Blogspot – Page 18 – Gopal Krishna Agarwal

Fuel Price Crisis: Issues Behind Petroleum Rates Explained in 7 Points; Lowering Dependency On Oil a long Drawn

September 12, 2018

India imported 256.32 million metric tones of crude oil and petroleum products in 2017-18 and paid Rs. 6, 52, 896 lakh crore. The import dependence of India in the case of crude oil is over 80 percent.

What is the benchmark crude price for India and how is it determined?

The Indian basket of crude oil represents a derived basket comprising of Sour grade (Oman & Dubai average) and Sweet grade (Brent Dated) of crude oil processed in Indian refineries in the ratio of 72.38:27.62 during 2016-17. The price of Indian crude oil basket was $106.85 per barrel (1 barrel=159 litres) in May, 2014. It fell down to $39.88 per barrel in April 2016 and has gradually increased since then and is around $78 per barrel.

What is the tax structure on petrol and diesel?

On 3^rd September, 2018, the price build-up for Diesel and Petrol in Delhi was as follows

Every dollar increase in the international price of crude oil increases the cost of petrol and diesel in India by Rs. 0.50/ litre and a fall in the exchange rate of the Indian rupee against US dollar increase the cost of petrol and diesel in India by Rs. 0.65/ litre.

What is the revenue generated by taxes on petroleum products?

The contribution to central and state exchequer by the petroleum section in the last few years is as follows:

42 percent of the Basic Excise Duty collection at the Centre is given to state governments for infrastructure and welfare programs and 60 percent of the balance 58 percent of the Basic Excise Duty collection is spent on Centrally Sponsored Welfare Schemes in the States i.e. total amount transferred to States is (42+34.8)= 76.8 percent.

Every one rupee reduction in central duty leads to a loss on about Rs 14000/= crores to the central exchequer.

How does the picture of under-recovery in the oil and natural gas sector look like?

Under Administered Price Mechanism (APM) earlier Petrol /diesel prices were not market linked and prices were being modulated, the steep increase in international prices of oil used to exert severe pressure on the oil marketing companies (OMCs). The retail prices of these commodities were kept below the cost resulting in large under-recoveries for OMCs.

From the year 2004-05 to 2013-14, the total under-recoveries was Rs. 8,53,628 crores.

Why oil bonds issued and what were is their current status?

During the period of 2004-08 when the international crude prices were increasing rapidly, the government started subsidizing petroleum products proved grossly insufficient but since the fiscal position of the government was already precarious, it could not increase the subsidy to this sector. The government resorted to the issuance of ‘oil bonds’ to the OMCs. These interest-bearing bonds were not even reflected on the balance sheet by the UPA government, resulting in artificial measurement of the burgeoning fiscal deficit.

Between 2005-06 and 2009-10, oil bonds worth Rs. 1,42,202 crore were issued by the government with the rate of interest on them ranging from 7.33 percent to 8.4 percent per annum repayable up to 2024-25 by successive governments. Oil companies have either sold these bonds or used them as collateral to raise cash. OMCs have sold oil bonds worth Rs 1,24,536 crore and had to bear a loss of around Rs 5,000 crore in selling of these bonds at a discounted rate because the bond market did not have much appetite for these bonds. Till date the government has repaid around Rs. 70,000 crore to the holders of these bonds and out of this amount, only Rs. 10,000 crore (approx) has gone into the repayment of the principal component and the rest towards the interest obligation. Thus the outstanding principal amount on these bonds is Rs. 1,30,000 crore. Most of these bonds will be matured by 2024-25.

How crucial are petroleum products in our energy mix?

In the year 2015-16, the source wise share in consumption of energy was as follows:

How can India reduce its dependence on crude oil?

Petroleum products are important because one cannot readily switch between them and other sources of energy. To make our economy less dependent on oil would be a long drawn process, which can be accelerated by conducive government policies. Modi government is working on this long-term solution.

It is evident than in order to reduce our dependence on imported oil, we need to generate more energy from coal and lignite, which we have in abundance and also focus on electricity generation from hydro and other renewable sources like wind and solar. Since the government is focused on having 1 GWh of installed solar capacity by 2022, we will see an increase in its share in the source wise energy share in the coming years.

Why Renewable energy is so vital for India

September 8, 2018

Petroleum prices have always been a contentious issue in India. Historically, political expediency overrode economic considerations. The central government has some compelling reasons not to interfere with market forces, which are currently being affected by global factors.

India imported 256.32 million metric tonnes of crude oil and petroleum products in 2017-18, for which it paid Rs 6.53 trillion. India’s import dependence in crude oil is over 80 per cent. The Indian basket of crude oil represents a derived basket comprising of sour grade (Oman and Dubai average) and sweet grade (Brent dated) of crude oil processed in Indian refineries in the ratio of 72:28 in 2016-17. The price of the Indian crude oil basket was $106.85 per barrel (1 barrel = 159 litres) in May 2014. It declined to $39.88 per barrel in April 2016, and has gradually increased since then and is around $78 per barrel now.

It is important that we look into the tax structure and petroleum prices. On September 3, 2018, the prices of diesel and petrol in New Delhi were Rs 71.15 and Rs 79.15 respectively (rounded off). With every one-dollar increase in the international price of crude oil, the cost of petrol and diesel in India increases by Rs 0.50 per litre, while a fall in the exchange rate of the rupee against the US dollar increases the cost of petrol and diesel by Rs 0.65 per litre.

The revenue generated by taxes on petroleum products is vital for both central as well as state governments — the total contribution to the central and state exchequer was Rs 4.93 trillion in 2017-18.

It is important to remember that 42 per cent of the basic excise duty collection at the Centre is given to state governments for infrastructure and welfare programmes and 60 per cent of the remaining 58 per cent is spent on centrally sponsored welfare schemes in the states. The total amount transferred to the states is thus 76.8 per cent (42+34.8). Every one-rupee reduction in central duty leads to a loss of about Rs 140 billion to the central exchequer.

Earlier, under the Administered Price Mechanism (APM), when petrol and diesel prices were not market-linked and prices were being modulated, the steep increase in international prices of oil exerted severe pressure on the oil marketing companies (OMCs). The retail prices of these commodities were kept below cost, resulting in large under-recoveries for OMCs. Between 2004-05 and 2013-14, total under-recoveries amounted to Rs 8.53 trillion and there were significant subsidies.

Subsidies for these under recoveries during the period 2004-08, when international crude prices were increasing rapidly, proved grossly insufficient. Since the fiscal position of the government was already precarious, it could not increase the subsidy to this sector. The UPA government then resorted to issuance of “oil bonds” to the OMCs. These interest-bearing oil bonds were not even reflected in the balance sheet of the UPA Government, resulting in artificial measurement of the burgeoning fiscal deficit.

Between 2005-06 and 2009-10, oil bonds worth Rs 1.42 trillion were issued by the government, with a rate of interest ranging from 7.33 per cent to 8.4 per cent per annum, repayable up to 2024-25 by successive governments. Oil companies have either sold these bonds or used them as collateral to raise cash. OMCs have sold oil bonds worth Rs 1.25 trillion and had to bear a loss of around Rs 50 billion in selling these bonds at discounted rates, because the bond market did not have much appetite for these bonds.

So far the government has repaid around Rs 700 billion to the holders of these bonds. Of this amount, only about Rs 100 billion has gone into repayment of the principal component and the rest towards the interest obligation. The outstanding principal amount on these bonds is thus Rs 1.3 trillion. Most of these bonds will mature by 2024-25, imposing a heavy burden on current as well future governments.

An important part of the solution to the problem will have to be a focus on alternative energy sources. In 2015-16, coal and lignite accounted for 46.28 per cent of India’s energy consumption; crude petroleum for 34.48 per cent; electricity from hydro, nuclear and other renewable sources of energy for 12.75 per cent; and natural gas for 6.49 per cent.

Therefore the policy of the NDA government is to move towards renewable sources of energy. But one cannot readily switch between them and other sources of energy. To make our economy less dependent on oil will be a long-drawn-out process, which can be accelerated by supportive government policies. The Modi government is working on this long-term solution. It is evident than in order to reduce our dependence on imported oil, we need to generate more energy from coal and lignite, which we have in abundance, and also focus on electricity generation from hydro and other renewable sources such as wind and solar. Since the government is focussed on having one GWh of installed solar capacity by 2022, we will see an increase in its share in the source-wise energy consumption in the years ahead. Until then economic prudence should override political expediency.

Vote-banks and foreigners

August 14, 2018

Opposition parties have sensed a chance after the release of the final draft of the NRC. Every attempt is being made to create a crisis where none exists. However, it is grossly premature to speculate on the future of those identified as illegal immigrants. Religion, region and caste have always affected politics but governance should be above such considerations.

A perfectly legitimate exercise by the Assam government, under the Assam Accord, has precipitated condemnable reaction from the Opposition parties. The Congress — and its president, Rahul Gandhi — must make its stand clear on the issue of illegal migrants from neighbouring countries. Both Indira Gandhi and Rajiv Gandhi had committed that immigrants to Assam after March 25, 1971, would be detected, identified and deported. The Congress had agreed to the NRC. But the party did nothing in this respect when it held office at the Centre or in Assam because the immigrants are mostly Muslims and the party has cultivated this community as its vote bank.

The Congress also tried to subvert the Foreigners Act 1946 through the Illegal Migrant Determination by Tribunal (IMDT) Act, 1983. The IMDT Act was stuck down by the Supreme Court in 2005. The Court’s verdict came in response to a petition filed by Assam’s current Chief Minister Sarbananda Sonowal. The court noted that the IMDT “is the main impediment or barrier in the identification and deportation of illegal migrants”.

The Congress’s conduct in the affair requires close scrutiny. In an affidavit filed before the Supreme Court on August 28, 2000, the then Asom Gana Parishad (AGP)-led government pointed out that it had been asking the Centre to repeal the IMDT Act because the law was against national interest. In May 2001, the AGP was defeated in elections to the Assam Assembly and a Congress-led government assumed office. On August 8, 2001, the new government moved an application in the apex court praying that the state be permitted to withdraw the earlier affidavit and be allowed to file a new affidavit. The application stated that “the IMDT Act is constitutional and there is no question of either repeal or striking down of the Act”.

The Atal Bihari Vajpayee-led NDA government at the Centre had filed an affidavit in the matter on July 18, 2000, stating that a proposal to repeal the IMDT Act was under its consideration. However, the Congress-led UPA government which assumed office at the Centre in 2004 file another affidavit in November that year. It said that the Centre had decided to retain the IMDT Act in its present form. But the Court stuck down the Act in 2005. It observed, “The dangerous consequences of large-scale illegal migration from Bangladesh, both for the people of Assam and more for the nation as a whole, need to be emphatically stressed. No misconceived and mistaken notions of secularism should be allowed to come in the way of doing so”.

It would not be an exaggeration to say that at the root of all socio-political problems in the country lie the Congress’s myopic politics. The party’s position on several issues, including the triple talaq issue, the Supreme Court judgment on maintenance to Shah Bano, illegal immigrants from Bangladesh, Ram Temple at Ayodhya and the plight of Kashmiri Pundits, testify to its myopic vision. The party is responsible for communalizing Indian politics.

West Bengal Chief Minister Mamata Banerjee’s political ambitions have grown in recent times. She sees the NRC issue as an opportunity to consolidate her Muslim vote-bank. Banerjee has dishonestly described the NRC as a restriction on the inter-state movement of Indian citizens. She is trying to turn the NRC into a Hindu-Muslim issue. We hope she explains her stand on the issue of illegal migration from Bangladesh. It is another matter that on August 4, 2005, she had stated in the Lok Sabha: “Infiltration in Bengal has become a disaster now. You can see Bangladeshi as well as Indian names in the list. I have both the Bangladeshi and the Indian voters’ list. This is a very serious matter”. The silence of other political parties like the CPI, CPM, BSP, SP, RJD reeks of hypocrisy.

The illegal immigrants are not refugees. The movement under the banners of the AASU and AAGSP had emerged because the people of Assam feared the adverse social, political, cultural and economic impacts of the unabated influx of foreigners. Census figures show that the percentage of Assamese-speakers in the state declined from 58 per cent in 1991 to 48 per cent in 2001. The Muslim population of Assam increased from 25 per cent in 1951 to 34 per cent in 2011.

All political parties should express their stand on the issue of illegal immigrants in no uncertain terms. Fear-mongering and hyperventilation would not serve the interests of the nation as would keeping quiet on the issue.

Petroleum Prices, Why They Are So Important For Our Economy

July 26, 2018

By Gopal Krishna Agarwal,

For understanding petroleum pricing in India: We have to break it into following aspects:

1. Petroleum prices component

2. Issues of under recovery and oil bonds during UPA

3. Revenue to Central and State governments from the petroleum section.

4. Alternative Sources of energy and future planning for reduced dependence on oil

Petroleum products pricing is always a contentious issue. It has a large impact on inflation and also a major source of revenue for the Central and State governments, we import about 80% of our consumption needs. An increase of one dollar in the international price of crude oil increases the cost of our petrol and diesel by Rs. 0.50/ litre and one rupee fall in exchange rate against US dollar increase the cost by Rs 0.65/litre of petrol and diesel. We can conclude that the prices of petroleum products are determined in India by external factors. India imported 256.32 million metric tones of crude oil and petroleum products in 2017-18 and paid Rs. 6,52,896 lakh crore.

Earlier under Administered Price Mechanism (APM) followed by UPA, petrol and diesel prices were not market determined. Steep increase in international prices of oil used to put severe pressure on the oil marketing companies (OMC). Still their retail prices were kept below the cost, resulting in under-recoveries for OMCs. Between the year 2004 to 2014, the total under-recoveries was to the tune of Rs. 8,53,628 crores.

When the international crude prices were increasing, during the period of 2004-08 the subsidy by the government on petroleum products became insufficient. Since the fiscal position of the Government was very bad, there was no scope for increasing the subsidy. The government started issuing ‘oil bonds’ to the OMCs instead of giving cash subsidy. These interests bearing Oil bonds were not even reflected in the Budget provision by the UPA Government, resulting in distortion of fiscal deficit figures. During 2005 to 2010, oil bonds for Rs. 1,42,202 crore were issued,

with rate of interest on them ranging from 7.33 to 8.4 % per annum repayable up to 2024-25 by successive governments in the future. This was a case of postponing current liabilities on the future generation.

Bad fiscal prudence under UPA government resulted in increasing of the interest rates affecting borrowing and investment in the economy and higher inflation for the common men. While the petrol and diesel prices were artificially kept low, people were paying higher prices for almost every other thing. The burden sharing mechanism devised by the UPA government had also led to a depletion of cash reserves of oil companies like ONGC, GAIL and OIL and destruction of their intrinsic market value.

The argument that high taxed on petroleum product in India needs to be brought down to control the spiraling prices has to be closely looked into.

Firstly, this revenue is required for catalyzing India’s economic growth, for building infrastructure for better quality of life and providing social security to the poor classes and in the backward areas. Secondly, large component of Central government duties on petroleum products i.e. 42% of the Basic Excise Duty is given to State governments and 60% of the balance 58% of the Basic Duty is spent on Centrally Sponsored welfare schemes in the States i.e. total amount transferred to the States by the Centre is (42+34.8)= 76.8 % of the Basic Excise Duty. It is also estimated that a one rupee reduction in the excise duty at the Centre would reduce revenue collection by Rs 14,000 crores.

Increase in the petroleum prices has different effect on the tax collected by the Centre and the States, which also has to be analyzed properly.

In a decontrolled regime now being followed in India, any change in international crude price is passed on to the consumer. Higher prices are likely to reduce consumption. The taxes imposed by the Centre are specific tax, i.e., fixed in terms of Rs per unit. So, if the consumption falls, the tax collected by the Centre goes down. The States, however, levy ad valorem taxes i.e. percentage based on prices and therefore with the increase in petroleum prices, its tax collection does not fall even with fall in consumption. Therefore, if the taxes on petroleum products have to be reduced in wake of the rising international prices, it should be done by the States first than by the Centre.

The solution to this teething problem on the long-term basis, is to change the share of petroleum products in energy consumption mix (34.48%, year 2015-16) We need to generate more energy from coal and lignite (46.28%), which and also focus on electricity generation from hydro, nuclear and other renewable sources like wind and solar (12.75%).

Shri Narendra Modi government is working on this line. In the coming years we will definitely see a fall in the contribution of petroleum products in the overall energy share in our consumption.

Higher Education in India – Key to Inclusive Economic Growth

July 7, 2018

The large scale inequalities that we see in India today is mostly resulting from inequality of opportunities and not on the basis of choices or abilities alone.

Education is the greatest leveler. It is a potential tool in the empowerment of those sections of our society that suffers from various forms of exclusion even after seven decades of independence. It can also have strong equity enhancing and inequality reducing impact if it is easily accessible and affordable. Education also empowers individuals and society and promotes true public involvement in the development process – making it robust and participatory.

India’s higher education system is the third largest in the world, after China and the United States. This, however, is only in terms of numbers. So far as the quality of higher education is concerned, India compares very poorly. According to the World University Ranking for the year 2018 United States has 62 universities in the global top 200, China has 7 and India has none. It shows that while India has made great strides in terms of numbers, it has not paid adequate attention on the quality aspect of education. Another problem is that most students going for higher education from reputed institutions leave the country and go outside for work, resulting in brain drain.

Ancient India had paid great attention to education and ‘Gurus’ commanded respect even from the mightiest kings. The system of ‘Gurukulas’ was accessible to everyone and the prince and the pauper studies under the same roof. It was also free and at the completion of the education process, each student paid according to his capacity. During the later periods, India also had institutes of higher studies at Taxila and Nalanda, which attracted students from all over the world. The education system gradually withered away during the medieval era. The present education system in India is a legacy from Britishers, who developed the system to meet its own needs.

Education has been a focus area since independence because it was seen as a tool to promote rapid economic development of the country. Higher education was also supposed to remove social barriers and provide upward social mobility but India’s patchy record in this field has ensured that our economic growth remains far from inclusive. It is thus imperative that access to affordable education at all levels i.e. from elementary education to higher education is ensured to achieve the goals of inclusive growth.

Investment in human capital

Education empowers people with skills and knowledge and gives them access to productive employment in future. The productive capacity of an economy depends on three factors of production i.e. land, labour and capital. Quality of labour i.e. human capital is primarily based on the skill and knowledge embodied in its population. The development of a strong nation requires that the human resources of the country be endowed with higher level of education, skill and specialization, in addition to good health.

Literacy as a qualitative attribute of the population is one of the most important indicators of its preparedness to skill and specialise. As per our decadal census our literacy rate has been going up which shows that a large part of our population is in a position to embody higher human capital. What is needed is a focused approach by the government to boost investment in education and health to build human capital.

The expansion in the number of institutions of higher education and their intake capacity has not been able to ensure simultaneous sustenance of quality. There is a severe shortage of well-qualified faculty, teaching facilities and proper infrastructure. As such, the quality parameters associated with teaching and research needs sustained attention and policy focus by the government. Kothari Commission had recommended that the expenditure on education should be 6 percent of GDP but the Government has consistently failed to achieve this target. The expenditure on education in India hovers around 2-3 percent of GDP.

Tapping the demographic dividend

Demographic dividend is superficially understood as the increasing share of the working age population in the total population of a country. The positive effect of this youth bulge can be realized only if this population is healthy and educated and finds gainful employment. Failure to provide employment to youth having ‘degrees’ is a recipe for social disaster as their angst and frustration can lead to destructive outcomes.

According to the AISHE survey, 2015-16, the Gross Enrolment Ratio (GER) in Higher education in India is 24.5%, which is calculated for 18-23 years of age group. GER for male population is 25.4% and for females, it is 23.5%. For scheduled castes, it is 19.9% and for scheduled tribes, it is 14.2% as compared to the national GER of 24.5%. Thus our GER is not only low, it also has a class character. It is lower for females and even lower for disadvantaged sections of the society like schedule castes and schedule tribes. It must be borne in mind that if the our degree holders fail to get remunerative work, it is likely to deter others, especially those from the lower strata of the society, from pursuing education because it entails a huge opportunity cost.

The demographic dividend can be tapped by educating our youth (increasing the GER) but doing more of the same is not going to help matters. India faces a paradoxical situation in having a mass of educated unemployed while at the same time industries facing acute shortage of skilled workmen. The situation can be resolved by coming up with educational courses that will fill the skill gaps in the industrial sector.

Enhancing effectiveness of governance

Education is a crucial instrument to make humans aware of their rights and duties. This awareness leads to a more demanding populace and ensures better governance. An educated population leads to participatory governance and better & more informed policy-making. It is generally seen that countries, which have achieved higher educational levels for their population have better respect for the rule of law, constitutional norms and niceties.

Market-oriented and skill intensive

A chief problem of Indian education is its defective and unbalanced curriculum. The curriculum, which is prescribed for the study emphasizes only bookish knowledge and rote learning. It is, therefore, not surprising at all that Indian education system churns out millions of unemployable graduates year after year while the economy suffers from lack of manpower with requisite skill-set, while there is lack of research and development skill set in higher education. According to the All India Survey on Higher Education (AISHE) 2015-16 only 10 programmes out of approximately 180 cover 83% of the total students enrolled in higher education. It further showed that maximum numbers of students are enrolled in B.A. program followed by B.Sc. and B.Com. programs, only 1.7% colleges run Ph.D. courses.

It is evident from the above data that most of our students are taking traditional courses. These courses are not tailored to the needs of the economy. Even professional courses like Engineering lack the dynamism needed to respond to the changing needs of the job market. The present government has tried to address it by focusing on making education, market oriented and skill intensive, emphasizing on vocational studies. Under the ‘Skill India’ initiative of the Government of India, the goal is to empower the youth with skill sets, which make them employable and more productive in their work environment. Skill India offers courses across 40 sectors in the country and are aligned to the standards recognised by the industry and the government under the National Skill Qualification Framework. The courses help a person focus on practical delivery of work and help him enhance his technical expertise so that he is ready from day one of his job and companies don’t have to invest into training him for his job profile. Under the Atal Innovation mission, government has set up Atal Tinkering Labs to encourage experimentations at the school level and Atal Incubation Centres provide hand holding to give industrial linkages to technological innovations.

Technological advancement

The spatial distribution of institutes of higher education also poses a challenge for inclusive economic growth. College density, i.e. the number of colleges per lakh eligible population (population in the age-group 18-23 years) varies from 7 in Bihar to 60 in Telangana as compared to all India average of 28. Except for a few top universities and colleges, ensuring quality education in other institutions has also been one of the biggest challenges for the government.

Technological advancements provide us with an opportunity to overcome these challenges. With the increasing penetration of high-speed Internet connection in India, higher education in India need not be location or college specific. High quality videos on various regular and professional courses can be made and shared online for them to be freely accessible. Students can watch these videos and then take exams at their convenience. For this to materialize the government should provide conducive regulatory environment. Educational institutions should be well regulated, having good infrastructure facilities and there is growth in the sector, attracting requisite resources for development.

Conclusion

The state of higher education in India leaves much to be desired. Though governments’ initiatives have created islands of excellence like the Indian Institutes of Technology (IIT) and Indian Institutes of Management (IIM) etc., most of the other universities and colleges are not up to mark. Admission to such colleges is not always possible due to issues of accessibility and affordability. Students also lack proper guidance on the available educational facilities and carrier counseling. The central and the state governments need to focus on higher education to make it more inclusive, purposeful and skill oriented. It will go a long way in making India’s economic growth more broad-based and inclusive.

Fuel for development

Revenue from Centre’s taxes on petroleum products goes to states, welfare programmes.

There has been lot of hue and cry over the rising prices of petroleum products in recent months, but it seems that the central government is not going to oblige. The statement by former Finance Minister P Chidambaram, that the prices of petrol and diesel could be reduced was rejected by Arun Jaitley. The Centre has some compelling reasons not to tinker with the prices of petroleum products.

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The pricing of petroleum products is always a contentious issue. On the one hand, it has a large impact on domestic inflation and on the other, it is a major source of revenue for the exchequer. The dependence on imports — over 80 per cent of our consumption needs — undermines our capacity to determine its prices. A one-dollar increase in the international price of crude oil increases the cost of petrol and diesel in India by Rs 0.50/litre and a fall in the exchange rate of the rupee against the US dollar increase the cost of petrol and diesel in India by Rs 0.65/litre. Thus, for all practical purposes the price of petroleum products are exogenously determined.

During UPA rule, under Administered Price Mechanism (APM), petrol and diesel prices were not market-linked and the steep increase in international prices used to exert severe pressure on the oil marketing companies (OMC). The retail prices were kept below the cost, resulting in large under-recoveries for OMCs. From the year 2004-05 to 2013-14, the total under-recoveries was Rs 8, 53,628 crore.

During 2004-08, when international crude prices were rising rapidly, the government subsidy on petroleum products proved grossly insufficient. Since the fiscal position of the government was already precarious, it could not increase the subsidy. The government resorted to issuing “oil bonds” to the OMCs in place of cash subsidy. These interest-bearing bonds were not even reflected on the balance sheet by the UPA government, resulting in the artificial measurement of the burgeoning fiscal deficit. Between 2005-06 and 2009-10, oil bonds worth Rs 1,42,202 crore were issued by the government interest on them ranging from 7.33 per cent to 8.4 per cent, per annum repayable up to 2024-25 by successive governments.

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This worsening fiscal situation under UPA led to the hardening of the interest rates affecting borrowing and investment for the corporate sector and runaway inflation for the common people. Thus, while the people where getting petrol and diesel at comparatively lower prices, they were paying much higher prices for almost everything else. The burden-sharing mechanism devised by the UPA government had also led to a depletion of cash reserves of upstream oil companies like ONGC, GAIL and OIL and the destruction of their intrinsic value.

This brings us to the argument that petroleum products are highly taxed in India and they need to be brought down to control the spiralling prices. The contribution to central and state exchequer by the petroleum sector in the last few years is as follows: The Centre received Rs 1,26,025 crore, Rs 2,09,354 crore, and Rs 2,73,225 crore in 2014-15, 2015-16 and 2016-7 respectively, and an estimated Rs 2,84,442 crore in 2017-18. While the states received Rs 1,60,526, Rs 1,60,114, Rs 1,89,587 and Rs 2,08,893 in the same years.

India needs this revenue for catalysing economic growth, building infrastructure for better quality of life and providing social security to the poor and in backward areas. Second, a large component of central government duties on petroleum products — 42 per cent of the basic excise duty — is given to state governments. Also, 60 per cent of the remaining 58 per cent of the basic excise duty collection is spent on centrally-sponsored welfare schemes in the states. Thus, the total amount transferred to the states is (42+34.8)= 76.8 per cent. It is estimated that a Rs 1 reduction in the excise duty would reduce revenue collection by Rs 14,000 crore.

The effect of increasing petroleum prices on the tax collected by the Centre and the states needs to be understood clearly. In the decontrolled regime that India is currently following, any change in international crude price is passed on to the consumer. Higher prices are likely to reduce consumption. The taxes imposed by the Centre are specific — fixed in terms of Rs per unit. So, if the consumption falls, the tax collected by the Centre also goes down. The states, however, levy ad valorem tax and it is likely that with the increase in petroleum prices, its tax collection goes up even with falling consumption. Therefore, if there is any merit in the argument that the taxes on petroleum products should be reduced in wake of the increasing international prices, it applies more forcefully to the states than to the Centre.

Ultimately, the long-term solution to this teething problem is to change the share of petroleum products in energy consumption mix (34.48 per cent in 2015-16). We need to generate more energy from coal and lignite (46.28 per cent), which we have in abundance and also focus on electricity generation from hydro, nuclear and other renewable sources like wind and solar (12.75 per cent). The Narendra Modi government is working on this long-term solution and in the coming years we will see a fall in the contribution of petroleum products in the source-wise energy share.

Paving the path to prosperity

June 19, 2018

As a part of its ongoing election campaign for Karnataka state elections, Congress party got ex- Prime Minister Shri Manmohan Singh to criticize Modi government’s management of Indian economy at a press conference in Bengaluru. It must be said that the critique was based on half-truths designed to mislead than to enlighten.

In the said press conference it was claimed that the UPA delivered an average growth rate of 7.8 percent under turbulent global conditions whereas the NDA, has managed lesser growth rate despite favorable international climate and low oil prices. In order to see through the dishonesty in this statement, we will need to segregate the performance of UPA I and UPA II. What Shri Singh has conveniently ignored is the fact that in 2004, UPA I inherited an economy that was in pink of its health, thanks to the macroeconomic policies of the NDA government headed by Shri Atal Bihari Vajpayee. Add to this the fact that, the Global Economy and international trade had witnessed some of its best years during this period. The average annual GDP growth rate of India during this period was 8.45 per annum.

No doubt, global factors had turned somewhat adverse during UPA II, but fiscally profligate policies of UPA I were coming home to roost during the tenure of UPA II. High Inflation had broken the back of the common man. When Mr Singh relinquished power in 2014 the economy was at the edge of a precipice (India was infamously part of the ‘Global fragile five’). It is instructive to note that the growth rate during the last two years of Manmohan Singh’s tenure was 5.4 and 6.1 percent respectively, with very high fiscal and current account deficits and low foreign exchange reserves.

Rising non-performing assets (NPA) of the banking system is one of the criticisms. There has been a relentless attempt by the Congress party to confuse the public by mentioning the loan write-offs and farm loan waiver in the same vein. Actually the Corporate loans are not being written off, but the banks are making provisions for the bad loans created under the previous UPA regime, so that the banks balance sheets are strengthened. All earlier attempts like SDR, S4A, CDR, LoC, LoU etc, to tackle NPA were simply to restructure and ever greening bad loans. Increased NPA is the result of the Modi Government identifying and recognizing a problem that existed in the system. The bad loans have increased by a magnitude of three times (from Rs 2.61 lakh crore to Rs 8.4 lakh crore by September, 2017) out of the outstanding loans in 2014 only.

The Narendra Modi government has enacted The Insolvency and Bankruptcy Code (IBC), which is helping in recovery of Bad Loans from the defaulters possible for the first time. The prospect of defaulting promoters losing control of their companies was unthinkable before IBC. ‘The Economist’, whose antipathy towards BJP is well known, has also said that due to IBC, “the outlines of a fresh era in Indian capitalism are taking shape.”

Congress and Mr Singh have also tried to create ruckus about the tax collection by the government. They say that the Government has collected Rs. 10 lakh crore through taxes on petroleum products without mentioning that this collected over the last four years. The taxes on petroleum products are counter-cyclical in nature and the Government has reduced them to a certain extent due to rising prices. It should also be noted that the administered price mechanism (APM) followed during the UPA years had led to hidden subsidies through the issuance of Oil Bonds, without provisioning in the budget. So far as appropriation of this revenue is concerned, Government has been able to bring down the fiscal deficit from 4.48 percent of GDP in 2013-14 to 3.24 in 2017-18 and keeping inflation under check. At the same time increased government spending on infrastructure.

Infrastructure spending is one of the focus areas of Modi Government because of its multiplier effect on other sectors of the economy and better quality of life for the common men. From spending Rs. 1,74,000 crore on infrastructure in the FY 15, the spending in FY 18 is expected to be Rs. 2,92,200 crore – an annual increase of 19 % per annum. The average annual construction of highways in the three-year period of NDA government stood at 6,200 kms against 5,000 kms in the preceding three years, similar is the case for rural roads, irrigation coverage and low cost housing. The increased government spending has also created demand for cement, steel and construction equipment.

On agriculture sector Shri Singh has claimed that in the last four years current government has reversed the successes of UPA government of increasing MSP and rise in exports. But the fact is that the current government has recognized that the problem in agriculture sector is not one of production, but of income security. To address rural distress, focus of the government has shifted from increasing production to doubling of farmer’s income. A large number of steps like e-NAM and model APMC Act, better agriculture risk mitigation through insurance has been taken to ensure that farmers get better price for their produce.

Independent bodies have also attested the current stellar performance of Indian economy. Centre for International Development at Harvard University in its report has said that India would be the fastest growing economy in the world in the coming decade. In 2017 Moody’s raised India’s sovereign rating from Baa3 to Baa2 after a gap of 13 years.

UPA is too recent in our memories to forget that Mr Singh led Congress government was not only one of the most corrupt governments since independence but also poor economic manager. The government is still willing to engage with Congress party because it shares Manmohan Singh’s belief that no one person can be the repository of all wisdom in a complex and diverse country like India. He should try to convince his party to shed its confrontationist attitude towards the Government. Wasting full sessions of Parliament is neither going to help the nation nor the Congress.

People of Karnataka are intelligent enough to see through the lies, deceit and inefficiency of the Siddaramaiah government. Whatever Congress party does, its fate is already sealed so far as the Karnataka assembly elections are concerned.

Gopal Krishna Agarwal

National Spokesperson on Economic affairs of BJP

Gopal.agarwal@bjp.org

Lack Of Technical Evaluation

June 15, 2018

There are several factors ailing corporate India. From the stakeholders’ viewpoint, it boils down to ease of doing business (EODB); whether it is regulations, compliances, permission or a level playing field. From a corporate point of view, the success or failure of a business will largely depend on its corporate governance. Corporate governance doesn’t mean the composition of board and how decisions are arrived at, but how companies identify projects, evaluate them technically, undertake feasibility studies and calculate the payback period. Otherwise how do you explain big corporate houses taking up and committing mega investments in infrastructure projects without even land acquisition in place?

Similar is the case with power generation, steel production and telecom sectors. In all these segments, we find large non-performing assets. Because there was little estimation about what will be the future demand; how much capacity is being generated; is it in sync with business life cycles; its impact on return on equity; and little consideration for backward and forward supply chain integration. Now we are saddled with many unviable projects with over capacity.

The corporate world will have to take responsibility for selection of projects and proper feasibility studies. They will have to own up the success or failure of their businesses, and then alone can there be an exit route for genuine business risks.

This evaluation should also take place at the financial institutions level. A corporate house cannot take up a project simply because finance is available. Similarly, banks cannot finance a project because a big name is associated with it or there is a lead banker, as is done in consortium finance.

At the government’s level, there is a lack of developmental financial institutions. This gap cannot be filled by commercial banks alone. Commercial banks are lending merely on the basis of financial feasibility studies; relying on outside technical reports. Term lending should not be done without technical evaluation by experts within the institutions. Generally, developmental financial institutions have in built capacity for technical evaluation. At present, we lack such institutions. Earlier, we had Industrial Development Bank of India (IDBI), Industrial Finance Corporation of India (IFCI), etc. Over time such institutions have been dismantled or converted into commercial banks.

Along with the removal of bottlenecks in factors of production such as land, labour and capital in progress, the government has to establish developmental financial institutions and the corporate world has to improve its corporate governance at the project level, evaluating them thoroughly. Only then the true benefit of such important government initiatives such as integrated cluster development for global supply chain, and defense corridors incorporating domestic requirements for captive demand, will bring desired results.

Gopal Krishna Agrawal

National Spokesperson of BJP on economic affairs

gopal.agarwal@bjp.org

Modi Government: Hype VS Reality

June 4, 2018

As the Modi government completes 4 years of its first term in office and the nation braces itself for the general elections next year, it is opportune moment to understand the inner motivations of the Government that shape its policies and workings. The victory of Narendra Modi led BJP in the 2014 general election was a tectonic shift in Indian politics. The mandate was a rejection of incrementalism in favour of transformative changes. Modi was voted to power on the promise of accelerating economic growth, creating corruption free environment and achieving participative development.

Economic Philosophy:

Modi government believes in being fiscally responsible, increasing efficiency of government expenditure and makes laws and policies that favour empowerment over entitlement.

Within the ambit of this philosophy and guided by ‘Antyodaya’, government is unabashedly pro-poor. Committed to address the challenge of slow economic growth and inequality, the government is not dogmatic about the instruments that should be used. This a clear shift from the policy of doles and entitlement followed by the UPA government.

Focus on infrastructure spending and increased allocation for economically disadvantaged sections of the society required higher governmental spending. Achieving this while at the same time reducing fiscal deficit called for increasing the tax to GDP ratio. Towards this goal, government implemented the Goods and Services Tax (GST) which is the biggest tax reform since independence. GST has broadened the tax base by creating a system where registration, filing, assessment, credit and refund are all online with little scope for subjective intervention and harassment.
Inflation is tamed and fiscal deficit is controlled by the Government by taking strong policy decisions. The government has tried to address all pervasive corruption through steps like demonetization, direct benefit transfer (DBT), Jan Dhan Accounts, Benami Properties Act and increased transparency in governmental working. Deregistration of shell companies, renegotiation of bilateral tax treaties, Income Disclosure Schemes (IDS) have been other steps in this direction. Business transactions through banking channels are being encouraged so that they leave an audit trail.Insolvency and Bankruptcy Code (IBC) has been one of the biggest reforms in the factors’ market. Promoters of defaulter companies are facing a real challenge of losing control over their companies. The successful resolution of the NPA of Bhushan Steel Limited under the IBC is going to be a game-changer for the banking sector. Financial Regulation and Deposit Insurance (FRDI) Bill seeks to create an institutional setup to resolve distress in financial institutions but is facing opposition from Congress party.
The kleptocracy that was UPA had led to a disappointment in the international community about the future of India. A hallmark of current government’s foreign policy has been the concerted attempt to dispel this image and to assure the global community that India will realize its true potential. The trust of the global community is vindicated by the ever rising foreign direct investments (FDI) in India.

Social philosophy:

When it comes to the social dimension of its programs and policies Modi government believes in scale, speed and the power of mass movement to realise the objective of Social upliftment.
Sanitation campaign under the aegis of ‘Swachh Bharat Abhiyan’ is to provide a life of dignity and honour to the poor, irrespective of their religion, caste or gender. ‘Beti bachao Beti padhao’ initiative of the government seeks to provide equality of status and opportunity to our daughters. The government has been successful in creating awareness and public participation. Modi Government’s stand in the Hon’ble Supreme Court in the matter of triple talaq flowed from its conviction that the practice was unconscionable and did grave injustice to Muslim women.
Political philosophy:

‘Sabka saath sabka vikas’ which loosely translates as a government that enjoys the support of every section of the society and that works for the development of all, is the credo of Modi government.
Modi government is not guided by narrow electoral considerations. The difference with the working of the Congress led UPA is too obvious to be missed. The Congress government during the period of 2004-2014 tried to institutionalize the cleavages of the Indian society with the hope to reap electoral gains. It made all attempts to pass a ‘Communal Violence Bill’ that was manifestly against the Hindus as was the Right to Education Act which exempted only minority educational institutions from its ambit, creating an incentive for various sects to dissociate from Hinduism. The UPA government has also constituted Sachar Committee for Muslims and was trying to make changes which it clearly knew to be unconstitutional. A completely fabricated narrative by the name of ‘Saffron terror’ was sought to be developed by Congress government in order to consolidate Muslim votes.
Modi government believes that responsive and effective governance also ensures electoral success. Thus so far as the government is concerned it should respect the mandate of the people by focusing on doing its job. It also firmly believes that good economics is good politics. Unlike the earlier governments, Modi government has not created vested interest for limited number of people in its continuation. The government has created higher benchmarks and evaluation matrix for fixing accountability and is willing to defend its performance. The success of BJP in the state elections since 2014 bear testimony to the fact that Modi government is reaping political rewards for its work at the centre.
Gopal Krishna Agrawal

National Spokesperson of BJP on economic affairs

gopal.agarwal@bjp.org

The Modi-Xi bonhomie at Wuhan

June 2, 2018

The global interest generated by the visit of Prime Minister Narendra Modi to Wuhan for an ‘informal’ summit meeting with the Chinese President Xi Jinping is testimony to the importance of these two Asian giants in the present global order.

China and India are not only important for each other, their agreements or disagreements on issues can now influence the global narrative. The world today is dealing with intractable issues of terrorism, rise in protectionism and climate change, and both India and China have to make important contributions in these matters.

Pain points

There are many sore points in Indo-China relations. The dispute arising from China’s refusal to accept MacMahan Line as the international border hangs like Damocles’ sword over our relationship and the stand-off at Doklam was a chilling reminder of it.

China’s unqualified support to Pakistan has also been a cause of concern here. It has allowed Pakistan to raise its stakes against India.

India has also expressed its displeasure at the ‘One Belt One Road’ project passing through Pakistan occupied Kashmir . India’s attempt to get Masood Azhar designated as an international terrorist by the United Nations has constantly been vetoed by China.

It has also frustrated India’s goal of becoming a member of the Nuclear Suppliers Group. China’s refusal to share river water data on Brahmaputra is also an irritant.

China has its own reasons to be frosty with India. India’s asylum to Tibetans is not viewed very kindly by it. India’s growing proximity with the US and the coalescing of this association with Japan and Australia with a view to ensure freedom of navigation in the South China Sea irks China.

China’s riding roughshod over its smaller neighbours has led these countries developing closer ties with India, which, even with all its limitations, is seen as a country that can stand up to China. It is in this background that this informal summit is taking place.

In spite of these hiccups, there are several areas in which India can be benefit from better ties with China. China is India’s biggest trading partner and runs a considerable balance of trade surplus with India at around $50 billion. India has expressed its discomfort at this skewed trade relationship and China has expressed its willingness to address the issue.

With labour costs rising in China, a lot of low value-addition manufacturing will become internationally uncompetitive.

India can benefit from this by insisting that Indian MSME clusters be made part of Chinese global supply chain.

The second leg of achieving trade balance can be higher exports of agricultural and pharmaceutical goods and IT services. India must insist that tariff and non-tariff barriers do not stultify the export of products and services in these categories. India should also insist on local production of Chinese imports to bring down the trade deficit. Such a shift in manufacturing will also complement the government’s ‘Make in India’ initiative.

FDI from China

India also stands to benefit if it can attract foreign direct investment (FDI) from China. According to the RBI’s provisional figures for 2016-17, FDI received from China was a mere $198 million whereas the total FDI received that year was $36.32 billion.

According to the World Investment Report 2017, in 2016 China was the second largest source of outward FDI, at $183 billion. China as a source of FDI is, therefore, virtually untapped. FDI from China can be in railways and the power, fintech and infrastructure sectors, where India needs huge capital investments.

India can also work with China in the areas of energy security, water security and climate change. Indian and Chinese interests converge on the issue of energy security as both are dependent on foreign sources for fossil fuels.

China can also help in developing our renewable energy sector.

Gains to China from a good relationship with India are also considerable. As China prospers it would need outlet for its capital. India, with its vast market, can be one of the attractive opportunities. China’s ambitious ‘One Belt One Road’ project cannot be truly successful without the participation of India.

India and China share very old cultural and civilisational ties. It is hoped that the sagacity of the leadership of these two countries at the Wuhan meet will provide the two countries with a new template to revive the old bonds.

Gopal Krishna Agrawal

National Spokesperson of BJP

Gopal.agarwal@bjp.org