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The Hindu Analysis Free PDF Download

Date: 01 January 2020

 

  • Finance Minister unveils plans for ₹102 lakh cr. infra projects
  • Centre, States and the private sector  to share capital expenditure till  2024-25
  • Union Finance Minister Nirmala Sitharaman on Tuesday outlined plans to invest more than ₹102 lakh crore in infrastructure projects by 2024-25, with the Centre, the States and the private sector sharing the capital expenditure in a 39:39:22 formula.
  • This will be a significant increase over the last six years, when the Centre and the States together spent ₹51 lakh crore on infrastructure.
  • On Independence Day, Prime Minister Narendra Modi had announced plans to invest ₹100 lakh crore in modern infrastructure. This is the expenditure needed to achieve a $5 trillion economy by 2024-25, according to an official statement.
  • A task force of senior bureaucrats, chaired by Economic Affairs Secretary Atanu Chakraborty, had identified ₹102 lakh crore worth of projects in 18 States as part of a National Infrastructure Pipeline.
  • Another ₹3 lakh crore worth of projects are likely to be added soon, Ms. Sitharaman told journalists, adding that the  idea was not to exclude any State, but certain States were yet to put forward their pipelines.
  • Large States yet to provide adequate data are Gujarat, West Bengal, Rajasthan and Bihar, said the task force report. The investment is phased over a six-year period, including the current financial year.

A big task

  • The plan calls for a ₹13.6 lakh crore investment in 2019-20, a big task considering that the 2018-19 investment in infrastructure by the Centre, the States and the private sector was only ₹10 lakh crore, a slight drop from the previous year’s investment of ₹10.2 lakh crore.
  • The funds would come from budgetary and extra-budgetary resources, as well as those raised from the market and  the internal accruals of the relevant state-owned companies, said Mr. Chakraborty.
  • Almost a quarter of the capital expenditure is going to the energy sector,  with ₹24.5 lakh crore expected to be invested in power, renewable  energy, atomic energy and petroleum and natural gas. This is also the  sector where the private sector has expressed the most interest, said Ms.  Sitharaman.
  • The other major focus areas are roads (19%) and railways (13%), urban  (16%) and rural (8%) infrastructure, and irrigation (8%).
  • Social infrastructure, including health and education, will get 3% of the  capital expenditure, with digital communication and industrial expenditure  each getting the same amount as well. Agriculture and food processing  infrastructure will get one per cent of the planned capital expenditure.
  • Going forward, the task force will continue to monitor progress and will  also have the flexibility to change course, with the power to drop selected  projects and pick up new ones, said Ms. Sitharaman.

A group of theocracies

  • India must rebuff attempts by the OIC to interfere in its internal affairs
  • The improvement in India’s ties with the Gulf countries is often cited as a major success of the present government.
  • Prime Minister Narendra Modi’s focus on relations with the Kingdom of Saudi Arabia (KSA) and the United Arab Emirates (UAE),  which he has visited more than once in his tenure, and his personal ties with their most powerful royals, has yielded accolades and  promises of investment. In March 2019, it resulted in then External Affairs Minister Sushma Swaraj addressing the 57-member  Organisation of Islamic Cooperation (OIC) in Abu Dhabi, a breakthrough for India. The government’s outreach to the grouping was seen as a way of strengthening ties with the “Muslim world” including West Asian countries where more than six million Indians live and work. It was therefore disappointing for the government to note that in June, the OIC appointed a “special envoy” on Jammu and Kashmir, and subsequently issued several strongly worded statements on the government’s decision to amend Article 370 of the Constitution, the Supreme Court verdict on the Ayodhya dispute and the Citizenship (Amendment) Act, 2019, or the CAA. . And last week, according to Pakistani officials, the OIC decided to convene  a special meeting in Islamabad in 2020 to discuss the Kashmir issue and the repercussions of the CAA, after discussions the Saudi  Foreign Minister had in Islamabad. It should be clear to the government that the engagement with the grouping this year was a  miscalculation. In any case, the basis of the OIC is a unity between theocratic Muslim states, an idea that India, as a secular  country with a large Muslim population has never been aligned with. At all costs, attempts by the OIC to make statements and  arrogate to itself the well-being of India’s Muslims must be rebuffed as gross interference.
  • However, New Delhi must note that the OIC’s recent statements also stem from a broader tussle within the grouping that has become a concern for traditional leaders, the KSA and the UAE. The challenge comes chiefly from Malaysia, where Prime where Prime Minister Mahathir Mohamad has revived his plans for a “reformed” OIC, and has enlisted other challengers to the RiyadhAbu Dhabi domination of the pan-Islamic movement including Iran, Turkey and Qatar. In that sense, the OIC’s criticism of India is a clear attempt at reaffirming its leadership of the movemen. New Delhi must strengthen ties with its strategic  partners in the region on both sides of the divide without taking sides or becoming collateral damage in the internecine warfare  between them. But it must also be wary of groupings with nothing in common other than a religious world view.
  • There seem to be broadly three positions with respect to the  privatisation of public sector undertakings (PSUs).
  • The left position is “PSU is family silver and should not be sold  irrespective of its performance”.
  • The divergent stand is that “business is not the business of  government”, which found resonance in the United Kingdom, and, of  late, in India.
  • There is also the third position: Why privatize profit-making PSUs?  Why do you sell the family silver? Bharat Petroleum Corporation  Limited (BPCL) which is making handsome profits, comes under this  category.

Case of loss-making units

  • Loss-making PSUs certainly merit privatisation — but no one would buy them with their huge debt and employee liabilities. The government may even have to pay the buyer, as it happened in the case of the Delhi Discom privatisation. Even then it may be worth it, since privatisation will stop fiscal flows to these PSUs. Alternatively, there is the exit route through the new Insolvency and Bankruptcy Code.
  • Some of the major loss-making PSUs, Bharat Sanchar Nigam Limited, Mahanagar Telephone Nigam Limited and Air India should go under the block as their losses are greater than their revenue. The Economist has a term for such entities — value subtracting enterprises. Restructuring them and even ensuring an additional infusion of funds and other resources have not produced results. Their chairmen cum managing directors are bureaucrats who may not have domain knowledge or technical  service people bereft of business acumen. Justifying their existence — in the case of BSNL/MTNL which  ran telecom at one time as a government monopoly, with a teledensity of 0.01% — by citing national security  is strange. At one time the argument was that BSNL alone maintains the military telecom network. It  was for the same reason that the private sector was not allowed to operate in the defence sector; we have  paid a heavy price for only entrusting it to the public sector in this area. The present government has by and large done well in opening up defence to the private sector.
  • Privatisation is not a default option; rather, it is resorted to only out of extreme necessity. As World  Bank consultants said on the Delhi Discom privatisation: “Privatization is resorted not just when the firm  makes losses, but only when the physical performance is so bad that the PSU becomes a political  embarrassment to the Government.” This may explain the hesitation to privatise some of the largest loss-  making PSUs — Air India, the BSNL and MTNL — as the embarrassment threshold may not have been reached as yet.

Meeting fiscal targets

  • But why privatise a profit-making PSU. What comes into play here is not the lofty “business is not the business of  government” argument, but a more mundane fiscal imperative. The Finance Minister’s disinvestment target of a  little over a lakh of crores for the current fiscal has to be met. It is this fiscal requirement that now drives  privatisation. Let us revisit the question: Should profit-making PSUs be privatised? It is good to remember what  former Prime Minister Manmohan Singh once said on the issue. He made the assurance that the government would not “privatise profit making PSUs working in competitive environments”. That is, if the output price is a competitive price and you still make a profit, then you are efficient and the need to privatise does not arise.
  • But if the output price is set in a monopoly background — the case now being the monopoly cartel of the oil  majors, BPCL, Indian Oil Corporation Limited and Hindustan Petroleum Corporation Limited — with the autonomy given being used for monopoly pricing, then your profit is no longer an index of your efficiency. In that case, privatisation will still bring in benefits of the efficient operation of private sector through reduced costs. Examples of PSUs that made monopoly profits and still inefficient were Coal India and Indian Airlines (IA). For IA, there was poor punctuality, high staff-to-plane ratio, high operating costs and overall customer indifference.
  • The BPCL is not inefficient but its privatisation still offers scope for improvement. When a company such as this has never faced any serious competition, it is impossible to even discuss the issue of efficiency or inefficiency. There is no comparable firm in the private sector to benchmark it with.
  • However if one looks at just about any public sector company in India, it is impossible to argue that the BPCL can be  an exception. Over the years, the financial performance of oil marketing companies has undergone a bureaucratic  process called “administrative price mechanism”. All one can say is that the oil PSUs have been allowed to make  profit; if one can use The Economist’s phrase again, they can be called “allotted millionaires”. On the non-  financial performance side, it would be difficult for the BPCL to show what innovations it has implemented over the years either in marketing or refinery operations.

Administered Price Mechanism

  • From 1970s to 2002, there was an Administered Price Mechanism  (APM) system in place in oil sector. Under this system, the oil and gas  sector was controlled at four stages viz. production, refining,  distribution and marketing.
  • The supply of raw material to the refineries at point of refining was  done at a predetermined price called ‘delivered cost of crude’. The  finished products were also made available at predetermined priced  called ‘ex-refinery prices’.
  • The overall regime was based on the principle of compensating  normative cost and allowing a pre-determined return on investments  to the oil companies.
  • Accompanied by competition
  • There is no point in converting a public monopoly to a private monopoly; it will  only result in inefficiency being replaced by private profits. Privatisation must be accompanied by competition in the post-privatised scenario.
  • However, the government will face a dilemma. If you want a high price, you must allow a monopoly situation post- privatisation, and if you want competition and low price for consumers, you must be content with a modest sale price, as the post- privatisation valuation of the firm critically depends on the market structure post- privatisation. If that is to be competitive, other PSU national oil companies such as the IOC and HPCL should also be privatised.
  • There is also no issue of national security for downstream oil firms. Oil marketing  companies, even if they are not in the public sector, can be made to own strategic  petroleum reserves as in most of Europe and by the government itself as in the U.S. Thus privatising the BPCL does not compromise India’s national security.
  • Similarly, LPG and kerosene subsidies can be handled by direct benefit transfer, which is already in vogue in the case of LPG.
  • Finally, there is an argument advanced in the case of the BPCL: that the government paid about ₹622 crore in today’s money to acquire it, while it now has a market value of around ₹85,000-1,15,000 crore. How did ₹622 crore balloon  into this amount even after the time value of money  adjustment?
  • Is it a bargain one cannot refuse? Not quite. After all, in the  interim period of many years, the firm would have invested,  out of retained profits, and also generated further monopoly  profits for dividends which explains its increased value. This  is not by its virtue of being a PSU. The BPCL is not a golden  goose. It may be an ATM.