Why Narendra Modi’s budget looks strangely familiar

narendra_modi

The Narendra Modi led government in India presented its third budget today. The budget was presented by finance minister Arun Jaitley, in a nearly 100 minute long speech.

Before the budget was presented the fear was that the Narendra Modi government is gradually going back to the Congress party’s way of doing things, at least on the economic front. The Congress party has governed India in every decade after independence.

So what is the verdict after the budget? Modi seems to have titled the farm way. As the finance minister Jaitley said during the course of his speech: “We need to think beyond ‘food security’ and give back to our farmers a sense of ‘income security’. Government will, therefore, reorient its interventions in the farm and non-farm sectors to double the income of the farmers by 2022.”

This isn’t surprising given that agricultural growth has been very low at the rate of 0.5% per year, over the last two years, due to bad monsoons. Further, the agricultural growth is expected to be at 1.2% this year, much lower than the overall growth of 7.6%.

Initiatives allowing farmers a better access to the market have been planned. Plans have also been made around judicious use of fertilizers, to increase crop yields across land which does not have access to irrigation and so on.

The government has also planned to offer incentives around the production of pulses. In the recent past, price of the tur dal (pigeon pea) has touched Rs 200 per kg and given that India needs to produce more pulses.

But that was the good bit.

Before the Modi led Bhartiya Janata Party (BJP) came to power in the 2014 Lok Sabha elections, the Congress led United Progressive Alliance (UPA) with Manmohan Singh as prime minster, was in power for a decade.

Singh’s term as prime minster, especially the second term, was marked by an increasing amount of doles as well as corruption. Loans to farmers were written off. The Mahatma Gandhi National Rural Employee Guarantee Act (MGNREGA) was passed and so was the Food Security Act. In July 2014, Modi had slammed the UPA government’s food security scheme by saying: “The government in Delhi thinks that just by bringing in the Food Security Bill there will be food on your plate.”

Modi has also mocked the other big Congress scheme, the MGNREGA in the past. In February 2015, Modi had said: “I will ensure MGNREGA is never discontinued. It is proof of your failings. After so many years of being in power, all you were able to deliver is for a poor man to dig ditches a few days a month.”

The Modi government has done a u-turn on this front and allocated Rs 38,500 crore to the scheme for 2016-2017. This is the highest ever allocation to the scheme, the finance minister Jaitley proudly claimed during the course of his speech. Modi is now looking more and more similar to Manmohan Singh. He is a better marketer though than Singh and his regime isn’t corrupt. Not until now, at least.

MGNREGA aims at providing at least 100 days of guaranteed employment in a financial year to every household whose adults are willing to do unskilled manual work. The trouble is that MGNREGA essentially became another scheme where money is simply given away without any substantial assets being created.

Modi in the run up to the 2014 Lok Sabha elections had promised minimum government and maximum governance. But with the allocations to MGNREGA being at its highest ever level, looks like that promise has gone out of the window, at least for now.

The economist Surjeet Bhalla has called MGNREGA as the fourth most corrupt institution in the world after FIFA, the BCCI (the board that governs cricket in India) and the public distribution system used by the Indian government to distribute food grains as well as kerosene to the poor.

The food security scheme provides rice and wheat at Rs 3 and Rs 2 per kg to the poor. The Economic Survey of the government presented on February 26, points out that nearly 54% of the wheat, 48% of the sugar and 15% of rice, meant to be distributed through PDS is lost as a leakage.

The price at which the government sells the food grains and the price at which it buys is essentially the food subsidy that it provides. The allocation to food subsidy is at Rs 1,34,835 crore for 2016-2017. This has come down a little from the Rs 1,39,419 crore that was allocated last year.

Nevertheless, no effort has been made to tackle this leakage which costs the country a lot of money. The Report of the High Level Committee on Reinventing the Role and Restructuring of Food Corporation of India presented a report in January 2015 to tackle this issue. It has since been gathering dust.

Further, what India needs is the creation of huge number of jobs. The organised sector in this country continues to remain very small. In 1991-1992, the total number of people working in the organised sector had stood at around 27 million. Since then the number has jumped to around 29.6 million (as of 2011-12, the latest data available).

At the same time nearly 58% of India’s population continues to be dependent on agriculture which generates around 16-18% of India’s gross domestic product. What this tells us is that there is huge overemployment in the sector and jobs need to be created in other sector so that people can move away from agriculture. And that is clearly not happening.

Modi’s win in 2014 tapped into the aspiring class of India and promised to create jobs. In fact, in November 2013, Modi had said: “If BJP comes to power, it will provide one crore jobs which the UPA Government could not do despite announcing it before the last Lok Sabha polls.”

The government is betting on the creation of road and railway infrastructure for the creation semi-skilled and unskilled jobs required for moving people away from agriculture. The finance minister has allocated Rs 97,000 crore towards the road sector. Together with the capital expenditure of the Railways, this amounts to a good Rs 2,18,000 crore during the course of the year.

The question is will this be enough to move people away from agriculture by creating a substantial number of jobs? There are no easy answers for that.

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

A slightly different version of the column appeared on BBC.com on February 29, 2016

India Is Still Facing The Ill-Effects Of The Congress Era Inflation

India's PM Singh speaks during India Economic Summit in New Delhi
The devil, like beauty, always lies in the detail.

Sometime last week the Central Statistics Office(CSO) put out data which clearly shows that India is still facing the ill-effects of the inflationary era unleashed by the Congress led United Progressive Alliance (UPA) government.

Between 2008-2009 and 2013-2014, the average consumer price inflation was higher than 10%. Food inflation was higher than 11%. High inflation essentially forced people to spend more and in the process they had lesser money to save.

Take a look at the following table. The household savings fell from 23.39% of the nominal Gross Domestic Product (GDP) to 19.06%. Nominal GDP does not take inflation into account.

In Rs crore2011-20122012-20132013-20142014-2015
Household Savings2065453223395023609362380488
As a % of total savings68.20%66.40%63.40%57.20%
As a % of nominal GDP23.39%22.36%20.94%19.06%
Net Financial Savings (Gross financial savings minus financial liabilities)642609733616862873961307
As a % of nominal GDP7.28%7.34%7.65%7.70%
Saving in physical assets1389209146368414608441379411
As a % of nominal GDP15.73%14.65%12.96%11.05%

The household savings primarily comprise of financial savings as well as savings in physical assets and savings in the form of gold and silver ornaments. The overall household savings have fallen from 23.39% of the GDP in 2011-2012 to 19.06% in 2014-2015.

The household financial savings (i.e. investments made in fixed deposits, provident funds, shares and debentures and life insurance) rose marginally from 7.28% to 7.70% of the GDP.

What the table does not tell you is that in 2007-2008, before the Congress led UPA government initiated an era of high-inflation, the household financial savings had stood at 11.45% of the GDP. Between 2007-2008 and 2011-2012, household financial savings fell dramatically. They haven’t really recovered since then despite lower inflation numbers.

In 2014-2015, the consumer price inflation was at an average of 5.83% during the course of the year. Food inflation was at 6.26%. The after-effects of the era of high inflation are still being felt. The low growth in household financial savings also explains why despite a massive fall in inflation, interest rates haven’t fallen at the same pace. If savings had risen at a much faster rate, the interest rates would have fallen more.

Savings in physical assets (homes, land, flats etc.) have fallen dramatically between 2011-2012 and 2014-2015 from 15.73% of the GDP to around 11.05%. This is again a reflection of the fact that people are not saving enough despite low inflation. One possible explanation for this is that incomes are not going up at a fast pace.

The other point that needs to be made here is that the real estate prices have gone way beyond what most people can afford. And that explains to some extent why household financial savings have risen between 2011-2012 and 2014-2015, but physical assets have not.

Now take a look at the following table. Companies (non-financial corporations) have been saving more over the years. Their savings have gone up from 9.59% of the GDP in 2011-2012 to 12.27% of the GDP in 2014-2015. What does this tell us?

 

In Rs crore2011-20122012-20132013-20142014-2015
Savings of non-financial corporations84713499032212180201532262
As a % of total savings28.00%29.40%32.70%37.20%
As a % of nominal GDP9.59%9.91%10.80%12.27%
Savings of financial corporations272371300599294180335679
As a % of total savings9.00%8.90%7.90%8.20%
As a % of nominal GDP3.08%3.01%2.61%2.69%
Savings of general government-158234-160048-148089-131729
As a % of total savings-5.20%-4.80%-4.00%3.20%
As a % of nominal GDP-1.79%-1.60%-1.31%-1.05%

 

It tells us that there are not enough investment opportunities going around and hence the profits that these companies are making are not being invested to expand but being saved. This is again a good indicator of the overall slow trend of the economy.

For sustainable economic growth to happen a country needs to produce things. As the Say’s Law states “A product is no sooner created, than it, from that instant, affords a market for other products to the full extent of its own value.”

The law essentially states that the production of goods ensures that the workers and suppliers of these goods are paid enough for them to be able to buy all the other goods that are being produced. Production of goods also creates new jobs.

A pithier version of this law is, “Supply creates its own demand.” And that is why industrial expansion is important for economic growth to happen. But currently that doesn’t seem to be happening.

(Vivek Kaul is the author of the Easy Money trilogy. He can be reached at [email protected])

The column originally appeared on Swarajya on February 3, 2016

Manmohan Singh—The dishonest politician

India's PM Singh speaks during India Economic Summit in New DelhiIf Bollywood like Hollywood made political biopics, and if things hadn’t turned out the way they have, the story of the former Prime Minister Manmohan Singh would have made for a reasonably good movie.
Here was a man who rose through the ranks and got a doctorate in economics from the Oxford University. He became the Chief Economic Adviser in the seventies, governor of the Reserve Bank of India and the Deputy Chairman of the Planning Commission in the eighties, the finance minister of India in nineties and finally the Prime Minister of India in the noughties.
It was the classic story of an underdog who was sometimes “very lucky,” making it in life. This is a format that biopics thrive on. Nevertheless, in the autumn of his career, things aren’t going quite right for Singh. A happy ending is no longer on its way. His tenure as Prime Minister saw him overseeing probably the most corrupt and inefficient government that India has ever seen.
And now Singh, despite being not corrupt is paying for the same. A few days back, special CBI judge Bharat Parashar, summoned Singh as accused in what is now known as the Coalgate scam.
Parashar has summoned Singh for re-allocating a coal mine to Hindalco. As the judge said in his order: “There was a conscious effort on his part to somehow accommodate M/s Hindalco in Talabira-II coal block.” The screening committee had earlier allocated the block to the government owned Neyveli Lignite Corporation.
Singh could have easily saved himself from this embarrassment, if he had acted in a way he thought was the correct way to go about things. But before we get into that, a few other things need to be discussed.
On June 9, 1993, the the Coal Mines(Nationalisation) Act was amended to allow companies which were in the business of producing power and iron and steel, to own coal mines for their captive use. This was done primarily because the government owned Coal India could not produce enough coal to meet demand.
Between 1993 and 2011, more than 200 hundred coal-blocks were given away free by various governments. Most of these blocks were allocated between 2004 and 2011 when the Congress led United Progressive Alliance was in power. A straight forward explanation for this lies in the fact that this was the period when coal prices had started to rally and hence, a free coal block had great value. Interestingly, Singh was coal minister for a significant period between 2004 and 2011.
The blocks were allocated by an inter-ministry screening committee which had the coal secretary as its Chairman. The committee was supposed to allot blocks after assessing applications by using parameters like techo-economic feasibility of the end-use project, the past record of the applicant in executing projects, the financial and technical capability and so on.
The trouble is that the process followed by the committee was not clear from its records. The former Comptroller and Auditor General Vinod Rai makes this point in his book Not Just An Accountant: “All that the records showed was that the committee met, deliberated and merely recorded the name of the block allotted to a company, and the state where the end-use plant existed. It is left to the reader to decide if transparency was a victim.”
Interestingly, from 2004 onwards the number of applicants for coal-blocks just went through the roof and it was not possible for the screening committee to be objective about the coal-block allocation. This is something that former coal secretary P C Parakh recounts in Crusader or Conspirator—Coalgate and Other Truths: “108 applications were received for Rampia and Dip Side of Rampia Block [names of two coal-blocks]. I found it difficult to make an objective selection when the number of applicants was in single digits. How could the Screening Committee take objective decisions when the number of applicants per block had run into three digits?”
In August 2004, Parakh proposed to Manmohan Singh(who had taken over as coal minister after Shibu Soren resigned) that the coal-blocks should be allocated through a process of competitive bidding. This would ensure transparency in allocation. It would keep also keep away non-serious players and help the government earn some revenue. On August 20, 2004, Singh approved allocation of coal-blocks through the competitive bidding route.
Immediately, letters written by various MPs opposing competitive bidding started to come in. As Parakh recounts in his book: “This included one from Mr Naveen Jindal who had considerable interest in coal mining.” What did not help was that Shibu Soren, who was a former coal minister by then, and would become coal minister again, opposed it. Dasari Narayana Rao, who was minister of state for coal, was also not in favour of the decision.
Politicians not wanting an auction was understandable because it would take away the influence that they had in allocating coal-blocks.
Singh gave into the pressure and on July 25, 2005, it was decided that the coal ministry would continue to allot coal-blocks through the screening committee route.
In a decision on September 24, 2014, the Supreme Court cancelled 204 out of the 218 coal-blocks allocated by the government since 1993. In fact in August 2014, the Court had stated that: “the entire exercise of allocation through Screening Committee route thus 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.”
Singh could have saved himself a lot of embarrassment if he had insisted on the competitive bidding route, which he had agreed to in August 2004. But he looked the other way, choosing to give in to the compulsions of coalitions politics and the fact that if he did things his way, he would not last as the Prime Minister.
That’s the thing about being in power. Once you have it, it is better to look the other way than stand up for what you believe in and risk the chance of being fired and leading a retired life of loneliness. Singh may not have been personally corrupt, but he was dishonest to himself. He ultimately did not stand up for things that he believed in, in order to ensure that he continued to be the prime minister. And that is indeed very tragic.

(Vivek Kaul is the author of the Easy Money trilogy. He can be reached at [email protected])

The column originally appeared in the Daily News and Analysis on Mar 20, 2015

What Narendra Modi can learn from Narsimha Rao

narendra_modiVivek Kaul

Before PV Narsimha Rao took over as the prime minister of the country, the finances were in a bad shape. Under the previous regime, the foreign exchange reserves had fallen to a level which was enough to pay only for three weeks worth of essential imports. In this scenario India had to take an emergency loan of $2.2 billion from the IMF. This was done by offering 67 tonnes of gold as a collateral.
Given this, Rao realized that he needed a ‘technocrat’ as his finance minister. IG Patel, a former governor of the Reserve Bank of India(RBI) was approached first. Patel, had been the fourteenth governor of the RBI between 1977 and 1982. After retiring from the RBI he was the director of IIM Ahmedabad. Between 1984 and 1990 he was the director of the London School of Economics.
Patel refused Rao’s offer and instead recommended Manmohan Singh. Singh had taken over from Patel as the governor of the RBI. He had a three year tenure at the RBI. After that he took over as the deputy chairman of the planning commission. In March 1991, Singh was appointed as the Chairman of the University Grants Commission(UGC). And this is when Narsimha Rao came calling and on June 21, 1991, the day Rao took over as the prime minister of the country, Singh was appointed as the finance minister.
Singh with the firm backing of Rao unleashed a spate of economic reforms which unshackled the moribund Indian economy and placed it on a much better footing. What is interesting nonetheless is that the entire period of Rao’s rule was not reform oriented. The economic reforms happened in the first three years and after that election considerations for the next Lok Sabha took over. Hence, the last two budgets of Manmohan Singh were of the ‘populist’ nature.
There is a lesson in this for the current prime minister Narendra Modi. Modi is likely to have elections on his mind more than Rao for the simple reason that his party and his allies are outnumbered in the Rajya Sabha. And if he has to establish a majority in the upper house, he first needs governments of the Bhartiya Janata Party in states. The BJP currently has 43 MPs in the Rajya Sabha and the NDA 63 MPs. This makes it difficult for the government to enact any legislation unless it calls for a joint sitting of both the houses.
Hence, elections for state governments are very important for the Modi government.
In this scenario it might is quite possible that economic reforms and even simple administrative decisions for that matter, may take a back seat. A very good example of this is that Modi had to wait for elections in Maharasthra and Haryana to get over before the government could announce the decontrolling of the price of diesel.
The good news is that an election free window of almost 11 months is coming up. As analysts Abhay Laijawala and Abhishek Saraf of Deutsche Bank Market Research point out in a recent report titled
Policy action to intensify “Following three state elections in December – Jharkhand, Jammu and Kashmir – there will be a near eleven month election free window, before Bihar state goes to the polls around November 2015.”
As can be seen from the accompanying table, after elections in the states of Jharkhand and Jammu and Kashmir are over, there is an election free window of close to 11 months. This table does not account for elections in Delhi, which also may happen soon.
The next big election is scheduled only in November 2015 in Bihar. The state has around 7.3% of the country’s Lok Sabha seats. It also elects 16 members to the Rajya Sabha. The Rajya Sabha has 241 seats in total. Hence, the Bihar election will be of significant importance. And it may not be possible to push economic reforms around the time elections happen in the state.
Hence, the time to push reforms is early next year, when the election free window starts. A good place to start with would be take the deregulation of diesel prices further, and start gradually increasing the price of cooking gas. Currently,
the oil marketing companies make an under-recovery of Rs 393.50, every time they sell a cooking gas cylinder.
As was done in the case of diesel, prices can be increased gradually at the rate of Rs 10-20 per month. Currently, the oil marketing companies face an under-recovery of Rs 188 crore per day on the sale of cooking gas and kerosene. A part of this amount is reimbursed by the government. This leads to an increase in the expenditure of the government and hence, its fiscal deficit. Fiscal deficit is the difference between what a government earns and what it spends. An increase in price will also ensure that over a period of time the black marketing of domestic cooking gas to hotels will become unviable.
Also, over a period of time as the government is able to increase its numbers in the Rajya Sabha it needs to introduce land and labour reforms as well. As Laijawala and Saraf point out “Most of the reforms in India, since 1991, have been broadly focused towards product and capital markets. Reforms in factor markets, other than capital, principally land and labor, have been broadly left out by all political administrations since 1991. We believe that a long era of coalition governments may be the reason for this anomaly.”
Narendra Modi’s government is not held back by the coalition dharma, as almost all governments since 1996 have been. Hence, it is in a position to push through some real economic reforms on this front. These reforms are of great importance if Modi’s call of
Make in India is to be take seriously.
Other than this, the Goods and Services Tax (GST) bill which has been in the works for a while, needs to be passed as well. The benefits of GST over the long term will be tremendous. “It has a very ambitious objective to wean away inefficiencies in India’s indirect tax value chain and ensure smoother movement of goods and services by converting India into a one common market, versus the current status where different states levy different types and rates of taxes, which introduces several inefficiencies,” write Laijawala and Saraf.
To conclude, Narendra Modi and his government need to make the best of the election free window that starts from January 2015 and try and make the best of it.

The article originally appeared on www.valueresearchonline.com on Nov 14, 2014

(Vivek Kaul is the author of the Easy Money trilogy. He can be reached at [email protected])

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

Inclusive Governance: Enabling Capability, Disabling Resistance

Vivek Kaul

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

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