In an earlier blog on this site (5 August 2011), I had cautioned against what might be termed a short-term revenue based approach to infrastructure investments, arguing that this would seriously harm investor sentiment. A year and more down the road, I note with considerable anguish that my earlier apprehensions are coming true with a vengeance. While my earlier blog focused only on the upstream petroleum sector, we now see that the virus of short-term policy making expediency has spread like a cancer to various parts of the Indian ‘body economic’ which, if not halted at the earliest, can seriously affect investor sentiment. While my earlier focus was on the petroleum (specifically the upstream exploration and production) sector, I would now touch on events in other sectors which point to a spreading malaise. There are, as I see it, four primary factors for this state of affairs:
a) Bumbling regulation: My last blog (7 December 2012) highlighted major shortcomings in the regulatory framework in the upstream petroleum sector. In that blog, I had refrained from questioning the competence of the Directorate General of Hydrocarbons (DGH) to regulate and supervise the petroleum operations of companies with which the Government of India had signed production sharing contracts (PSC). Now, a friend who read that blog has brought to my notice that in the Ravva field (Krishna-Godavari basin) PSC, the DGH insisted that the contractor should drill more wells even though the contractor had achieved the agreed production levels by drilling a lesser number of wells (and no production gain would have resulted by drilling more wells). This must be the first case of its kind where a regulator sought to enhance the capital cost of a project, apparently unmindful of its adverse implications for the profit petroleum share that would accrue to the government. [My blogs of 30 November and 7 December 2012 have explained in detail the economics of upstream petroleum operations under a PSC]. While I am not aware of the final outcome in this case, it reflects a very poor understanding of both the technical and financial aspects of petroleum operations. Add to this the other episodes listed in my blog of 7 December 2012 and you would understand why there is increasingly lukewarm investor response to the offer of exploration blocks in successive bidding rounds under the New Exploration Licensing Policy.
b) Contractual sanctity and pussyfooted policy: Considering that all major decisions in government (especially the Government of India) are taken after voluminous file notings and consultations with all concerned Ministries, the flip-flops in government policy in the past few years have been truly astounding. I will again take up examples from the petroleum sector (with which I am familiar). As far back as 1986, the Petroleum Ministry took a considered decision, with approval at the highest levels, to exempt investors in oil and gas exploration ventures from the payment of royalty. This was to encourage private foreign investment in exploration at a time when international prices were in the region of US$ 12 a barrel and any upfront deduction from revenue (as in the case of royalty) would have kept away investors. This policy was continued in the bidding rounds held after 1991; it was only with the advent of the New Exploration Licensing Policy in 1998 that royalty payment was incorporated in the fiscal package. This did not, however, deter the Government of India from departing from the contract provisions in the PSC with Cairn India for the Barmer block in Rajasthan and demanding, as a condition for approving the sale of interest in Cairn India to Vedanta, the payment of royalty. In my blog of 5 August 2011, I had pointed out how this move represented a breach of contract by the Government of India and why the payment of royalty would, in the final analysis, make little difference to the share of oilfield revenues accruing to the government. That Vedanta agreed to the condition in their anxiety to obtain government permission is beside the point; the government chose to alter the PSC when there was no logic in doing so and no interests of government or the country had been compromised. A second and more recent case is the gas price finalisation for gas produced from the D-6 gas field in the offshore Krishna-Godavari basin operated by Reliance Industries and its partners. The bid conditions when the block was offered clearly stipulated that the contractor was free to market the gas. The 2006 report of a Committee of officials of the Petroleum Ministry which prepared the guidelines for government approval for gas pricing under PSCs categorically stated that where gas prices had been arrived at on the basis of open competitive bidding (OCB), there was no need for government to interfere with the same. And yet, when the National Thermal Power Corporation was able to secure a deal for gas supply from Reliance at US$ 2.34 per million BTU, the Petroleum Ministry did not accept this bid. There was talk (fuelled by uninformed press reports) that the government stood to lose revenues from the field on account of the low gas prices. This was in spite of the fact that it was a government corporation that was benefiting from the lower gas price and the end-consumer would have been the ultimate beneficiary. And yet, when the same Reliance asked for gas prices higher than US$ 4.20 per million BTU, the Government of India was reluctant to look at a reasonable price for gas in the region. A higher gas price would have also given government a greater share of profit petroleum consequent on increased revenues from the gas field. In this Dr. Jekyll and Hyde situation, it will be very difficult for any private company to do business with the government, given that no one can predict flip-flops by future governments.
c) Mistrust and bureaucratic inertia: At the best of times, the private sector has found the Indian bureaucracy to be slow and obstructive, with petty harassment at various levels. Now, the prevailing atmosphere of suspicion of any major government decision has brought the bureaucracy at the higher levels to an almost complete stop. This paranoia seems to have affected the ministers as well: every decision goes to the Cabinet and/or to an Empowered Group of Ministers. Decision making has obviously been a casualty in such an environment. Matters are not helped by ill-informed and widespread media (especially electronic media) reporting that targets specific Ministers and bureaucrats. The slow, tortuous legal process in India is a matter of dread for any honest government functionary: once he is enmeshed in some enquiry, it can take anywhere from ten to twenty years to clear his name, with both his reputation and his career in tatters. At the same time, the failure to quickly bring to a closure corruption cases already under way only deepens the public suspicion that the powerful are above the law.
d) Political posturing and doublespeak: Partisan politics has in the last couple of years played havoc with economic decision making. Take the case of foreign direct investment (FDI) in retail. The main opposition party had espoused this cause when it was in power – now, it suddenly discovers many evils in the policy. Other parties are no better – their response is dictated more by political exigencies and less by the merits of the policy. Opening up the insurance and pension sectors has run into the same roadblocks. Even the debate on the FDI retail issue has had its share of factual inaccuracies. The Bharatiya Janata Party (BJP) claimed that foreign fast food chains were importing potatoes for making French fries. The companies promptly issued rejoinders to the effect that the potatoes were wholly sourced from within India – in what is probably the greatest irony, the potatoes were sourced from farmers in Gujarat state, ruled for fifteen years now by the BJP. While the position of the Left is understandable, given their antipathy to foreign investment in any form (even when such investment makes sound economic sense), the position of other parties, especially those hoping to come to power at Delhi or in different states, seems to be dictated by political expediency. It is almost as if they are afraid to give any credit for successful policies to the political party currently in power and will back these policies once the levers of power are in their hands. Since this is likely to be a zero-sum game, given that no party looks like cobbling together a respectable majority to push through economic reforms, the result could well be legislative paralysis over an extended period of time.
2. Opinion and decision makers in government, political parties, the media and academia need to clarify their positions on economic reforms, foreign investment and the overall role of the private sector in the growth process. Open thinking on these issues is all the more imperative since India is competing with a host of other nations to secure investment opportunities. Newer and newer countries are emerging as attractive investment destinations, ranging from the old Indo-China region to Africa and Latin America. India (and Indians) must shed their schizophrenic attitude to private investment. If India as a country wants to export its manpower and capital to other countries to earn foreign exchange and grab a greater share of the economic pie, it must equally welcome such investment. In fact, a situation is developing where, confronting the difficulty of doing business in India, even private Indian companies are looking for investment opportunities in other countries, thereby reducing the scope for job and income-creating opportunities within India. Let us pray that we do not reach a situation where private companies, Indian and foreign, take too literally the words of Mohammad Rafi’s immortal lines from the song from the film Pyaasa in beating a retreat from Indian shores:
Mere saamne se hata lo ye duniya
Tumhari hai tum hi sambhalo yeh duniya
Yeh duniya agar mil bhi jaaye to kya hai