India: Economic Illiteracy (or Economic Hypocrisy)?

There was a lot of congratulatory backslapping in the government and mass media recently when huge amounts were realised from the sale of telecom spectrum, auction of coal blocks and the divestment of government interest in the public sector. Lost in all this noise was the signal it conveyed: that, for government and, indeed, for large sections of the Indian intelligentsia, short-term material gains are far more important than the presence of investors in crucial infrastructure sectors over the long haul. No one tried to analyse the impact of the successful bids in terms of their implications for prices for the consumer or for the sustainability of the project for the investor. Public policy actions in India have almost always seemed to live up to my favourite lament, which has appeared in my blogs on more than one occasion: “don’t kill the goose that lays the golden eggs.” It is time, therefore, to analyse this revenue mania in the light of recent actions and decisions taken not just by government but by other institutions of the state as well and the approval these have received from the media and from what one would have thought were better-informed sections of the thinking classes.

The recent efforts by the Petroleum Ministry to tinker with a thirty-five year old revenue model for oil and gas extraction are but a continuation of its attempts to renege on the sanctity of negotiated, signed contracts once these contracts reach the stage where petroleum revenues start or are likely to commence flowing soon. Behind these moves are what I would term a paranoia related to short-term revenue accrual, long-term economic interests be damned. In the case of the acquisition of Cairn India by the Vedanta Group, the Government of India successfully extracted its pound of flesh in terms of imposing payments of royalty on oil and gas, from payment of which companies had been specifically exempted in the contracts of the early 1990s to encourage investment in risky exploration activities. This represented nothing less than a violation of a signed contract by a government. As if this was not bad enough, the Government of India reversed its policy on allowing private companies to market their share of gas produced under the New Exploration Licensing Policy, in breach of accepted contractual provisions. It played along, for reasons best known to it, with the Supreme Court view that, as the owner of the natural resource, government has the right to decide the end-consumers, when accepted international practice is that once the oil/gas reaches a particular delivery point, ownership of the resource devolves in the agreed percentages to the government and the contracting producing parties. Extend this logic to the mining of other natural resources like coal, bauxite and copper and you are back in the heyday of the license-permit raj of the 1960s and 1970s, when government decided who would produce and who would consume a particular resource. As the Government of India got sucked into the Ambani family war (of which more in a subsequent blog), it started to get more and more defensive about the exploration and production contracts signed by it over the years with private parties. Not to be outdone in adding its two bits to the management of petroleum contracts, the Comptroller & Auditor General (CAG), the audit watchdog of the government, weighed in with advice on how petroleum operations should be carried out and what constituted acceptable expenditure. Given the lack of knowledge in India’s legal and financial fraternity (especially in the government sector) about the economic and technical niceties of petroleum exploration and production, it is not surprising that private investors found themselves caught in a bind, with a harried government refusing to clear payments of company dues. The situation has come to a pass where the government is apprehensive of resorting to arbitration and obtaining expert opinion to resolve contractual issues: given the level of mistrust and suspicion about a subject that most of those taking decisions have very little understanding about, only a very brave person would stick her neck out to take bold decisions.

I am sorry for dragging you through a subject with which I have been connected for the past quarter century. But I am using this example from a crucial infrastructure sector to draw your attention to a serious lack of economic common sense in not only the government but other pillars of the establishment as well, which is fraught with grave consequences for the future economic development of India. Let us dwell for a moment on the disinvestment of government stakes in public sector gems like the Oil and Natural Gas Corporation, the Steel Authority of India Limited, Coal India Limited and Bharat Heavy Electricals Limited. The aim of any disinvestment should be to broaden the shareholder base and makes these companies more market-responsive. Instead, with government, and its captive institutions in the insurance and finance sectors, controlling over 70% of the shares, there is no change at all in the archaic decision making processes installed in these enterprises in the past, despite cosmetic changes in “granting autonomy” to these units that make no difference to their operational and managerial efficiency. Appointments to top managerial positions still go through a tortuous process, often taking months on end while prospective candidates lobby for posts. The fear of decision making in public sector enterprises arises from the dread of the big three C’s: the Comptroller and Auditor General, the Central Vigilance Commission and the Central Bureau of Investigation. As a manager, attract the attention of any of these three worthies and you can kiss your peace of mind goodbye for the next couple of decades. An example will suffice: the public sector National Thermal Power Corporation (NTPC) was to get gas for its power plants from the gas fields operated by Reliance and its partners in the offshore Krishna-Godavari basin. For various reasons, their gas sales agreement could not be concluded and is still to date embroiled in legal squabbles. Any sensible power producer would have recognised the time value of money; besides, NTPC was in a position to get liquefied natural gas on a 17-year term contract from Petronas, the Malaysian producer, for US$ 3.50 per million British Thermal Units (million BTU). But just imagine the furore if NTPC had opted for gas at US$ 3.50 per million BTU instead of the agreed effective price with Reliance of US$ 2.97 per million BTU; there would have been allegations of a sell-out and someone from NTPC would have lost his head. So NTPC played safe and continued its courtroom wrangles with Reliance. But power projects cannot wait for fuel indefinitely, so NTPC went in for spot market purchases, where it is today paying US$ 10-14 per million BTU. A greater criminal wastage of finances is difficult to imagine, but when tied up in the embrace of government, all is possible.

We need to analyse the reasons for this unspeakable economic illiteracy, not only wasting scarce investible resources but acting as a drag on the economic future of the country. Essentially, the post-Independence period has been characterised by the dominance of four interest groups: the landed elite, the rentier businessman/industrialist, the trade unions and the urban middle class. The 1991 reforms hardly dented the influence of these groups. The landed elite is interested in paying no taxes, having access to heavily subsidised water, power and fertilisers and an assured minimum support price for their produce, with suitable increases over time. The rentier businessman/industrialist has drawn on his “know-who” rather than his “know-how” to corner, in recent years, scarce natural resources like land and minerals. The less said about the trade union movement in India the better: they represent a fraction of India’s labour force and, through their stubborn opposition to labour law reform, have denied large swathes of Indians access to relatively secure, well-paid jobs in a growing industrial sector. The vocal Indian urban middle class is the two-faced Janus: while they seek aspirational lifestyles for themselves, their “bleeding heart” liberalism prevents them from allowing the extension of this privilege to their far less fortunate and far more numerous countrymen and women. Thus, whether it is a sensible land acquisition policy that gives manufacturing industry quick access to land, a labour law policy that gives far better employment opportunities to India’s growing unemployed and underemployed or a foreign direct investment retail policy that enables the farm producer to control the disposal of his produce besides adding value through the reduction of wastage, there is a shrill cacophony each time these issues are debated. Listening to the declamations of politicians and other self-styled experts can make you despair about the chances of any coherent economic policy.

It is then that the first doubt starts to set in: is all this posturing more to do with hypocrisy rather than illiteracy? In my years in government, I have seen politicians run successful businesses of their own, especially in the cooperative sector in Maharashtra. But put them in charge of the government and they successfully run it aground in the space of a few years. Clearly, private thrift does not extend to public prudence. Our search for the great leader who will lead us out of this morass is fated to be doomed. What we need is something more on the lines of the English Glorious Revolution of 1688, when the wealth-creating classes established their ascendancy over the wealth-preserving classes. What India needs today is a coalition of interest groups dedicated to the creation of wealth with, of course, the incorporation of social security measures that have evolved over the past two centuries. What it needs also are governments at both the national and state levels that steadfastly pursue this goal, unmindful of electoral consequences. Failure to do so can have very grim consequences. India is adding 13 million unemployed to its rolls every year. The consequences of this waste of human resources are beginning to be felt in the Maoist insurgencies in Central and Eastern India, which have access to a ready supply of disaffected and angry youth who have no connect with the Indian economic system. With growing urbanisation, this restlessness is spreading to major urban pockets. It is time India’s governing elite realised they are sitting on a series of time bombs which can go off at any time and any place. So my advice to them would be: stop this tinkering with welfare schemes and empower the people through bold reforms. The time for action is NOW.

 

 

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7 Responses to India: Economic Illiteracy (or Economic Hypocrisy)?

  1. Ravi says:

    A very impressive analysis

  2. j lobo says:

    Will govts always be the same in a different guises? A sad commentary on who we are!

  3. Jay Soni says:

    Well said. I am very impressed with this candid analysis of our Economic policies which always look for short term gains. The lack of longterm perspective is seen in the shabby infrastructure, which in my view will never improve. We need to learn few things from our neighbour China if we need to see some progress in real terms. The new government lacks the long term perspective and the higher growth rate are only dreams. In my view we will stay as usual at Hindu Rate of Growth whatever the propaganda says.

  4. Excellent article Mr Ramani. Conflict between short-term election benefits and long-term development of India as a Nation. We have a leader in Modi who is being harassed at every step not only by the opposition but some of his own party members. Will he be really strong to face both? We have yet to see.

  5. Sanjoy says:

    Very well said, Ramani……and couldn’t agree with you more…..there’s a distinct tendency now towards bolstering short-term gains with little thought about the long run…. but the as we learnt in D’School…….”in the long run, we are all ……..”

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