Why FM is tickling the markets: it’s his only chance

Vivek Kaul
So P Chidambaram’s at it again, trying to bully the Reserve Bank of India (RBI) to cut interest rates. “In our view, the government and monetary authority must point in the same direction and walk in the same direction. As we take steps on the fiscal side, RBI  should take steps on the monetary side,” the Union Finance Minister told the Economic Times.
Economic theory suggests that when interest rates are low, consumers and businesses tend to borrow more. When consumers borrow and spend money businesses benefit. When businesses benefit they tend to expand their operations by borrowing money. And this benefits the entire economy and it grows at a much faster rate.
But then economics is no science and so theory and practice do not always go together. If they did the world we live would be a much better place. As John Kenneth Galbraith points out in The Economics of Innocent Fraud: “If in recession the interest rate is lowered by the central bank, the member banks are counted on to pass the lower rate along to their customers, thus encouraging them to borrow. Producers will thus produce goods and services, buy the plant and machinery they can afford now and from which they can make money, and consumption paid for by cheaper loans will expand..The difficulty is that this highly plausible, wholly agreeable process exists only in well-established economic belief and not in real life… Business firms borrow when they can make money and not because interest rates are low.
While India is not in a recession exactly, economic growth has slowed down considerably this year. And this has led to businesses not borrowing. As a story in theBusiness Standard points outAt a recent meeting with the Reserve Bank of India (RBI), 10 of the country’s top bankers said companies were still keeping expansion plans on hold, as business growth continued to be slow in an uncertain economic environment. Nine of 10 bankers who attended the meeting admitted their sanctioned loan pipeline was shrinking fast due to tepid demand.”
This is borne out even by RBI data. The incremental credit deposit ratio for scheduled commercial banks between March 30, 2012 and September7, 2012, stood at 14.4%. This meant that for every Rs 100 that bank raised as deposits during this period they only lent out Rs 14.4 as loans. Hence, businesses are not borrowing to expand neither are consumers borrowing to buy flats, cars, motorcycles and consumer durables.
One reason for this lack of borrowing is high interest rates. But just cutting interest rates won’t ensure that the borrowing will pick up. As Galbraith aptly puts it business firms borrow when they can make money. But that doesn’t seem to be the case right now. Take the case of the infrastructure sector which was one of the most hyped sectors in 2007. As Swaminathan Aiyar points out in the Times of India “The government claims India is a global leader in public-private partnerships in infrastructure. The private sector financed 36% of infrastructure in the 11th Plan (2007-12 ),and is expected to finance fully 50% in the 12th Plan. This is now a pie in the sky. Corporations that charged into this sector have suffered heavy losses. They expected a gold mine, but found only quicksand. They have been hit by financially disastrous time and cost overruns.”
Clearly these firms are not in a state to borrow. Several other business sectors are in a mess. Airlines are not going anywhere. The big Indian companies that got into organised retail have lost a lot of money. The telecom sector is bleeding. So just because interest rates are low it doesn’t automatically follow that businesses will borrow money.
“If you take a poll of the top 100 companies in the country, you will find them saying nothing has changed despite the reforms. Confidence will return only if things start happening on the ground,” a Chief Executive of a leading foreign bank in India was quoted as saying in the Business Standard.
Confidence on the ground can only come back once businesses start feeling that this business is committed to genuine economic reform, there is lesser corruption, more transparency, so and so forth. These things cannot happen overnight.
Consumers are also feeling the heat with salary increments having been low this year and the consumer price inflation remaining higher than 10%. Borrowing doesn’t exactly make sense in an environment like this, when just trying to make ends meet has become more and more difficult.
Given these reasons why has Chidambaram been after the RBI to try and get it to cut interest rates? The thing is that the finance minister is not so concerned about consumers and businesses, but what he is concerned about is the stock market.
With interest rates on fixed income investments like bank fixed deposits, corporate fixed deposits, debentures, etc, being close to 10%, there is very little incentive for the Indian investor to channelise his money into the stock market.
Since the beginning of the year the domestic institutional investors have taken out Rs 38,000.5 crore from the stock market. If the RBI does cut interest rates as Chidambaram wants it to, then investing in fixed income investments will become less lucrative and this might just get Indian investors interested in the stock market.
The lucky thing is that even though Indian investors have been selling out of the stock market, the foreign investors have been buying. Since the beginning of the year the foreign institutional investors have bought stocks worth Rs 72,065.2 crore. This has ensured that stock market has not fallen despite the Indian investors selling out.
If the RBI does cut interest rates and that leads Indian investors getting back into the stock market there might be several other positive things that can happen. If Indian investors turn net buyers and the stock market goes up, more foreign money will come in. This will push up the stock market even further up.
The other thing that will happen with the foreign money coming in is that the rupee will appreciate against the dollar. When foreigners bring dollars into India they have to sell those dollars and buy rupees. This increases the demand for the rupee and it gains value against the dollar.
An appreciating rupee will also spruce up returns for foreign investors. Let us say a foreign investor gets $1million to invest in Indian stocks when one dollar is worth Rs 55. He converts the dollars into rupees and invests Rs 5.5 crore ($1million x Rs 55) into the Indian market. He invests for a period of one year and makes a return of 10%. His investment is now worth Rs 6.05 crore. One dollar is now worth Rs 50. When he converts the investors ends up with $1.21million or a return of 21% in dollar terms. An appreciating rupee thus spruces up his returns. This prospect of making more money in dollar terms is likely to get more and more foreign investors into India, which will lead to the rupee appreciating further. So the cycle will feeds on itself.
In the month of September 2012, foreign investors have bought stocks worth Rs 20,807.8 crore. Correspondingly, the rupee has gained in value against the dollar. On September 1, 2012, one dollar was worth Rs 55.42. Currently it quotes at around Rs 52.8. This means that the rupee has appreciated against the dollar by 4.72%.
An immediate impact of the appreciating rupee is that it brings down the oil bill. Oil is sold internationally in dollars. Let us say the Indian basket of crude oil is selling at $108 per barrel (one barrel equals 159 litres). If one dollar is worth Rs 55.4 then India has to pay Rs 5983.2 for a barrel of oil. If one dollar is worth Rs 52.8, then India has to pay Rs 5702.4 per barrel. So as the rupee appreciates the oil bill comes down.
The oil marketing companies (OMCs) sell diesel, kerosene and cooking gas at a price which is lower than the cost price and thus incur huge losses. The government compensates the OMCs for these losses to prevent them from going bankrupt. This money is provided out of the annual budget of the government under the oil subsidy account. But as the rupee appreciates and the losses come down, the oil subsidy also comes down. This means that the expenditure of the government comes down as well, thus lowering the fiscal deficit. Fiscal deficit is the difference between what the government earns and what it spends.
This is how a rising stock market may lead to a lower fiscal deficit. But that’s just one part of the argument. A rising stock market will also allow the government to sell some of the shares that it owns in public sector enterprises to the general public.  The targeted disinvestment for the year is Rs 30,000 crore. While that can be easily met the government has to exceed this target given that the government is unlikely to meet the fiscal deficit target of 5.1% of GDP as its subsidy bill keeps going up. The Kelkar Committee recently estimated that the fiscal deficit level can even reach 6.1% of the GDP.
For the government to exceed this target the stock markets need to continue to do well. It is a well known fact people buy stocks only when the stock markets have rallied for a while. As Akash Prakash writes in the Business Standard “The finance minister will have to do a lot more than raise Rs 40,000 crore from spectrum and Rs 30,000 crore from divestment. We will need to see movement on selling the SUUTI (Specified Undertaking of UTI) stakes, strategic assets like Hindustan Zinc, land with companies like VSNL, coal block auctions, etc. To enable the government to raise resources of the required magnitude, the capital markets have to remain healthy, both to absorb equity issuance and to enable companies to raise enough debt resources to participate in these asset auctions.”
Given this the stock market has a very important role to play in the scheme of things. Controlling the burgeoning fiscal deficit remains the top priority for the government. But it is easier said than done. “Given the difficulty in getting the coalition to accept the diesel hike and LPG-targeting measures, there are limitations as to how much the current subsidies and revenue expenditure can be compressed. We can see some further measures on fuel price hikes and maybe some movement on a nutrient-based subsidy on urea; but with elections only 15-18 months away, there are serious political costs to any subsidy cuts,” points out Prakash.
Over and above this with elections around the corner the government is also likely to announce more freebies. Money to finance this also needs to come from somewhere. As Prakash writes “There is also intense pressure on the government to roll out more freebies through the right to food, free medicines and so on. If expenditure compression is intensely difficult in the run-up to an election cycle, higher revenue is the only way to control the fiscal deficit.”
For the government to raise a higher revenue it is very important that more and more money keeps coming into the stock market.  For this to happen interest rates need to fall. And that is something that D Subbarao the governor of RBI controls and not Chidambaram.
The article originally appeared on www.firstpost.com on October 1, 2012. http://www.firstpost.com/economy/why-fm-is-tickling-the-markets-its-his-only-chance-474908.html
Vivek Kaul is a writer. He can be reached at [email protected]

Mute Manmohan watches as “Coalgate” engulfs Congress from all sides

Vivek Kaul

The Great Fire of Rome started on July 19, 64AD, and burnt for six days. There are several varying accounts of it in history. One of the accounts suggests that Nero the king of Rome watched the fire destroy the city, from one of Rome’s many hills, while singing and playing the lyre, a stringed musical instrument.
India these days has its own Nero, Prime Minister Manmohan Singh. As the Congress led United Progressive Alliance (UPA) government gets engulfed in the coal-gate scam, Manmohan Singh has largely been a silent spectator watching from the stands and seeing his government being engulfed by the coal fire.
And this is not the first time. Manmohan Singh has largely been a bystander at the helm of what is turning out to be probably the most corrupt government that India has ever seen. As TN Ninan, one of the most respected business editors in the country, recently wrote in the Business Standard “Corruption silenced telecom, it froze orders for defence equipment, it flared up over gas, and now it might black out the mining and power sectors. Manmohan Singh’s fatal flaw — his willingness to tolerate corruption all around him while keeping his own hands clean — has led us into a cul de sac , with the country able to neither tolerate rampant corruption nor root it out.”
Manmohan Singh like Nero before him has been watching as institutionalised corruption burns India. The biggest of these scams has been termed “coal-gate” by the Indian media. The Comptroller and the Auditor General (CAG) of India put the losses on account of this scam at a whopping Rs 1,86,000 crore.
The background
The Planning Commission of India had estimated that the raw demand for coal in the year 2011-2012 will be at around 696 million tonnes. Of this 554 million tonnes was expected to be produced in the country by Coal India, Singareni Collieries and a host of other small companies. The remaining was expected to be met through imports.
Production of coal in 2011-2012 in million tonnes
Company Target Achievement
Coal India 447 436
Singareni Collieries 51 52
Others 56 52
Total 554 540
Source: Provisional Coal Statistics 2011-2012, Coal Controller Organisation, Ministry of Coal
As can be seen from the table above the actual production of coal at 540 million tonnes was a little less than the target. This was an increase of 1.3% over the previous year. Also since the actual demand for coal was significantly higher than the actual production, India had to import a lot of coal during the course of the year. Estimates made by the Coal Controller Organisation suggest that the country imported around 99million tonnes of coal in 2011-2012. The Planning Commission had expected around 137million tonnes to be imported in the year. So the Coal Controller’s estimate for coal imports is significantly lower than that. Also the increasing iport of coal is not a one off trend.
Coal Imports In Million tonnes In Rupees crore
1999-2000 19.7 3548
2000-2001 20.9 4053
2001-2002 20.5 4536
2002-2003 23.3 5028
2003-2004 21.7 5009
2004-2005 29 10266
2005-2006 38.6 14910
2006-2007 43.1 16689
2007-2008 49.8 20738
2008-2009 59 41341
2009-2010 73.3 39180
2010-2011 68.9 41550
2011-2012 98.9 45723*
*from April-Oct 2011
Source: Provisional Coal Statistics 2011-2012, Coal Control Organisation, Ministry of Coal
As the above table suggests India has been importing more and more coal since the turn of the century. A major reason for this has been the inability of the government owned Coal India, which is the largest producer of coal in the country, to increase production at a faster rate. Between 2004-2005 and 2011-2012 the company managed to increase its production by just 65million tonnes to 436million tonnes, an absolute increase of around 17.5%. The import of coal went up by a massive 241% to around 99 million tonnes, during the same period.
In fact, to its credit, the government of India realised the inability of the country to produce enough coal in the early 1990s. The Coal Mines (Nationalisation) Act 1973 was amended with effect from June 9, 1973, to allow the government to give away coal blocks for free for captive use of coal. The Economic Survey for 1994-95 points out the reason behind the decision: “In order 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 total coal production in the country in 1993-94 stood at 246.04million tonnes having grown by 3.3% from 1992-93. The government understood that the production was not going to increase at a faster rate anytime soon because the newer projects were having time delays and cost overruns. As the 1994-95 economic survey put it “As on December 31,1994, out of 71 projects under implementation in the coal sector, 22 projects are bedeviled by time and cost over-runs. On an average, the time overrun per project is about 38months.There is urgent need to improve project implementation in the coal sector”.
The last few years
The idea of giving away coal blocks for free was to encourage investment in coal by companies which were dependant on coal as an input. This included companies producing power, iron and steel and cement. Since the government couldn’t produce enough coal to meet their needs, the companies would be allowed to produce coal to meet their own needs by giving them coal blocks for free.
While the policy to give away coal blocks has been in place since 1993, it didn’t really take off till the mid 2000s. Between 1993 and 2003, the government gave away 39 coal blocks free to private companies as well as government owned companies. 20 out of the 39 blocks were allocated in 2003.
In the year 2004, the government gave away four blocks. But these were big blocks with the total geological reserves of coal amounting to 2143.5million tonnes. After this the floodgates really opened up and between 2005 and 2009, 149 coal blocks were given away for free.
Year Number of mines Geological Reserves (in million tonns)
2004 4 2143.5
2005 21 3174.3
2006 47 14424.8
2007 45 10585.8
2008 21 3423.5
2009 15 6549.2
153 40301.1
Source: Provisional Coal Statistics 2011-2012, Coal Control Organisation, Ministry of Coal
The above table makes for a very interesting reading. Between 2004 and 2009, the government of India gave away 153 coal blocks with geological reserves amounting to a little more than 40billion tonnes for free. Estimates made by the Geological Survey of India suggest that India has 293.5billon tonnes of coal reserves. This implies that the government gave away 13.7% of India’s coal reserves for free in a period of just five years.
The Congress led United Progressive Alliance was in power for most of this period with Manmohan Singh having been sworn in as the Prime Minister in May 2004. Interestingly, things reached their peak between 2006 and 2009, when the Prime Minister was also the Minister for Coal. During this period 128 coal blocks with geological reserves amounting to around 35billion tonnes were given away for free. But giving away the coal blocks for free did not solve any problem. As per the report prepared the Comptroller and Auditor General of India, as on March 31, 2011, eighty six of these blocks were supposed to produce around 73million tonnes of coal. Only 28 blocks have started production and their total production has been around 34.6million tonnes, as on March 31,2011.
The CAG and the losses
As is clearly explained above the Manmohan Singh led UPA government gave away around 14% of nation’s coal reserves away for free. Nevertheless, several senior leaders of the Congress party have told the nation that there have been no losses on account of the coal blocks being given away for free, primarily because very little coal was being produced from these blocks.
P Chidamabaram, the finance minister recently said “If coal is not mined, where is the loss? The loss will only occur if coal is sold at a certain price or undervalued.” Digvijaya Singh, a senior Congress leader targeted Vinod Rai, the Comptroller and Auditor General. Singh told The Indian Express that “the way the CAG is going, it is clear he(i.e. Vinod Rai) has political ambitions like TN Chaturvedi (a former CAG who later joined the BJP). He has been giving notional and fictional figures that have no relevance to facts. How has he computed these figures? He is talking through his hat.”
This is sheer nonsense to say the least and anyone who understands how CAG arrived at the loss number of Rs 1,86,000 crore wouldn’t say so.
The CAG reasonably assumed that the coal mined from the coal blocks given away for free could have been sold at a certain price in the market. Since the government gave away the blocks for free it lost that opportunity. This lost opportunity is what CAG has tried to quantify in terms of a number.
While calculating the loss the CAG did not take into account the coal blocks given to the government companies. Only blocks given to private companies were taken into account. Further only open cast mines were included in calculating the loss. Underground mines were not taken into account.
Also, the total coal available in a block is referred to as geological reserve. Due to several reasons including those of safely, the entire geological reserve cannot be mined. The portion that can be mined is referred to as extractable reserve. The extractable reserves for the blocks (after ignoring the blocks owned by government companies and underground mines) came to 6282.5million tonnes. This is equivalent to more than 14 times the annual production of Coal India Ltd.
The government could have sold this coal at a certain price. Also mining this coal would have involved a certain cost. The CAG first calculated the average sale price for all grades of coal sold by Coal India in 2010-2011. This came to Rs 1028.42 per tonne. Then it calculated the average cost of production for all grades of coal for the same period. This came at Rs 583.01. Other than this there was a financing cost of Rs 150 per tonne which was taken into account, as advised by the Ministry of Coal. Hence a benefit of Rs 295.41 per tonne of coal was arrived at (Rs 1028.42 – Rs 583.01 – Rs 150). The losses were thus estimated to be at Rs 1,85,591.33 crore (Rs 295.41 x 6282.5million tonnes) or around Rs 1.86lakh crore, by the CAG.
Chidambaram and Singh were basically trying to confuse us by mixing two issues here. One is the fact that the government gave away the blocks for free. And another is the inability of the companies who got these blocks to start mining coal. Just because these companies haven’t been able to mine coal doesn’t mean that the government of India did not face a loss by giving away the mines for free.
What are the problems with the CAG’s loss calculation?
The problem with CAG’s loss calculation is that it doesn’t take into account the time value of money. The government wouldn’t have been able to sell all the coal all at once. It would have only been able to do so over a period of time. The CAG doesn’t take this into account. Ideally, it should have assumed that the government earns this revenue over a certain number of years and then discounted those revenues to arrive at a present value for the losses.
This goes against the government. But there are several assumptions that favour the government. The coal blocks given away free to government companies aren’t taken into account. The transaction of handing over a coal block was between two arms of the government. The ministry of coal and a government owned public sector company (like NTPC). In the past when such transactions have happened the profit earned from such transactions have been recognised. A very good example is when the government forces the Life Insurance Corporation (LIC) of India to buy shares of public sector companies to meet its disinvestment target. One arm of the government (LIC) is buying shares of another arm of the government (for eg: ONGC). And the money received by the government is recognised as revenue in the annual financial statement. So when revenues for transactions between two arms of the government are recognised so should losses. Around half of the coal blocks were given to government owned companies.
Also, the price at which Coal India sells coal to companies it has an agreement with, is the lowest in the market. It is not linked to the international price of coal. The price of coal that is auctioned by Coal India is much higher than its normal price. As the CAG points out in its report on the ultra mega power project, the average price of coal sold by Coal India through e-auction in 2010-2011 was Rs 1782 per tonne. The average price of imported coal in November 2009 was Rs 2874 per tonne (calculated by the CAG based on NTPC data). The CAG did not take into account these prices. It took into account the lowest price of Rs 1028.42 per tonne, which was the average Coal India price.
Let’s run some numbers to try and understand what kind of losses CAG could have come up with if it wanted to. At a price of Rs 1,782, the profit per tonne would have been Rs 1050 (Rs 1782-Rs 583.01- Rs 150). If this number had been used the losses would have amounted to Rs6.6lakh crore.
At a price of Rs 2874 per tonne, the profit per tonne would have been Rs 2142(Rs 2874 – Rs 583.01 – Rs 150). If this number had been used the losses would have been Rs 13.5lakh crore. This number is a little more than the Rs 13.18 lakh crore expenditure that the government of India incurred in 2011-2012.
So there are weaknesses in the CAG’s calculation of the losses on account of coal blocks being given away free. But these weaknesses work in both the directions. The bottomline though is that the country has suffered a big loss, though the quantum of the loss is debatable.
To conclude
News reports suggest that several Congress politicians have benefitted from the coal blocks being given away for free. The companies which got coal blocks haven’t been able to produce coal. The government hasn’t been able to invoke the bank guarantees of the companies for the delay in producing coal. This is because of a flaw in the allocation letters. As the Business Standard reports “There is a technical flaw in the format of the allocation letters. As per the letters, the government can invoke the bank guarantee clause only in cases of less production, and not nil production.” Some companies have started selling power in the open market. This power is being produced from the coal they mined out of the coal blocks they got free from the government.
The situation has all the facets of turning into a big mess like the previous scams under the Congress led UPA regime. And like the previous scams, it is likely to be swept under the carpet as well. Despite all this, the Prime Minister Manmohan Singh will continue to be a mute spectator to all this, keeping the chair warm till Rahul Gandhi is ready to take over. I would be glad to be proven otherwise.
(The article originally appeared in The Seasonal Magazine on September 12,2012. http://www.seasonalmagazine.com/2012/09/mute-manmohan-watches-as-coalgate.html)
(Vivek Kaul is a writer and can be reached at [email protected])

Chimpanzee Ai knows what zero means, but does Chidambaram?

Vivek Kaul

Tetsuor Matsuzawa is the director of the Primate Research Institute at Kyoto University in Japan. Among other things, Matsuzawa has taught a chimpanzee named ‘Ai’ to recognize the number zero.
As Alex Bellos writes in Alex’s Adventures in Numberland, “Ai had mastered the cardinality of the digits from 1 to 9…Matsuzawa then introduced the concept of zero. Ai picked up the cardinality of the symbol easily. Whenever a square appeared on the screen with nothing in it, she would tap the digit.”
So human beings are not the only ones to understand the concept of zero and what it means these days. Even chimpanzees do.
But one individual who does not seem to understand the concept of zero is Finance Minister P Chidambaram. He said on Friday that the government of India did not incur any losses by giving away coal blocks for free, while the Comptroller and Auditor General (CAG) of India put the losses at Rs 1,86,000 crore.
“If coal is not mined, where is the loss? The loss will only occur if coal is sold at a certain price or undervalued,” said Chidambaram. So what he essentially meant was that the government incurred zero losses by giving away the coal blocks for free.
Let’s go into some detail to try and understand why Chidambaram does not understand – or pretends he doesn’t – the concept of zero, his education credentials of having studied at Harvard Business School (HBS) notwithstanding. But then, even George Bush studied at HBS.
Between 2004 and 2011, the government allocated 218 coal blocks to private sector and public sector companies (including ultra mega power projects). Of these, the major allocations were made between 2004 and 2009 with only two allocations being made in 2010 and 2011. Twenty-one allocations made during the period have since been cancelled.
“If coal is not mined, where is the loss? The loss will only occur if coal is sold at a certain price or undervalued,” said Chidambaram.
These coal blocks were given away for free. This was done in order to increase the total coal production in the country. The government-owned Coal India Ltd, which accounts for 80 percent of the total coal production in the country, hasn’t been able to produce enough to meet the growing energy needs of the country.
Between 1 April 2004 and 31 March 2012, the production of coal by Coal India has increased by just 65 million tonnes to 436 million tonnes. This means a growth of 2.3 percent per year on an average.
Hence, to increase the overall production, the government gave away coal blocks for free so that power plants, including captive plants, are not starved of coal.
The CAG put the losses on giving away these blocks at Rs 1,86,000 crore. They used a certain methodology to arrive at the figure. First and foremost the blocks given to the public sector companies were ignored while computing losses. Secondly, only open-cast mines were considered while calculating these losses, underground mines were ignored.
The coal that is available in a block is referred to as geological reserve. But due to various reasons, including those relating to safety, the entire coal cannot be mined. What can be mined is referred to as an extractable reserve. The extractable reserves of these blocks (after ignoring the public sector companies and the underground mines) came to around 6,282.5 million tonnes. The average benefit per tonne was estimated to be at Rs 295.41.
As Abhishek Tyagi and Rajesh Panjwani of CLSA write in a report dated 21 August 2012, “The average benefit per tonne has been arrived at by first, taking the difference between the average sale price (Rs 1,028.42) per tonne for all grades of CIL (Coal India Ltd) coal for 2010-11 and the average cost of production (Rs 583.01) per tonne for all grades of CIL coal for 2010-11. Secondly, as advised by the ministry of coal vide letter dated 15 March 2012, a further allowance of Rs 150 per tonne has been made for financing cost. Accordingly, the average benefit of Rs 295.41 per tonne has been applied to the extractable reserve of 6,282.5 million tonnes calculated as above.”
Using this very very conservative methodology the losses were calculated to be at Rs 1,85,591.33 crore (Rs 295.41 x 6,282.5million tonnes) by the CAG.
These coal blocks, after being handed over for free, have been producing very little coal. Guidelines issued by the coal ministry call for captive blocks to start production within 36 or 42 months. According to CAG, these blocks were producing around 34.64 million tonnes of coal as on 31 March 2011. This is minuscule in comparison to the extractable reserves of 6,282.5 million tonnes that these blocks are supposed to have.
The fact that there has been very little production of coal is what Chidamabaram was referring to when he said that if coal has not been mined, how can there be a loss?
But this is a specious argument to make and in no way takes away the fact that the government of India gave away coal blocks for free. The CAG needed a method to calculate the losses on account of this. And it went about it in the best possible way. It essentially assumed that if the government had sold the coal that could be extracted from these mines it would have made around Rs 1,86,000 crore. In fact, by not taking into account the blocks given to public sector companies and and the underground mines, CAG underestimated the quantum of the loss.
The CAG can be criticised for not taking the time value of money into account. But the moot point is that whatever the assumptions made to calculate the losses, the resulting number would have been very big. And that is something that the government cannot shy away from.
Chidambaram is basically trying to confuse us by mixing two issues here. One is the fact that the government gave away the blocks for free. And another is the inability of the companies who got these blocks to start mining coal. Just because these companies haven’t been able to mine coal doesn’t mean that the government of India did not face a loss by giving away the mines for free.
All this does not change the fact that between 2006 and 2009 the Congress-led UPA government gave away 146 coal blocks to private and public sector companies for free. These blocks had geological reserves amounting to a total of around 40 billion tonnes of coal.
The CAG, in its report, points out that India has geological reserves of coal amounting to around 286 billion tonnes. Of this nearly 40 billion tonnes, or nearly 14 per cent, was given away free.
If Chidambaram still feels this means zero losses, then I guess we will have to redefine the entire concept of zero and mathematics. And this, during a time when even chimpanzees have started understanding the concept of zero.
The article originally appeared on www.firstpost.com on August 25,2012. http://www.firstpost.com/business/chimpanzee-ai-knows-what-zero-means-but-does-chidambaram-430073.html
Vivek Kaul is a writer and can be reached at [email protected]

A policy rate Catch 22

Vivek Kaul

“That’s some catch, that Catch-22,” says Yossarian, the lead character in Joseph Heller’s all time classic Catch 22. Duvvuri Subbarao, the governor of the Reserve Bank of India (RBI) is facing a Catch 22 situation currently and some catch it is.
He needs to decide whether to encourage economic growth or to control inflation. Theoretically Subbarao can encourage economic growth by cutting the interest rates. But that is likely to fuel inflation as people and companies will borrow and spend more, leading to a rise in prices.
He can control inflation by keeping the interest rates high. But that kills economic growth as businesses don’t borrow money to expand and people go slow on taking loans for purchasing cars, motorcycles, homes and consumer durables. This hurts businesses and slows down economic growth.
The RBI seems to be trying to control inflation by keeping the interest rates high rather than try and encourage economic growth by cutting the interest rate. In the first quarter review of monetary policy 2012-2013 which was released on July 31, 2012, the RBI decided to keep the repo rate at 8%. Repo rate is the interest rate at which the RBI lends to banks.
By keeping the repo rate high the RBI hopes to control inflation. “The primary focus of monetary policy remains inflation control,” the RBI said in a statement. But economic theory and practice don’t always go together.
The inflation in India is primarily on account of rising oil prices and food prices. Oil is a commodity that is bought and sold internationally and the RBI cannot control its price. The price of oil has been falling since the beginning of this year but it has started to inch its way back up and as I write this, brent crude oil is quoting at $105per barrel. While the government has shielded the people from a rise in oil price by not raising the price of diesel, LPG and kerosene, petrol prices have been raised.
As far as food is concerned there seems to be a structural shift happening. “The stickiness in inflation…was largely on account of high primary food inflation…due to an unusual spike in vegetable prices and sustained high inflation in protein items,” the RBI said.
Protein items primarily include various kinds of pulses, milk and other dairy items. The various social schemes being run by the current United Progressive Alliance (UPA) government have put more money into the hands of rural India. One thing that seems to have happened because of this is that people are eating better than before.
Economic theory suggests that once income levels rise above $1000 per annum, a major portion of the increased income is spent on more food and better quality food. Also people shift from cereal based diets to protein based diets. In large parts of the world this means an increase in the consumption of meat. But in India it means more consumption of milk and pulses. Again this is something that the RBI has no control over. As long as the UPA keeps running its social schemes this phenomenon of increased food prices is likely to continue.
What does not help in the near term is a deficient monsoon. Rainfall upto July 25,2012 has been 22% below its long period average. This means food prices will continue to rise.
What this clearly tells us is that RBI is not in a position to control inflation as it stands today. So should it be cutting the repo rate and in the process encouraging economic growth?
When RBI cuts the repo rate it is essentially giving a signal to banks that it expects the interest rates to go down in the days to come. But it is upto the banks to decide whether they take that signal seriously. When the RBI cut the repo rate by 50 basis points (one basis point is one hundredth of a percentage point) in April, the banks cut their interest rates by only 25 basis points on an average.
The reason was the increased borrowing by the government to finance its growing fiscal deficit. Fiscal deficit is the difference between what the government earns and what it spends. Between 2007 and 2012 the fiscal deficit of the government has gone up by more than 300%. During the same period its income has increased by just 36%.
The fiscal deficit has been growing on account of various subsidies like oil, food and fertizlier being offered by the government. “During April-May 2012, while food subsidies were lower, fertiliser subsidies were more than twice the previous year’s level,” the RBI statement pointed out. What also does not help is the fact that the Rs 43,580 crore oil subsidy budgeted for this year has already run out. The government compensates the oil marketing companies (OMCs) for selling kerosene, diesel and LPG at below cost. With oil prices over $100 again, the oil subsidies are likely to increase in the days to come.
This means increased borrowing by the government to compensate the OMCs for their losses. Increased borrowing by the government will mean that banks will have a lower pool of money to borrow from and hence they will have to continue to offer high interest rates on their deposits and charge high interest rates on their loans.
So what is the way out? “Clearly, if the target of restricting the expenditure on subsidies to under 2 per cent of GDP in 2012-13, as set out in the Union Budget, is to be achieved, immediate action on fuel and fertiliser subsidies will be required,” the RBI said.
But raising prices is easier said than done. Another theory being bandied around is that Duvvuri Subbarao is Chiddu’s baby (P Chidambaram, the Home Minister) and he will start cutting the repo rate as soon as Chidambaram is back at the Finance Ministry.
(The article originally appeared in the Asian Age/Deccan Chronicle on August 1,2012. http://www.asianage.com/columnists/policy-rate-catch-22-677)
The article was written before P Chidambaram was appointed as the Finance Minister
(Vivek Kaul is a Mumbai based writer and can be reached at [email protected])