common people have been chanting the slogan, “Agli baari, Atal Bihari”.”
This was a political master stroke. At the same time it needs to be said that not many people would have been able to make the decision that Advani did, if they had been in his position. It is never easy to build an organisation right from scratch and then hand it over to someone else, to lead it.
With Vajpayee at the helm, other poltical parties were ready to ally with the BJP. The BJP led National Democratic Alliance first came to power in 1998. They were in power till 2004, when they lost the Lok Sabha elections. After the 2004 Lok Sabha elections, Vajpayee gradually faded from the limelight.
In these years, the spin-doctors of Advani had managed to tone down his image as a Hindu hardliner. This can be very gauged from the fact that Nitish Kumar had no problem with being in alliance with an Advani led BJP, but he wasn’t ready to work with a Narendra Modi led BJP.
The NDA fought the 2009 Lok Sabha elections under the leadership of Advani and lost. And from then on, the stock of Advani has constantly fallen in the BJP. The decision to drop him from the Parliamentary Board of the party, as mentioned earlier, is probably the last nail in the coffin of his political career.
Interestingly, Narendra Modi was also handpicked by Advani to play a greater role in the BJP. As Nilanjan Mukhopadhyay writes in Narendra Modi – The Man. The Times “From the beginning it was evident that Modi was Advani’s personal choice and he was keen to strengthen the unit in Gujarat because the state was identified as a potential citadel in the future.”
Advani also mentored Modi during his early days in politics. “It was Advani who mentored Modi when he virtually handpicked him into his team of state apparatchiks after recommendations from a few trusted peers in the late 1980s. Advani also gave Modi early lessons in how to convert the mosque-temple dispute into one of national identity,” writes Mukhopadhyay.
But in the recent years while Advani’s stock within the BJP and the RSS has fallen dramatically, Modi’s stock has been on a bull run. The shishya has become the guru. The trouble is that the guru does not want to retire, and is probably still itching for a one-last-fight.
But there is not much that he can do about it. Advani’s side-lining is an excellent lesson of what happens when one overstays one’s welcome in politics as well as life. There is a time to work. And there is time to retire and move on.
To conclude, Advani’s one remaining political ambition would have been to become the prime minister of India. But that somehow did not happen. As Salamn Rushdie aptly put in Midnight’s Children “This is not what I had planned; but perhaps the story you finish is never the one you begin.”
The article originally appeared on www.firstpost.com on August 29, 2014

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

Act now: Arun Jaitley needs to use his lucky streak to push through reforms

 

Fostering Public Leadership - World Economic Forum - India Economic Summit 2010

Napoleon Bonaparte once said “I know he’s a good general, but is he lucky?”
Luck is an essential part of politics and lucky governments tend to do better than plain and simple skilful governments. As ex cricketer turned writer Ed Smith writes in Luck—A Fresh Look At Fortune “Academic research supports the idea that voters often can’t tell the difference between lucky governments and skilful ones.” In fact, research carried out by Australian economist Andrew Leigh suggests that “it is more important to be a lucky government than an effective government”. Leigh studied nearly 268 elections between 1978 and 1999.
As Smith writes regarding this study “A government’s average rate of re-election is 57 per cent…Even superb economic management, outpacing world growth by 1 percentage point, only raises the Prime Minister or President’s likelihood of re-election from 57 per cent to 60 per cent. An economically competent government gets an electoral boost of 3 per cent; a lucky one gets a leg up of 7 per cent [i.e.]… the government’s re-election rate jumps to a 64 per cent likelihood.”
Hence, if a government has “luck” going for it, it is important that it does not throw it away and takes some decisions that help it over the long term.
Narendra Modi took over as the Prime Minister of India on May 26, 2014. Things were looking difficult on the economic front and a poor monsoon was being predicted.
The fiscal deficit of the Indian government as on May 31, 2014, stood at Rs 2,40,837 crore. This meant that during the first two months of the financial year (April 2014 to March 2015), the fiscal deficit had already reached 45.6% of the annual target. By June 30, 2014, the fiscal deficit for the first three months of the financial year had reached 56.1% of the annual target. Fiscal deficit is the difference between what a government earns and what it spends.
Typically the income of the government is back loaded, given that its earnings are the highest during the last three months of the financial year. But a large part of the expenditure of the government is more or less spread out through the financial year. Given this, the fiscal deficit typically tends to be high during the first few months of the year.
Nevertheless, even after taking this factor into account, a fiscal deficit of 56.1% of the annual target during the first three months of the year was a very high number. During the last financial year the number had stood at 48.4%. This was largely a reflection of the fiscal mess that the Congress led UPA government had left the country in.
Over and above this, the initial monsoon numbers were not very encouraging. The India Meteorological Department(IMD) in a press release dated July 11, 2014, pointed out that the“rainfall activity was deficient/scanty over the country as a whole” for the period between July 3 and July 9, 2014. This deficiency of rainfall was at 41% of the long period average.” This delay in rainfall had led to a 51% annual decline in the sowing of kharif crops.
These two factors which could have undermined the performance of the new Modi government greatly, have changed for the good in the recent past.
One of the major reasons for a high fiscal deficit has been the fact that oil marketing companies have been incurring huge “under-recoveries” on the sale of diesel, cooking gas and kerosene. The government in turn has had to compensate the OMCs for these “under-recoveries”. This pushed up the government expenditure and hence, the fiscal deficit.
The good news is that oil prices have been falling. The international crude oil price of Indian Basket of oil as computed by Petroleum Planning and Analysis Cell (PPAC) fell to US$ 99.94 per barrel on 19.08.2014. Two months earlier on June 19, the price of the Indian basket of oil had touched $111.94 per barrel.
This fall in oil prices has ensured that the under-recoveries of the OMCs for the financial year 2014-15 are projected to be Rs 91,665 crore while the figure was Rs 1,39,869 crore in the 2013-14. If this trend continues the government is likely to incur a lower expenditure for compensating the OMCs for their under-recoveries. And this will also have an impact on the fiscal deficit.
The government has also been lucky on the monsoon front. As the IMD said in a release dated August 15, 2014, “For the country as a whole, cumulative rainfall during this year’s monsoon has so far upto 13 August been 18% below the Long Period Average (LPA).” This is way lower than the deficiency in early July. A bad monsoon could have created several economic challenges for the government. Thankfully, the scenario did not turn out to be as bad it was initially expected to be. Hence, it is safe to conclude that the Modi government has indeed been very lucky on the economic front during its first 90 days.
Given this, the government should use this lucky streak to push in some reform on the pricing of petroleum products. With oil prices falling, this would be a good time to decontrol diesel prices. Over and above this , this would be a good time to limit subsidies on kerosene and cooking gas as well. As has been suggested here earlier, this might be a good time to start raising cooking gas prices by Rs 10 per cylinder every month, in order to eliminate the subsidy on it, over a period of time.
What might further work for the Modi government is the fact that oil prices might continue to fall in the years to come. As Crisil Research points out in a report titled Falling crude, LNG, coal prices huge positive for India dated August 2014 “Over the next five years, we expect global oil demand to increase by 4-4.5 m
illion barrels per day (mbpd). However, crude oil supply is expected to increase by 8-10 mbpd. This, we believe, will bring down prices from current levels.”
This should help the government control its fiscal deficit. If the government is able to lower its fiscal deficit, it will have to borrow less and that will eventually lead to lower interest rates. If the government borrows less, there will be more money to lend to others. At lower interest rates consumers are more likely to borrow and spend. This will have a positive impact on economic growth.
The Modi government has luck going for it right now, but this may or may not last. Hence, it is important that it makes the best of it, and pushes in some decisions which will work well for the economy in the long run.

The article originally appeared on www.Firstbiz.com on August 22, 2014 
(Vivek Kaul is the author of the Easy Money trilogy. He tweets @kaul_vivek)