Deregulating diesel prices: A good decision that will be tested when oil prices rise again

light-diesel-oil-250x250

Vivek Kaul

The government on Saturday announced the decision to deregulate diesel prices. “Henceforth—like petrol—the price of diesel will be linked to the market,” the finance minister Arun Jaitley said after a cabinet meeting. “Whatever the cost involved, that is what consumer will have to pay,” he added.
After this decision the price of diesel was reduced by around Rs 3.50 per litre (the cut would vary all around India given the different rates of taxes in different states). This was the first cut in the price of diesel since January 2009.
The proposal to allow oil marketing companies to decide the price of diesel was first made in 1997, when Inder Kumar Gujral was the prime minister. The price of petrol and diesel were finally deregulated in April 2002, under the regime of Atal Bihari Vajpayee.
But this decision was over turned in late 2004, around the time oil prices had touched $50 per barrel. In November 2004, Mani Shankar Aiyar, the then Petroleum Minister said “since January 1, 2004, government was dictating even petrol and diesel prices… We have been far more honest in saying the government will control prices of cooking and auto fuels.”
This led to the oil marketing companies having to sell oil products at a price at which they incurred under-recoveries. The government compensated a part of these under-recoveries. And due to this the government expenditure and in turn, the fiscal deficit went up. Fiscal deficit is the difference between what a government earns and what it spends.
In the last two financial years (i.e. 2012-2013 and 2013-2014) the total petroleum subsidy (subsidy for diesel, cooking gas and kerosene) amounted to Rs 1,82,359.9 crore. As an article in The Wall Street Journal points out “Around half of that was for diesel. Before diesel prices were freed, economists estimated that a $1 per barrel rise in the global price of oil would increase India’s subsidy bill by around $1 billion a year.”
As government expenditure in order to pay for the under-recoveries of the oil marketing companies went up over the years, so did its borrowing. When the government borrows more, it crowds out the other borrowers i.e. it leaves lesser on the table for the private borrowers to borrow. This, in turn, pushes up interest rates, as the other borrowers now need to compete harder.
The high interest rate scenario that has prevailed in India over the last five-six years has been because of this increased government borrowing. If diesel prices had continued to be deregulated this wouldn’t have happened.
Other than the high interest rates, there were several other things that happened. But before we get into that let’s see what the economist Henry Hazlitt writes in
Economics in One Lesson “We cannot hold the price of any commodity below its market level without in time bringing about two consequences. The first is to increase the demand for that commodity. Because the commodity is cheaper, people are tempted to buy, and can afford to buy, more of it…In addition to this production of that commodity is discouraged. Profit margins are reduced or wiped out. The marginal producers are driven out of business.”
The demand for diesel went up in the form of people buying more and more passenger cars that ran on diesel, given the substantial difference between the price of petrol and diesel. This led to the government of India indirectly subsidising car owners over the last few years. Hence, rich consumers ended up consuming more than their fair share of diesel.
As Hazlitt writes in this context: “Unless a subsidized commodity is completely rationed, it is those with the most purchasing power than can buy most of it. This means that they are being subsidized more than those with less purchasing power…What is forgotten is that subsidies are paid for by someone, and that no method has been discovered by which the community gets something for nothing.”
The move to dismantle diesel price deregulation also drove private marketers of oil (Reliance, Essar etc) out of business, as suggested by what Hazlitt had to say on the issue. The government owned oil marketing companies (Indian Oil, Bharat Petroleum, Hindustan Petroleum) were compensated by the government and the upstream oil companies (like ONGC, Oil India Ltd) for selling diesel at a lower price. There was no such compensation for the private oil marketers and hence, they had to shut down their business.
Once all these factors are taken into account the decision to deregulate diesel prices is a brilliant one even though it took a long time to come. Nevertheless, it will not lead to any major immediate benefits for the government. Since Narendra Modi took over as the prime minister of the country, the oil price has fallen dramatically.
As per the Petroleum Planning and Analysis Cell, the international crude oil price of Indian Basket as on October 17, 2014, stood at $ 85.06 per barrel. This price had stood at $108.05 per barrel on May 26, 2014, the day Modi took over as the prime minister.
Interestingly, during April to June 2014, the first quarter of this financial year, the under-recoveries of oil marketing companies on the sale of diesel, cooking gas and kerosene were at Rs 9,037 crore. This is much lower in comparison to the huge under-recoveries that these companies suffered over the last few years.
Also, since January 2013, the price of diesel has been raised by 50 paisa every month. This has led to the under-recoveries of oil marketing companies coming down significantly. Interestingly, for the fortnight starting October 16, 2014, the over-recovery on diesel stood at Rs 3.56 per litre. And that explains why the government was able to cut the price of diesel by around Rs 3.50 per litre.
What this tells us clearly is that there will be no immediate benefit on the fiscal front of diesel price deregulation to the government. Further, the real benefit of this reform will kick in only once oil prices start to rise. And it is at that point of time, the government of the day will have to resist any temptation to start controlling diesel prices, as has been the case in the past.
If it resists this temptation, the upstream oil companies (ONGC, Oil India) will also benefit because the government will not strip them of their profits to pay off the under-recoveries of the oil marketing companies. This explains why the share price of ONGC is up by more than 5% today.
Nevertheless, one immediate benefit of the diesel price cut will be a slightly lower inflation. On the flip side, this also means that if and when oil prices start to go up, the inflation will start reflecting a higher price of diesel more quickly than was the case in the past.
Another benefit of the deregulation will be that private marketers can now look to get back into the business. This is good news for the Indian consumer as it will mean more competition, which may lead to better services. In fact, one huge problem with the products sold by the public sector oil marketing companies is adulteration. Given the cheap price of kerosene, there is lot of adulteration of petrol and diesel. Private marketers can make in roads into the market by providing pure petrol and diesel, and hope to attract the attention of the consumer.
To conclude, there are a few immediate benefits of diesel price deregulation, but the real challenge and the benefit for the government will only come, once oil prices start to go up again.

The article originally appeared on www.FirstBiz.com on Oct 20, 2014

(Vivek Kaul is a writer. 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)

How Nitish's pragmatic politics beat brand Modi in Bihar

220px-Nitish_Kumar

In the recently concluded bye-election in Bihar, the Bhartiya Janata Party (BJP) won only four out of the 10 seats that went to the polls. The alliance of Rashtriya Janata Dal (RJD), Janata Dal United (JD(U)) and Indian National Congress won six seats.
It was widely expected that BJP would do well in these polls given that in the Lok Sabha elections along with Ram Vilas Paswan’s Lok Janshakti Party(LJP) it had won 28 out of the 40 Lok Sabha seats in the state. The LJP won six out of the 28 seats.
In the aftermath of this débâcle a lot of analysis has been put out on why the BJP lost. Some analysts pointed out that the Modi magic did not work in the same way during the bye-poll as it did during the Lok Sabha polls, a few months back. Some others said that Modi did not manage these polls on his own and it was the Bihar unit of the party that managed the polls, and hence the BJP+LJP combine lost.
As veteran political journalist Ajoy Bose writes in The Economic Times “
Narendra Modi’s spectacular triumph in the Lok Sabha polls three months ago may not signal a tectonic shift in Indian politics as many political pundits predicted. Nor does the BJP seem poised to become the predominant party in the country despite forming the first single-party majority government in New Delhi after three decades.” Still others have said that people tend to vote differently in Lok Sabha and state assembly elections.
The trouble is none of these analysts have bothered to look at the voting pattern. If they had done that, they would have known that there is just one reason behind the BJP not doing well in Bihar and that is the “first past the post system”.
In the Indian political system, the candidate who wins the most number of votes wins the election, even though a major part of the electorate maybe against him. It is not the perfect way to elect leaders, but that is what we have got.
Election commission data shows that in the Lok Sabha elections, the BJP+LJP combine had got 35.8% of the votes polled. The RJD and the Congress had an alliance during the Lok Sabha polls. The JD(U) had fought the polls on its own. The RJD got 20.1%, the Congress got 8.4% and the JD(U) got 15.8% of the votes polled. In total, this amounted to 44.3% of the total votes polled.
So RJD+Congress+JD(U) got more votes than BJP+LJP. Nevertheless, since RJD+ Congress and JD(U) were not in alliance, these votes did not translate into Lok Sabha seats.
Now what happened in the recent bye-election? Data from the election commission shows that the RJD+Congress+JD(U) got 45.6% of the total votes polled. The BJP+LJP got 37.9% of the votes polled. Given that, this time JD(U) was not fighting the elections separately, the votes polled translated into assembly seats as well, unlike the Lok Sabha polls.
Further, the vote percentages have not changed majorly since the Lok Sabha elections, as a lot of analysis seems to suggest. In fact, the vote share of both the RJD+Congress+JD(U)alliance and the BJP+LJP has improved marginally at the cost of other parties.
The BJP+LJP combine lost simply because Lalu Prasad Yadav and Nitish Kumar decided to come together. What it tells us very clearly is that in the first past the post system, tactical political alliances can clearly neutralize the impact of brand Modi. Both Nitish and Lalu realised this the second time around and came together to form an alliance, despite having been sworn political enemies for nearly two decades.
In fact, early in his political career Nitish had decided to be pragmatic about his politics. Sankarshan Thakur descirbes a very interesting incident in the
Single Man: The Life & Times of Nitish Kumar of Bihar. This incident happened sometime in the late 1970s, after the Emergency had been lifted.
Karpuri Thakur became the Chief Minister of Bihar in December 1977. Nitish quickly became disillusioned with this government. As Sankarshan Thakur writes “He thought it had betrayed the promise of the JP movement, strayed from Lohia…He had turned a critic and went about addressing seminars and meetings on how and why this was not the dispensation he had fought for.”
One day, while at the India Coffee House, a scrap at another table, got Niish going. As Thakur writes “He banged the table with his fist and announced: ‘
Satta prapt karoonga, by hook or by crook, lekin satta leke acha kaam karoonga.’ (I shall get power, by hook or by crook, but once I have got power I will do good work.”
Nitish became the Chief Minister of Bihar nearly three decades later in 2005. And for the first half of his political career, he propped up Lalu Prasad Yadav even though he knew that Lalu wasn’t fit to govern. Thakur puts this question to Nitish in the
Single Man: “Why did you promote Laloo Yadav so actively in your early years?” he asked.
And surprisingly, Nitish gave an honest answer. As Thakur writes “’But where was there ever even the question of promoting Laloo Yadav?’ he mumbled…’We always knew what quality of man he was, utterly unfit to govern, totally lacking vision or focus.”
So why then did Nitish decide to support him? “’There wasn’t any other choice at that time,’ Nitish countered…’We came from a certain kind of politics. Backward communities had to be given prime space and Laloo belonged to the most powerful section of Backwards, politically and numerically.” And thus Nitish ended up supporting Lalu for nearly the first two decades of his political career.
Nitish finally decided to go on his own at the
Kurmi Chetna Rally [Nitish belongs to the Kurmi caste] in February 1994. At this rally he roared “Bheekh nahin hissedari chahiye..Jo sarkar hamare hiton ko nazarandaz karti hai who sarkar satta mein reh nahi sakti (We seek our rightful share, not charity, a government that ignores our interests cannot be allowed to remain in power).”
Nevertheless, Nitish had to wait for 11 more years to finally come to power in Bihar. An
d this finally happened after he entered into a pragmatic alliance with the “communal” Bhartiya Janata Party (BJP) (As most of the other parties tend to look at the BJP). After more than eight years, Nitish decided to break this alliance once it was more or less clear that Narendra Modi would be BJP’s prime ministerial candidate.
Given this background, it is not surprising that Nitish decided to ally with Lalu even though he thought that Lalu was “utterly unfit to govern”. It was a pragmatic decision to get power
by hook or by crook, as Nitish put it many years back.
This pragmatism worked in the recent bye-election. Now Nitish is trying to build an even more formidable alliance by getting the left parties together as well. And this alliance, if it comes together, will be even more difficult to beat, the brand Modi notwithstanding.

The article was published on www.Firstpost.com on August 26, 2014 

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

How Nitish's pragmatic politics beat brand Modi in Bihar

220px-Nitish_Kumar

In the recently concluded bye-election in Bihar, the Bhartiya Janata Party (BJP) won only four out of the 10 seats that went to the polls. The alliance of Rashtriya Janata Dal (RJD), Janata Dal United (JD(U)) and Indian National Congress won six seats.
It was widely expected that BJP would do well in these polls given that in the Lok Sabha elections along with Ram Vilas Paswan’s Lok Janshakti Party(LJP) it had won 28 out of the 40 Lok Sabha seats in the state. The LJP won six out of the 28 seats.
In the aftermath of this débâcle a lot of analysis has been put out on why the BJP lost. Some analysts pointed out that the Modi magic did not work in the same way during the bye-poll as it did during the Lok Sabha polls, a few months back. Some others said that Modi did not manage these polls on his own and it was the Bihar unit of the party that managed the polls, and hence the BJP+LJP combine lost.
As veteran political journalist Ajoy Bose writes in The Economic Times “
Narendra Modi’s spectacular triumph in the Lok Sabha polls three months ago may not signal a tectonic shift in Indian politics as many political pundits predicted. Nor does the BJP seem poised to become the predominant party in the country despite forming the first single-party majority government in New Delhi after three decades.” Still others have said that people tend to vote differently in Lok Sabha and state assembly elections.
The trouble is none of these analysts have bothered to look at the voting pattern. If they had done that, they would have known that there is just one reason behind the BJP not doing well in Bihar and that is the “first past the post system”.
In the Indian political system, the candidate who wins the most number of votes wins the election, even though a major part of the electorate maybe against him. It is not the perfect way to elect leaders, but that is what we have got.
Election commission data shows that in the Lok Sabha elections, the BJP+LJP combine had got 35.8% of the votes polled. The RJD and the Congress had an alliance during the Lok Sabha polls. The JD(U) had fought the polls on its own. The RJD got 20.1%, the Congress got 8.4% and the JD(U) got 15.8% of the votes polled. In total, this amounted to 44.3% of the total votes polled.
So RJD+Congress+JD(U) got more votes than BJP+LJP. Nevertheless, since RJD+ Congress and JD(U) were not in alliance, these votes did not translate into Lok Sabha seats.
Now what happened in the recent bye-election? Data from the election commission shows that the RJD+Congress+JD(U) got 45.6% of the total votes polled. The BJP+LJP got 37.9% of the votes polled. Given that, this time JD(U) was not fighting the elections separately, the votes polled translated into assembly seats as well, unlike the Lok Sabha polls.
Further, the vote percentages have not changed majorly since the Lok Sabha elections, as a lot of analysis seems to suggest. In fact, the vote share of both the RJD+Congress+JD(U)alliance and the BJP+LJP has improved marginally at the cost of other parties.
The BJP+LJP combine lost simply because Lalu Prasad Yadav and Nitish Kumar decided to come together. What it tells us very clearly is that in the first past the post system, tactical political alliances can clearly neutralize the impact of brand Modi. Both Nitish and Lalu realised this the second time around and came together to form an alliance, despite having been sworn political enemies for nearly two decades.
In fact, early in his political career Nitish had decided to be pragmatic about his politics. Sankarshan Thakur descirbes a very interesting incident in the
Single Man: The Life & Times of Nitish Kumar of Bihar. This incident happened sometime in the late 1970s, after the Emergency had been lifted.
Karpuri Thakur became the Chief Minister of Bihar in December 1977. Nitish quickly became disillusioned with this government. As Sankarshan Thakur writes “He thought it had betrayed the promise of the JP movement, strayed from Lohia…He had turned a critic and went about addressing seminars and meetings on how and why this was not the dispensation he had fought for.”
One day, while at the India Coffee House, a scrap at another table, got Niish going. As Thakur writes “He banged the table with his fist and announced: ‘
Satta prapt karoonga, by hook or by crook, lekin satta leke acha kaam karoonga.’ (I shall get power, by hook or by crook, but once I have got power I will do good work.”
Nitish became the Chief Minister of Bihar nearly three decades later in 2005. And for the first half of his political career, he propped up Lalu Prasad Yadav even though he knew that Lalu wasn’t fit to govern. Thakur puts this question to Nitish in the
Single Man: “Why did you promote Laloo Yadav so actively in your early years?” he asked.
And surprisingly, Nitish gave an honest answer. As Thakur writes “’But where was there ever even the question of promoting Laloo Yadav?’ he mumbled…’We always knew what quality of man he was, utterly unfit to govern, totally lacking vision or focus.”
So why then did Nitish decide to support him? “’There wasn’t any other choice at that time,’ Nitish countered…’We came from a certain kind of politics. Backward communities had to be given prime space and Laloo belonged to the most powerful section of Backwards, politically and numerically.” And thus Nitish ended up supporting Lalu for nearly the first two decades of his political career.
Nitish finally decided to go on his own at the
Kurmi Chetna Rally [Nitish belongs to the Kurmi caste] in February 1994. At this rally he roared “Bheekh nahin hissedari chahiye..Jo sarkar hamare hiton ko nazarandaz karti hai who sarkar satta mein reh nahi sakti (We seek our rightful share, not charity, a government that ignores our interests cannot be allowed to remain in power).”
Nevertheless, Nitish had to wait for 11 more years to finally come to power in Bihar. An
d this finally happened after he entered into a pragmatic alliance with the “communal” Bhartiya Janata Party (BJP) (As most of the other parties tend to look at the BJP). After more than eight years, Nitish decided to break this alliance once it was more or less clear that Narendra Modi would be BJP’s prime ministerial candidate.
Given this background, it is not surprising that Nitish decided to ally with Lalu even though he thought that Lalu was “utterly unfit to govern”. It was a pragmatic decision to get power
by hook or by crook, as Nitish put it many years back.
This pragmatism worked in the recent bye-election. Now Nitish is trying to build an even more formidable alliance by getting the left parties together as well. And this alliance, if it comes together, will be even more difficult to beat, the brand Modi notwithstanding.

The article was published on www.Firstpost.com on August 26, 2014 

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

The coalgate mess: SC order shows UPA left our energy sector in a crisis

coal Supreme Court of India today delivered a judgement which is likely to have far reaching consequences on the energy scenario in India. In a judgement the court said “The allocation of coal blocks through Government dispensation route, however laudable the object may be, also is illegal since it is impermissible as per the scheme of the CMN Act (Coal Mines Nationalisation Act, 1973).
This essentially deemed illegal, the 195 coal blocks that had been allocated to public sector and private sector companies since 1993. These coal blocks had geological reserves amounting to 44.8 billion tonnes.
The decision to give away coal blocks free to the private sector was first made in 1993. 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 idea sounded “laudable” at least on paper but the trouble was that “no objective criteria for evaluation of comparative merits” of companies to which these coal blocks were allocated, was followed. As the Supreme Court judgement put it “The approach had been
ad-hoc and casual. There was no fair and transparent procedure, all resulting in unfair distribution of the national wealth. Common good and public interest have, thus, suffered heavily.”
Most of these coal blocks were allocated between 2004 and 2011 when the Congress led United Progressive Alliance (UPA) was in power. Data from the Provisional Coal Statistics for 2011-2012 points out that 156 of the 195 mines with geological reserves amounting to 41.24 billion tonnes of the total 44.8 billion tonnes, were allocated between 2004 and 2011. Hence, nearly 94% of the reserves were allocated between 2004 and 2011. Interestingly, Manmohan Singh was the minister of coal for a large part of this period between 2006 and 2009. During this period a little over 78% of the total 44.8 billion tonnes of coal reserves were allocated.
While the approach was adhoc, the move could have still benefited the country, if the companies to whom the blocks had been allocated had started producing coal quickly enough. Interestingly, during 2011-2012, these coal blocks produced 36.9 million tonnes. This amounted to around 6.8% of the total production of 539.94 million tonnes during the course of that year.
For the current financial year (i.e. 2014-2015) these mines are expected to produce around 52.93 million tonnes. This will be out of a total produce of around close to 590 million tonnes. The demand for this year is expected to be at 787 million tonnes.
Interestingly only 31 out of the 195 coal blocks currently produce coal. What this tells us is that most of the public sector and the private sector companies to which coal blocks were allocated haven’t started producing coal as yet. A major part of these blocks as mentioned earlier were allocated between 2006 and 2009. Given that its been a while since these blocks were allocated, and hence its surprising to see that only 31 out of the 195 coal blocks are currently producing coal.
This tells us a lot about the ground level implementation challenges in India.
What remains to be seen is the impact this judgement will have. At close to 53 million tonnes in 2014-2015, the captive blocks will produce around 9% of the country’s total coal production. It has to be ensured that this produce is not suddenly taken out of the equation because that can have disastrous consequences for the energy scenario in this country.
The Supreme Court also pointed out that “it is directed that the coal blocks allocated for ultra mega power project (UMPP) would only be used for UMPP.” Data shows the total amount of coal expected to be produced by UMPP in 2014-2015 stands at two million tonnes. Adjusting for this, the amount of coal being produced by coal blocks stands at 50.92 million tonnes (52.92 million tonnes – 2 million tonnes).
If this coal were to be imported, assuming a landing price of Rs 3400 per tonne of coal (if its imported from Indonesia) this would mean an additional expense of Rs 17,300 crore per year. In this scenario, power tariffs will go up further. This will in turn impact inflation and economic growth.
But it is not just about power tariffs. 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, it is likely to drive up international price of coal, which has been falling lately. Also, it needs to be decided as to what happens to those coal blocks were coal is actually being produced. Do they get away just by paying a fine?
By following an arbitrary process of allotment of coal mines the various governments of the past (primarily the Congress led UPA) have left a huge mess which threatens the energy security of India. The Supreme Court judgement points out that “the explanation by the Central Government for not adopting the competitive bidding is that coal is a natural resource used as a raw material in several basic industries like power generation, iron and steel and cement.”
It goes on to add that “The end products of these basic industries are, in turn, used as inputs in almost all manufacturing and infrastructure development industries. Therefore, the price of coal occupies a fundamental place in the growth of the economy and any increase in the input price would have a cascading effect. The auction of coal blocks could not have been possible when the power generation and, consequently, coal mining sectors were first opened up to private participants as the private sector needed to be encouraged at that time to come forward and invest. Allocation of coal blocks through competitive bidding in such a scenario would have been impractical and unrealistic.”
The Central Government referred to in the judgement is the Congress led UPA government. The moral of the story here is that when you don’t allow the free market to operate, when things are not transparent, and when politicians decide on rules and framework as they go, the situation usually ends up in a mess.
The least that can be learnt from the Coalgate experience is that whenever the government decides to allocate natural resources from now on, it should do so in a transparent and rule based manner.

The article originally appeared on www.firstpost.com and www.firstbiz.com on August 25,2014 
(Vivek Kaul is the author of the
Easy Money trilogy. He tweets @kaul_vivek)