In a speech that Rahul Gandhi, the Vice President of the Congress party, made on January 17, 2014, he requested the Prime Minister Manmohan Singh to provide 12 cooking gas cylinders a year at the subsided rate, instead of nine.
Since the request came from the Gandhi family scion, the normally slow Congress led United Progressive Alliance (UPA) government acted quickly for a change, and before the end of January 2014, the cap had been raised. From April 1, 2014, consumers will get one subsidised gas cylinder a month. This increase in cap is expected to increase the subsidy burden of the government by Rs 5,000 crore.
Along with increasing the cap, the government has also suspended the Aadhar card-linked Direct Benefit Transfer for LPG (DBTL) scheme. This scheme had been implemented in 289 districts in 18 states. In January 2014, it had been extended to a further 105 districts including Delhi and Mumbai. Under this scheme, the consumers bought the cooking gas cylinder at its actual market price. The subsidy amount was then transferred directly into their Aadhar card linked bank accounts.
So, a resident of Delhi, where the scheme was recently launched, while buying a gas cylinder would have had to pay Rs 1,258 for a 14.2 kg cylinder. The cost of the subsidised cylinder is Rs 414 in Delhi. Hence, the difference of Rs 844 would be paid directly into the Aadhar linked bank account of the consumer.
The trouble is that many people still do not have Aadhar accounts. And those who have it have not been able to link it to their bank accounts. Hence, the government has set up to review the DBTL scheme. In an election year, the worst thing that can happen to a government is that its subsidies do not reaching the citizens. By forming a committee to review the DBTL that discrepancy has been set right.
Anyone who has implemented even a very basic project would tell you that it is very important to do a SWOT(strengths, weaknesses opportunities, threats) analysis of the project. A basic SWOT analysis would have shown that the first problem in the DBTL scheme would be people not having Aadhar cards and those who had it, would not have had it linked to their bank accounts.
But the government and Nandan Nilekani, the chief of Unique Identification Authority of India (UIDAI), have been in a hurry to showcase Aadhar. UIADAI is in charge of implementing Aadhar. In fact, a recent report on the website of the Moneylife magazine pointed out that Nilekani is a member of almost every committee that has been making Aadhar mandatory “for citizens to access several services and benefits” from the government. Guess, he is not bothered about the conflict of interest his being on these committees creates, even after having held one of the top jobs at Infosys, one of India’s most ethical companies. In the recent past, the political ambitions of Nilekani have come to the fore. Does that explain his hurry to get Aadhar up and running and everywhere?
What is interesting is that the oil marketing companies (OMCs) (i.e. IOC, BP and HP) continued to insist on Aadhar linked bank accounts for subsidy payments in case of cooking gas, even after the Supreme Court ruled that Aadhar should not be made mandatory for availing any services. The September 2013 order had unequivocally said that “no person should suffer for not getting the Aadhaar card in spite of the fact that some authority had issued a circular making it mandatory.”
Even before the Supreme Court had ruled, Rajiv Shukla, minister of state for parliamentary affairs and planning, had said on May 8, 2013, that the “Aadhaar card is not mandatory to avail subsidized facilities being offered by the Government like LPG cylinders.”
The irony is that the form Aadhar enrolment form clearly states that “Aadhar enrolment is free and voluntary”.
If enrolment into Aadhar is free and voluntary, how could the OMCs have insisted on Aadhar linked bank accounts for payment of cooking gas subsidies? And why did the Supreme Court have to rule that Aadar should not be made mandatory for availing any services? The situation should not have reached that stage. In the world of Nandan Nilekani and the government of India, free and voluntary, clearly means something that you and I do not understand.
Interestingly, Montek Singh Ahluwalia, the Deputy Chairman of the Planning Commission, did some straight talking on Aadhar (UIDAI was created by a notification of the Planning Commission in January 2009), at Davos in January 2011. “We will simply make it compulsory for those benefiting from government programmes to register for the UID number,” Ahluwalia remarked. And that is what seems to be happening. In Maharashtra, the government employees have been ordered to get Aadhar cards so that their salaries can be paid into Aadhar linked bank accounts. In Delhi, Aadhar is compulsory for marriage registrations.
Nilekani has tried to explain this by saying “Yes, [Aadhaar] is voluntary. But the service providers might make it mandatory. In the long run I wouldn’t call it compulsory. I’d rather say it will become ubiquitous.” As stated earlier Nilekani is a member of almost every committee that has been making Aadhar mandatory. In fact, as he put it in November 2012 “If you do not have the Aadhaar card, you will not get the right to rights.” When it comes to Aadhar, Nilekani and his masters have offered the nation a Hobson’s choice.
For more than four years now, the Nilekani led UIADAI has been collecting biometric information (photographs of the face, iris scans and fingerprints of all the 10 fingers) of the citizens of this country, without any statutory backing. The Aadhar card has been fostered upon the nation without any statutory backing. The Union Cabinet has approved the National Identification Authority of India Bill that will give statutory status to the UIDAI. But this bill hasn’t been introduced in the Parliament.
The joke, as always, is on us.
The article originally appeared in The Asian Age dated February 4, 2014.
(Vivek Kaul is the author of Easy Money. He can be reached at [email protected])
Of fiscal deficit, Manmohan Singh and a prayer to god
India is country that lives on hope, gods and pipedreams. The Prime Minister Manmohan Singh is no different when it comes to this. In a recent interview after taking over as the finance minister of the country he said he was focusing on controlling the fiscal deficit through a series of measures that the officials were working on.
He did not explain what these measures were. But with things as they stand now, it is next to impossible for the government to control the fiscal deficit and the PM can just hope for the best.
Fiscal deficit is the difference between what the government earns and spends. For the financial year 2012-2013 (from April 1, 2012 to March 31, 2013) this number is expected to be at Rs 5,13,590 crore. The government finances the deficit by borrowing money or taking on debt as it is technically referred to as.
There are several reasons why the fiscal deficit is likely to turn out to be higher than the projected number. Let’s start with oil subsidies. Oil subsidies for the year have been budgeted at Rs 43,580crore. The government has more or less run out of this money. It has paid Rs 38,500 crore to oil marketing companies (OMCs) like Indian Oil Corporation, Bharat Petroleum and Hindustan Petroleum for selling diesel, kerosene and LPG, at a loss during the last financial year. This payment was made only in the current financial year and hence has had to be adjusted against the oil subsidies budgeted for the current financial year.
This leaves only around Rs 5080 crore (Rs 43,580 crore – Rs 38,500crore) with the government for compensating the OMCs for the losses for the remaining part of the year.
International oil prices have come down since the beginning of April. Back then the OMCs were losing around Rs 563crore per day. A recent estimate made at the beginning of July by ICICI Securities puts this loss at Rs 355crore a day. Oil prices have fallen further by around 8% since this estimate was made. Adjusting for that the oil companies continue to lose around Rs 325crore per day or around Rs 10,000 crore per month. Hence the Rs 5080 crore that the government has remaining in its oil subsidy account would be over in a period of 15 days, at the current rate of losses.
Oil prices have fallen by 32% to $85 per barrel since the beginning of April. It’s is unlikely that the price will continue to fall given that at some stage the oil cartel, Organization of Petroleum Exporting Countries (OPEC), will intervene and start cutting production to push up prices. Also, the threat of confrontation between Iran and the United States has been on for a while. Even a whiff of a crisis can push up oil prices. Iran is the second largest producer of oil in OPEC after Saudi Arabia. It has been trying to sell oil in currencies other than the US dollar for the past few years, much to the annoyance of the US.
So if the OMCs continue to lose money at the current rate, the projected losses for the year will be over Rs 120,000 crore. In 2011-2012 the government compensated around 60% of the losses. It got oil producing companies like ONGC and Oil India Ltd to pay the OMCs for the remaining losses. If the same ratio is followed in this financial year as well, it would mean an extra burden of around Rs 72,000 crore for the government (60% of Rs 1,20,000 crore). The fiscal deficit would go up by a similar amount.
Oil subsidies are the not the government’s only problem. On June 14, 2012, the government had approved the minimum support price (MSP) of rice to be increased by 16% from Rs 1250 per quintal from Rs 1080 per quintal. The Food Corporation of India buys rice from the farmers at the MSP. The food subsidy for the current financial year has been set at Rs 75,000 crore. Experts believe that this number is terribly under-provisioned given the various programmes of the government. Also with a significant increase in the MSP of rice the food subsidy is expected to cost the government around Rs 40,000 crore more from its current estimates. Even this number is likely to be beaten because after increasing the MSP of rice significantly, a similar price increase would have to be made for wheat during the coming months.
What does not help is that interest payments on all the money that the government has previously borrowed, comes to Rs 3,19,759 crore. Other than paying interest the government also needs to repay the past debt that is maturing. This amount comes to Rs 1,24,302 crore. Hence the cost of total debt servicing comes to Rs 4,44,061 crore or around 87% of the projected fiscal deficit of Rs 5,13,590 crore for the year. There is nothing that Manmohan Singh and the government can do to control this.
If all these problems were not enough the monsoon till now has been 23% deficient. This impacts the purchasing power of “rural” India and means lower sales of cars, bikes, white goods and fast moving consumer products in rural India, leading to a lower collection of indirect tax for the government. Lower taxes can drive up the fiscal deficit further.
So what is the way out? The subsidy on various oil products needs to be brought down. That’s the only solution that Manmohan Singh led government has to this problem. But the question is will they bite the bullet and make some tough decisions? From the past record it can be safely said, the answer is no. Given these reasons hoping to control the fiscal deficit remains a distant pipe dream.
Hence it’s time for Manmohan Singh to do what most Indians do when they are stretched and stressed. Pray to god. And hope for the best.
(The article originally appeared in the Asian Age/Deccan Chronicle on July 16,2012. http://www.deccanchronicle.com/editorial/dc-comment/fiscal-deficit-and-prayer-god-905)
(Vivek Kaul is a writer and can be reached at [email protected])
Higher Oil Prices or Higher EMIs? Take your pick
The petrol prices were raised by Rs 6.28 per litre yesterday. With taxes the total comes to Rs 7.54 per litre. Let’s try and understand what impact this increase in prices will have.
The primary beneficiary of this increase will be the oil marketing companies like Indian Oil, Bharat Petroleum and Hindustan Petroleum. The companies had been losing Rs 6.28 per litre of petrol they sold. Since December, when prices were last raised the companies had lost $830million in total. With the increase in prices the companies will not lose money when they sell petrol.
The increase in price will have no impact on the fiscal deficit of the government. The fiscal deficit is the difference between what the government spends and what it earns. The government does not subsidize the oil marketing companies for the losses they make on selling petrol.
It subsidizes them for losses made on selling diesel, kerosene and LPG, below cost.
The losses on account of this currently run at Rs 512 crore a day. The loss last year to these companies because of selling diesel, kerosene and LPG below cost was at Rs 138,541crore. They were compensated for this loss by the government. Out of this the government got the oil and gas producing companies like ONGC, Oil India Ltd and GAIL to pick up a tab of Rs 55,000 crore. The remaining Rs 83,000 odd crore came from the coffers of the government.
What is interesting that when the budget was presented in March, the oil subsidy bill for the year 2011-2012 (from April 1, 2011 to March 31,2012) was expected to be at around Rs 68,500 crore. The final number was Rs 14,500 crore higher.
The losses for this financial year (from April 1, 2012 to March 31,2012) are expected to be at Rs Rs. 193,880 crore. If the losses are divided between the government and the oil and gas producing companies in the same ratio as last year, then the government will have to compensate the oil marketing companies with around Rs 1,14,000 crore. The remaining money will come from the oil and gas producing companies.
The trouble is in two fronts. It will pull down the earnings of the oil and gas producing companies. But that’s the smaller problem. The bigger problem is it will push up the fiscal deficit. If we look at the assumptions made in the budget for the current financial year, the oil subsidies have been assumed at Rs Rs 43,580 crore. If the government has to compensate the oil marketing companies to the extent of Rs 1,14,000 crore, it means that the fiscal deficit will be pushed up by around Rs 70,000 crore more (Rs 1,14,000crore minus Rs 43,580 crore), assuming all other expenses remain the same.
A higher fiscal deficit would mean that the government would have to borrow more. A higher government borrowing will ‘crowd-out’ the private borrowing and push interest rates higher. This would mean higher equated monthly installments(EMIs) for people who have loans to pay off or are even thinking of borrowing.
The only way of bringing down the interest rates is to bring down the fiscal deficit. The fiscal deficit target for the financial year 2012-2013 has been set at Rs 5,13,590 crore. The government raises this money from the financial system by issuing bonds which pay interest and mature at various points of time. Of this amount that the government will raise, it will spend Rs 3,19,759 crore to pay interest on the debt that it already has. Rs 1,24,302 crore will be spent to payback the debt that was raised in the previous years and matures during the course of the year 2012-2013. Hence a total of Rs 4,44,061 crore or a whopping 86.5% of the fiscal deficit will be spent in paying interest on and paying off previously issued debt. This is an expenditure that cannot be done away with.
The other major expenditure for the government during the course of the year are subsidies. The total cost of subsidies during the course of this year has been estimated to be at Rs Rs 1,90,015 crore. The subsidies are basically of three kinds: oil, food and petroleum. The food subsidy is at Rs 75,000 crore. This is a favourite with Sonia Gandhi and hence cannot be lowered. And more than that there is a humanitarian angle to it as well.
The fertizlier subsidies have been estimated at Rs 60,974 crore. This is a political hot potato and any attempts to cut this in the pst have been unsuccessful and have had to be rolled back. There are other subsidies amounting to Rs 10,461 crore which are minuscule in comparison to the numbers we are talking about.
This leaves us with oil subsidies which have been estimated to be at Rs 43,580 crore. This as we see will be overshot by a huge level, if oil prices continue to be current levels. Even if prices fall a little, the subsidy will not come down by much. .
Hence if the government has to even maintain its deficit (forget bringing it down) the only way out currently is to increase the price of diesel, LPG and kerosene. Diesel is a transport fuel and an increase in its price will push prices inflation in the short term. But maintain the fiscal deficit will at least keep interest rates at their current levels and not push them up from their already high levels.
If the government continues to subsidize diesel, LPG and kerosene, interest rates are bound to go up because it will have to borrow more. This will mean higher EMIs for sure. It would also mean businesses postponing expansion because higher interest rates would mean that projects may not be financially viable. It would also mean people borrowing lesser to buy homes, cars and other things, leading to a further slowdown in a lot of sectors. In turn it would mean lower economic growth.
That’s the choice the government has to make. Does it want the citizens of this country to pay higher fuel and gas prices? Or does it want them to pay higher EMIs? There is no way of providing both.
(The article originally appeared at www.rediff.com on May 24,2012. http://www.rediff.com/business/slide-show/slide-show-1-special-higher-oil-prices-or-higher-emis-take-your-pick/20120524.htm)
(Vivek Kaul is a writer and can be reached at [email protected])