Pawar is no Mamata di! He is giving the Congress batting practice

Vivek Kaul
“A woman and an elephant never forget an injury,” wrote Hector Hugh Munro better known by his pen name Saki. Wonder whether, Sharad Pawar, the sharp man that he is, has ever read Saki? (On a totally different note, the short stories of Saki are an absolutely delightful read).
The Maratha strongman Sharad Pawar resigned from the Union Cabinet last week. Media reports suggest that he was miffed by the fact that after Pranab Mukherjee decided to retire, and move to the Rashtrapati Bhavan, he was not made the number two in the Union Cabinet .It seems that the defence minister AK Antony has been allocated the seat to the right of the Prime Minister Manmohan Singh, where Mukherjee used to sit, making him number two in the government. And that’s a seat that Pawar had wanted.
The Congress Party has been trying to mollify Pawar and his Nationalist Congress Party (NCP) since he quit a few days back. “In a Parliamentary democracy, all are equal in Cabinet. The Prime Minister is first among equals and there is no number two or number three,” Congress general secretary Digvijaya Singh told the Deccan Chronicle.
That apart it would be rather stupid of Sharad Pawar to assume that the Congress would offer the number two position in the cabinet to him, assuming there was a thing like that. Pawar was one of the first to raise revolt against Sonia Gandhi by bringing her foreign origins to the forefront, after she had taken over as the President of the Congress Party in the late 1990s.
Even before that Sonia and Pawar never shared a great relationship. As Rashid Kidwai writes in Sonia-A Biography “When she (Sonia Gandhi) took over as the Congress chief, there was a certain unease between her and Sharad Pawar. Though Pawar concurred with the party’s decision to request Sonia to save the Congress, he later candidly admitted that he was never comfortable with her. Their conversations never lasted long and even that short duration was punctuated by long pauses.”
On March 14, 1998, the Congress Working Committee unceremoniously shunted out Sitaram Kesri, an elected President, and requested Sonia Gandhi to take over as the President of the Congress.
Kidwai in his book suggests that after Sonia took over as the President of the Congress, Pawar got an informal poll survey done. The results of the survey concluded that if he raised the banner of revolt against Sonia on the issue of her foreign origin, he would be the second Lokmanya Tilak. “The actual findings of the survey were never made public,” writes Kidwai. Things got nasty a little over a year and two months later on May 19, 1999, when Sharad Pawar, P.A.Sangma and Tariq Anwar raised a revolt against Sonia Gandhi on the issue of her foreign origin. Sonia resigned in a huff. But she took her resignation back after the trio was kicked out of the Congress party.
Therefore things went from bad to worse between Pawar and Sonia. “After revolting against her on the ground of her foreign origins, Pawar said that Sonia would never openly speak to him, but a CWC member who had tried hard to bring about a rapprochement between Pawar and Sonia said the same thing about him: ‘We encouraged him to have an open, heart-to-heart discussion with the Congress president, but he would just not open up,’” writes Kidwai.
So all this suggests that Pawar and Sonia share a very uneasy relationship and probably bear each other because of the compulsions of coalition politics. Also Sharad Pawar effectively ensured that Sonia Gandhi never became the Prime Minister of the country. Given that it is highly unlikely that Sonia would appoint Pawar number two in any union cabinet which she effectively controls.
Pawar of course understands this more than anyone else given the shrewd man that he is. So why is then all the drama of quitting in a huff happening? The major reason seems to be the fact that the Maharashtra chief minister Prithiviraj Chauhan is seen to be hurting the interests of the NCP. He has announced a white paper on the irrigation department which has been headed by Pawar’s nephew Ajit Pawar for ten years now.
The other major issue has been with co-operative banks. The Reserve Bank of India had dissolved the board of directors of the Maharashtra State Co-operative Bank which was controlled by Ajit Pawar in May last year. Pawar junior had come down heavily on the manner in which Chavan had implemented the RBI order in haste.
A few months back in March, RBI dissolved the NCP controlled Sangli District Central Cooperative Bank for violation of the Banking Regualtion Act. This move came a week after the NCP leader Dinkar Patel was elected as the Chairman of the Bank.
Chavan has also distanced himself from the refurbished Maharashtra Sadan in New Delhi. Allegations are now being made that relatives and family members of public works development (PWD) minister Chhagan Bhujbal, a senior NCP leader, benefitted considerably from contracts that were awarded out at inflated costs.
The NCP is also unhappy with the fact Chavan is not giving Pawar enough respect. “”In the past, CMs would make it a point to call on him and give him the respect due to a tall leader,” Times of India reported sources as saying.
The other theory going around is that Pawar is worried about the increasing influence of his nephew Ajit among the party legislators. Hence this move of resigning from the union cabinet is also being seen as a pressure tactic to get a ministerial birth for his daughter Supriya Sule, who is a member of the Lok Sabha from the Baramati constituency. As the Times of India on July 22 “Congress sources feel Pawar is shrewdly leveraging his unhappiness with the CM to pressure the Centre on demands ranging from a say in governorships, appointments to various boards, a ministerial perch for daughter Supriya while invoking the coalition mantra. He is also seen to be pitching for a say in Rajya Sabha nominations.”
The game is all about drawing some concessions out of the Congress party. At the end of the day we must remember that Pawar is no Mamata Banerjee. The influence of the NCP is limited to parts of western Maharashtra (primarily in districts around Pune). Pawar and NCP cannot win an election in Maharashtra on their own, unlike Mamata can and did in West Bengal. They need the Congress party as an alliance partner as much as the Congress needs them. The elections in Maharasthra are due in 2014. NCP is a party of business barons who have huge stakes in co-operative banks, sugar co-operatives and education institutes. Given this, it is important for them to remain in government. And they won’t remain in government unless they have a seat sharing agreement with the Congress party.
So what Pawar is doing right now is throwing some tough deliveries at the Congress party to give them some batting practice and hoping that he is able to draw out some goodies from them in the process. In the meanwhile we will some serious rhetoric from the NCP continuing. The one that caught my eye was of Jitendra Ahwad, an NCP leader, recently telling CNN-IBN that Sharad Pawar was the best man to be the Prime Minister.
(The article originally appeared on on July 23,2012.
(Vivek Kaul is a writer and can be reached at [email protected])

Of fiscal deficit, Manmohan Singh and a prayer to god

Vivek Kaul

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.
(Vivek Kaul is a writer and can be reached at [email protected])

Will Rahul say “Mere Paas Ma Hai”? Or will Manmohan say “Mogambo Khush Hua”?

Vivek Kaul

I remember reading an interview with Shekhar Kapur years back in which he described his experience with Javed Akhtar during the making of Mr India.
When Akhtar first recited the line “Mogambo Khush Hua” to Kapur, he wasn’t impressed. This was the main line of Mogambo, the villain of the movie. As Kapur recounts on his blog “Hmmm, I thought – there must be more to that.”
But Akhtar was convinced about the line. “Shekhar Sahib, when Kapil Dev hits a six over the grounds, people will shout Mogambo Khush Hua, and when people play three card brag (teen patti) and if they get three aces, they will shout “Mogambo Khush Hua.” “You trust me on that,” Javed Akhtar assured me,” writes Kapur on his blog.
Kapur ran with what Akhtar told him and the rest as we all know is history. Mr India was a huge hit. Such was the power of the line that people started to use it during the course of regular conversation, whenever they felt happy about something. As Kapoor writes “And some time later as I was watching Kapail Dev hit a six over the Sharjah grounds I saw a huge banner go up in the Indian supporters. It said : “Mogambo Khush Hua.””
Mogambo Khush Hua” became one of the most famous one-liners that Hindi cinema had produced. But this wasn’t the best one-liner that Akhtar ever wrote. His best one liner clearly has to be “Mere Paas Ma Hai” from the movie Deewar. The line is simple yet so powerful.
Deewar was released on January 1, 1975. Around six months later on June 25, 1975, Indira Gandhi, the then Prime Minister of India declared a state of emergency. During the 21 month period of emergency Indira’s younger son Sanjay almost ran a parallel government along with his cronies. One of his major areas of concern was overpopulation and the government under his instructions forcefully carried vasectomies all over the country. This phenomenon got Atal Behari Vajpayee all worked up to write a poem titled “aao mardon na mard bano”. Those were the days.
Sanjay Gandhi wouldn’t have been able to force vasectomies on thousands of Indian men without the “love” and the “backing” of his mother Indira Gandhi, who is said to have had a soft corner for her ill-tempered son. “Mere Paas Ma Hai” was a line written for Sanjay Gandhi rather than Ravi, the character played by Shashi Kapoor in Deewar , who speaks the line in the movie. Chances are that if Deewar had been released six months later during the emergency, the line wouldn’t have made it past the censor board.
India is at the same stage again. The love of a mother for her only son is holding the country back. The moves are already being made. Pranab Mukjerhee has been packed off to the Rashtrapati Bhavan. The next decision that is to be made is who will replace him at the Finance Ministry?
Manmohan Singh, the Prime Minister, wants to run the ministry with his team of economists: Montek Singh Ahulwalia, the deputy chairman of the planning commission, C Rangarajan the Chairman of the Prime Minister’s Economic Advisory Council and Kaushik Basu, the Chief Economic Adviser to the government of India. He is also hoping that Raghuham Rajan from the University of Chicago, a former Chief Economist at the IMF, to join the team.
But will this be allowed to happen? The answer is no. Sonia Gandhi needs a politician as the minister of Finance. A politician who can like, P Chidambaram did, come up with schemes like the Rs 71,000 crore of farmers loans being waived off. A politician who can get the right to food act up and running.
A politician who can get onto a helicopter and drop bucket loads of money from it. Okay, not quite that. But a politician who can ensure that voters of this country have been bribed enough in the name of poverty and economic development, so that when Lok Sabha elections happen in 2014, they vote for the United Progressive Alliance (UPA) and the Congress. All this to ensure that Rahul baba takes over the reins of the world’s biggest democracy.
This means that the fiscal deficit of the government of India will continue to go up. The government will continue to borrow more and more. And interest rates are likely to remain high. Economic sense be dammed.
And in the next few months you might hear of an A K Antony or a Digvijay Singh or a Jairam Ramesh or a Kamal Nath or a Sushil Kumar Shinde or even the all guns blazing all the time, Kapil Sibbal, taking over as the finance minister of this country. The name doesn’t really matter because none of them have voices or ideas of their own. Even if they did they have long been put on the backburner because all that matters now is that “Rahul Gandhi has to be made the PM”.
Manmohan Singh is the only person who can stop a seasoned Congress politician from taking over as the finance minister of India and limiting the serious damage to the Indian economy that would come with it. The good “doctor” has got more and “much” more, than he would have ever bargained for. He can resist moves to appoint a politician as a finance minister by threatening to resign. That is one thing that the Congress won’t be able to handle. It would set the cat among the pigeons.
It’s time for Singh to payback to the country for all that the country has given to him. But the question is will he be as docile as he has been and allow a mother’s love for her son to takeover? Will Rahul Gandhi say “Mere Paas Ma Hai”? Or will Manmohan Singh by resisting a full time politician taking over the ministry of finance, give us, you, me and everybody else, an opportunity to say “Mogambo Khush Hua”.
(The article originally appeared on on July 2,2012.
(Vivek Kaul is a writer and can be reached at [email protected])

Is Manmohan following Lalu’s no-growth Bihar strategy?

Vivek Kaul

In a piece titled Farewell to Incredible India, which deals with the current economic problems in India, The Economist writes: “The Congress-led coalition government, with Brezhnev-grade complacency, insists things will bounce back.”
Leonid Brezhnev was the General Secretary of the Central Committee (CC) of the Communist Party of the Soviet Union (CPSU). He ruled the country from 1964 till his death in 1982.
I guess The Economist looked too far. They could have found someone right here in India to describe the complacency of the Manmohan Singh-led United Progressive Alliance(UPA) government. The man I am talking about is none other than Lalu Prasad, the former railway minister and former chief minister of Bihar.
Yes, you read it right. Before I get into explaining why I just said what I did, let us go back a little into history.
The lucky Lalu Yadav
Lalu Yadav re-entered politics in 1973, just by sheer chance. He didn’t have to struggle for it. The opportunity just fell into his lap.
As Sankarshan Thakur writes in Subaltern Sahib: Bihar and the Making of Lalu Yadav, “On the eve of elections of Patna University Students Union (PUSU) in 1973 non-Congress student bodies had again come together, if only for their limited purpose of ousting the Congress. But they needed a credible and energetic backward candidate to head the union. Lalu Yadav was sent for.”
The only trouble was that Lalu Yadav was no longer a student, but was an employee of the Patna Veterinary College. He had quit student politics in 1970, after having lost the election for the presidentship of PUSU to a Congress candidate. Before this, Lalu had been the general secretary of PUSU for three consecutive years.
But Lalu got around the problem. “Assured that the caste arithmetic was loaded against the Congress union, Lalu readily agreed to contest. He quietly buried his job at the Patna Veterinary College and got a backdated admission into the Patna Law College. He stood for elections and won. The non-Congress coalition in fact swept the polls,” writes Thakur.
And from there on Lalu Yadav went from strength to strength. In 1974, the students’ agitation against then prime minister Indira Gandhi spread throughout the country. As Thakur points out, “An agitation committee was formed, the Bihar Chatra Sangharsh Samiti to coordinate the activities of various unions and Lalu Yadav as president of PUSU was chosen its chief.”
These events catapulted Lalu Yadav into the big league. In the 1977 elections, Lalu was elected to the Lok Sabha as a Janata Party candidate at a young age of 29.
Chief Minister of Bihar
VS Naipaul once described Bihar as “the place where civilisation ends”. Lalu Prasad first became the chief minister of Bihar in 1990. Between him and his wife Rabri Devi they largely ruled the state till 2005, and almost brought civilisation to an end.
When India was going from strength to strength with economic growth rates that it had never seen before, the economy of Bihar was shrinking in size. As Ruchir Sharma writes in Breakout Nations – In Pursuit of the Next Economic Miracles , “Bihar was the only Indian state that not only sat out India’s first growth spurt but also saw its economy shrink (by 9 percent) between 1980 and 2003.”
Lalu and his wife Rabri ruled for the major portion of the period between 1980 and 2003. Economic development was nowhere in the agenda of Lalu and on several occasions when questioned about the lack of economic development in the state, he replied that economic development does not get votes. And he was proved right.
In fact such was Lalu’s lack of belief in development that even money allocated to the state government by the Central government remained unspent. As Santhosh Mathew and Mick Moore write in a research paper titled State Incapacity by Design: Understanding the Bihar Story, “Despite the poverty of the state, the governments led by Lalu Prasad signally failed to spend the money actually available to them: ‘…Bihar has the country’s lowest utilisation rate for centrally funded programs, and it is estimated that the state forfeited one-fifth of central plan assistance during 1997–2000.’”
Between 1997 and 2005, the Ministry of Rural Development allocated Rs 9,600 crore. Of this, nearly Rs 2,200 crore was not drawn. And of the money received only 64 percent was spent. Similarly, money allocated from other programmes was also not spent.
How did he survive?
Lalu survived by building a potent combination of MY (Muslim + Yadav) voters. The Yadavs are the single largest caste in Bihar. Such was his faith in the MY voters that Lalu did not even promise development, like most politicians tend to do. As Mathew and Moore write: “He finessed this problem…by departing from the normal practices of Indian electoral politics and not vigorously promising ‘development’. For example, if during his many trips to villages he was asked to provide better roads, he would tend to question whether roads were really of much benefit to ordinary villagers, and suggest that the real beneficiaries would be contractors and the wealthy, powerful people who had cars. He typically required a large escort of senior public officials on these visits, and would require them to line up dutifully and humbly on display while he himself was doing his best to behave like a villager. He might gesture at this line-up and ask ‘Do you really want a road so that people like this can speed through your village in their big cars?’”
So what was Lalu Yadav trying to do here? “Lalu Prasad Yadav was not trying to fool most of his voters most of the time. He was offering then tangible benefits: respect (izzat – a Hindi term that he employed frequently) and the end of local socio-political tyrannies
Where does Manmohan Singh fit in here?
Some time after Lalu Yadav became the chief minister of Bihar, India had a financial crisis. PV Narasimha Rao was looking for a technocrat for the Finance Minister’s position. He first approached Dr Indraprasad Gordhanbhai Patel, who was the Governor of the Reserve Bank of India(RBI) from 1977 to 1982. Patel refused and suggested the name of his successor at the RBI, Manmohan Singh, who had been the Governor of the RBI from 1982 to 1985. Singh had just taken over as the Chairman of the University Grants Commission (UGC) in March 1991. He was pulled out of there and made the Finance Minister of India. And thus started Singh’s second career. Like Lalu, Singh’s career got a second life.
And he, like Lalu, before him went from strength to strength and finally became the Prime Minister of India. A few days ago, Mamata Banerjee had even proposed his name for President. He would make for an excellent President given that the Indian President doesn’t really do anything, except what the government (in this case Sonia) wants him to.
If Pratibha Patil, who no one had ever heard of, could become the President of India, so can the much more loyal Manmohan. He fits all the parameters Sonia Gandhi is looking for in a President. But the trouble, of course, is she wants the same parameters in her Prime Minister as well. And he can’t be at two places at the same time. So Singh’s name as a presidential candidate has been rejected by the Congress party. It would have been a rather glorious end to an “illustrious” career.
The irony
However what is ironic is that a man, who once spearheaded the economic reform process in India, has now totally withdrawn himself from the same. In fact, at times one wonders whether it is even a priority with him and his government? Now that Pranab Mukherjee is leaving the finance ministry for Rashtrapati Bhawan, we will find out what Manmohan has in store.
There has hardly been any response from the UPA government to the recent low GDP growth rate number of 5.3 percent for the period between January and March 2012. Pranab Mukherjee has blamed the slow growth on the problems in Greece in particular and Europe in general. This is a typical Lalu response where the old adage “if you can’t convince them, confuse them” is at work. The problems of India are not because of problems in Greece or Europe, but because of the economic policies of the Manmohan Singh-led UPA government. (It’s not Greece: Cong policies responsible for rupee crash).
As The Economist puts it, “India’s slowdown is due mainly to problems at home and has been looming for a while. The state is borrowing too much, crowding out private firms and keeping inflation high. It has not passed a big reform for years. Graft, confusion and red tape have infuriated domestic businesses and harmed investment. A high-handed view of foreign investors has made a big current-account deficit harder to finance, and the rupee has plunged.”
In fact, there is a state of total denial within the UPA that there are serious economic problems facing India. The spin-doctors of UPA are even working overtime to sell the country that famous song from 3 Idiots “All is Well“. On a recent TV show, Montek Singh Ahulwalia, the deputy chairman of the Planning Commission, kept insisting that a 7 percent economic growth rate was a given. As it turned out the GDP growth rate fell to 5.3 percent.
Economic development doesn’t matter
The way the UPA government has been working over the last few years, it is very easy to conclude that economic development of this country isn’t really top of the agenda. Like was the case with Lalu Yadav.
The solutions to the problems are simple and largely agreed upon by everyone who has an informed opinion on the issue. As The Economist puts it, “The remedies, agreed on not just by foreign investors and liberal newspapers but also by Manmohan Singh’s government are blindingly obvious. A combined budget deficit of nearly a tenth of GDP must be tamed, particularly by cutting wasteful fuel subsidies. India must reform tax and foreign-investment rules. It must speed up big industrial and infrastructure projects. It must confront corruption. None of these tasks is insurmountable. Most are supposedly government policy.”
But then there is hardly any policy coming out of the government. So what is top of the agenda? To stay in power and enjoy its fruits? And by the time the 2014 elections come around, set the stage ready for Rahul Gandhi to take over? But the question that crops up here is this: like Lalu, does the Manmohan Singh-led UPA have a MY formula? And even if it does have a formula, will it work?
Lalu found out in 2005 that formulas become useless over a period of time. “We could not make it because of overconfidence and division in Muslim-Yadav (votes),” Lalu told India Today magazine after his defeat to Nitish Kumar in the 2005 election.
Overconfidence is the word the Manmohan Singh led UPA needs to watch out for.
(The article originally appeared on on June 16,2012.
(Vivek Kaul is a writer and can be reached at [email protected])

Petrol bomb is a dud: If only Dr Singh had listened…

Vivek Kaul
The Congress led United Progressive Alliance (UPA) government finally acted hoping to halt the fall of the falling rupee, by raising petrol prices by Rs 6.28 per litre, before taxes. Let us try and understand what will be the implications of this move.
Some relief for oil companies:
The oil companies like Indian Oil Company (IOC), Bharat Petroleum (BP) and Hindustan Petroleum(HP) had been selling oil at a loss of Rs 6.28 per litre since the last hike in December. That loss will now be eliminated with this increase in prices. The oil companies have lost $830million on selling petrol at below its cost since the prices were last hiked in December last year. If the increase in price stays and is not withdrawn the oil companies will not face any further losses on selling petrol, unless the price of oil goes up and the increase is not passed on to the consumers.
No impact on fiscal deficit:
The government compensates the oil marketing companies like Indian Oil, BP and HP, for selling diesel, LPG gas and kerosene at a loss. Petrol losses are not reimbursed by the government. Hence the move will have no impact on the projected fiscal deficit of Rs 5,13,590 crore. The losses on selling diesel, LPG and kerosene at below cost are much higher at Rs 512 crore a day. For this the companies are compensated for by the government. The companies had lost Rs 138,541 crore during the last financial year i.e.2011-2012 (Between April 1,2011 and March 31,2012).
Of this the government had borne around Rs 83,000 crore and the remaining Rs 55,000 crore came from government owned oil and gas producing companies like ONGC, Oil India Ltd and GAIL.
When the finance minister Pranab Mukherjee presented the budget in March, the oil subsidies for the year 2011-2012 had been expected to be at Rs Rs 68,481 crore. The final bill has turned out to be at around Rs 83,000 crore, this after the oil producing companies owned by the government, were forced to pick up around 40% of the bill.
For the current year the expected losses of the oil companies on selling kerosene, LPG and diesel at below cost is expected to be around Rs 190,000 crore. In the budget, the oil subsidy for the year 2012-2013, has been assumed to be at Rs 43,580 crore. If the government picks up 60% of this bill like it did in the last financial year, it works out to around Rs 114,000 crore. This is around Rs 70,000 crore more than the oil subsidy that the government has budgeted for.
Interest rates will continue to remain high
The difference between what the government earns and what it spends is referred to as the fiscal deficit. The government finances this difference by borrowing. As stated above, the fiscal deficit for the year 2012-2013 is expected to be at Rs 5,13,590 crore. This, when we assume Rs 43,580crore as oil subsidy. But the way things currently are, the government might end up paying Rs 70,000 crore more for oil subsidy, unless the oil prices crash. The amount of Rs 70,000 crore will have to be borrowed from financial markets. This extra borrowing will “crowd-out” the private borrowers in the market even further leading to higher interest rates. At the retail level, this means two things. One EMIs will keep going up. And two, with interest rates being high, investors will prefer to invest in fixed income instruments like fixed deposits, corporate bonds and fixed maturity plans from mutual funds. This in other terms will mean that the money will stay away from the stock market.
The trade deficit
One dollar is worth around Rs 56 now, the reason being that India imports more than it exports. When the difference between exports and imports is negative, the situation is referred to as a trade deficit. This trade deficit is largely on two accounts. We import 80% of our oil requirements and at the same time we have a great fascination for gold. During the last financial year India imported $150billion worth of oil and $60billion worth of gold. This meant that India ran up a huge trade deficit of $185billion during the course of the last financial year. The trend has continued in this financial year. The imports for the month of April 2012 were at $37.9billion, nearly 54.7% more than the exports which stood at $24.5billion.
These imports have to be paid for in dollars. When payments are to be made importers buy dollars and sell rupees. When this happens, the foreign exchange market has an excess supply of rupees and a short fall of dollars. This leads to the rupee losing value against the dollar. In case our exports matched our imports, then exporters who brought in dollars would be converting them into rupees, and thus there would be a balance in the market. Importers would be buying dollars and selling rupees. And exporters would be selling dollars and buying rupees. But that isn’t happening in a balanced way.
What has also not helped is the fact that foreign institutional investors(FIIs) have been selling out of the stock as well as the bond market. Since April 1, the FIIs have sold around $758 million worth of stocks and bonds. When the FIIs repatriate this money they sell rupees and buy dollars, this puts further pressure on the rupee. The impact from this is marginal because $758 million over a period of more than 50 days is not a huge amount.
When it comes to foreign investors, a falling rupee feeds on itself. Lets us try and understand this through an example. When the dollar was worth Rs 50, a foreign investor wanting to repatriate Rs 50 crore would have got $10million. If he wants to repatriate the same amount now he would get only $8.33million. So the fear of the rupee falling further gets foreign investors to sell out, which in turn pushes the rupee down even further.
What could have helped is dollars coming into India through the foreign direct investment route, where multinational companies bring money into India to establish businesses here. But for that the government will have to open up sectors like retail, print media and insurance (from the current 26% cap) more. That hasn’t happened and the way the government is operating currently, it is unlikely to happen.
The Reserve Bank of India does intervene at times to stem the fall of the rupee. This it does by selling dollars and buying rupee to ensure that there is adequate supply of dollars in the market and the excess supply of rupee is sucked out. But the RBI does not have an unlimited supply of dollars and hence cannot keep intervening indefinitely.
What about the trade deficit?
The trade deficit might come down a little if the increase in price of petrol leads to people consuming less petrol. This in turn would mean lesser import of oil and hence a slightly lower trade deficit. A lower trade deficit would mean lesser pressure on the rupee. But the fact of the matter is that even if the consumption of petrol comes down, its overall impact on the import of oil would not be that much. For the trade deficit to come down the government has to increase prices of kerosene, LPG and diesel. That would have a major impact on the oil imports and thus would push down the demand for the dollar. It would also mean a lower fiscal deficit, which in turn will lead to lower interest rates. Lower interest rates might lead to businesses looking to expand and people borrowing and spending that money, leading to a better economic growth rate. It might also motivate Multi National Companies (MNCs) to increase their investments in India, bringing in more dollars and thus lightening the pressure on the rupee. In the short run an increase in the prices of diesel particularly will lead higher inflation because transportation costs will increase.
Freeing the price
The government had last increased the price of petrol in December before this. For nearly five months it did not do anything and now has gone ahead and increased the price by Rs 6.28 per litre, which after taxes works out to around Rs 7.54 per litre. It need not be said that such a stupendous increase at one go makes it very difficult for the consumers to handle. If a normal market (like it is with vegetables where prices change everyday) was allowed to operate, the price of oil would have risen gradually from December to May and the consumers would have adjusted their consumption of petrol at the same pace. By raising the price suddenly the last person on the mind of the government is the aam aadmi, a term which the UPAwallahs do not stop using time and again.
The other option of course is to continue subsidize diesel, LPG and kerosene. As a known stock bull said on television show a couple of months back, even Saudi Arabia doesn’t sell kerosene at the price at which we do. And that is why a lot of kerosene gets smuggled into neighbouring countries and is used to adulterate diesel and petrol.
If the subsidies continue it is likely that the consumption of the various oil products will not fall. And that in turn would mean oil imports would remain at their current level, meaning that the trade deficit will continue to remain high. It will also mean a higher fiscal deficit and hence high interest rates. The economic growth will remain stagnant, keeping foreign businesses looking to invest in India away.
Manmohan Singh as the finance minister started India’s reform process. On July 24, 1991, he backed his “then” revolutionary proposals of opening up India’s economy by paraphrasing Victor Hugo: “No power on Earth can stop an idea whose time has come.
Good economics is also good politics. That is an idea whose time has come. Now only if Mr Singh were listening. Or should we say be allowed to listen..
(The article originally appeared at on May 24,2012.
(Vivek Kaul is a writer and can be reached at [email protected])