Need for a Transformational Change in Fuel Policy not Random Pricing, Rationing, Inefficiencies and Corruption

As always the news of fuel price hike was met with much criticism across the political aisle including those of the ruling government's alies while social media was abuzz with creativity in showing the effects of such a hike. My favorite was a marketing pitch for petrol sachets.

Keeping the criticism of the masses and my personal belief that government must get out of industry keeping no role to play in setting fuel prices aside, increasing diesel prices and reducing excise on petrol was for once a sensible decision taken by the government.

I broke down the cost of petrol in my earlier blog (Read Here) - c. 40% of the retail price of petrol is made up of Cental and State taxes. These high taxes on petrol have long been put justified in the disguise of cross subsidizing diesel, kerosene and LPG. This cross subsidization however serves no purpose. Cheaper diesel has led to proliferation of diesel run passenger cars and SUVs cuasing unreasonably high consumption of diesel. Diesel as we know is an extremely high polluting fuel compared to petrol. Kerosene on the other hand has been rampantly adulterated with petrol causing engine and environmental damage while creating another avenue for black money in the system. Reduction of central excise on Petrol by 5.3 a litre is therefore a step in the right direction. Increasing the price of diesel is certainly going to lead to a slight jump in inflation across the board but we cannot always escape the hard reality of global markets where crude prices have jumped more than 30% in last 3 months due to speculation and middle east uncertainties. 

Only way to manage price stability is for the oil companies to effectively and opportunistically use hedging instruments which would never happen as long as they are government owned and dont have any incentive to improve efficiencies and compete in an free market environment.  

Turning to no price hike in kerosene - in a fractured coalition and messy democracy like ours, it is more or less blasphemous to expect an increase or rather rationalization of kerosene prices. Black marketing of kerosene has become so intertwined with the corrupt political system and bloated bureaucracy that no one would ever dare plug the spigot that feeds politicians' and middlemen's Swiss accounts. Narasimha D Rao of 'International Institute for Applied Systems Analysis' concludes in 'Energy For Sustainable Development' March 2012 issue, 'kerosene subsidies are regressive and of minimal financial value to poor rural households. This is in part because household quotas are based on cooking needs, but kerosene is used predominantly for lighting. In urban areas, subsidies are progressive, and provide benefits of up to 5 to 10% of household expenditure among poorer households which lack affordable access to LPG and biomass. Overall, only 26% of the total subsidy value directly reaches households'. Another study was more liberal to the government and mentioned c. 40% of kerosene is stolen and never reaches intended beneficiaries.

Based on this, kerosene subsidies are the biggest and longest running scam India has ever seen still going strong. Based on mid point of this 74% and 40% loss estimated by the two studies mentioned earlier and last years subsidy of $4 Bn, here is $2.3 Bn in corrupt money warming politicians/middlemen pockets annually.

I dont want to sound an environmental activist here but common sense thinking would suggest a better policy would be to give intended beneficiaries access to cleaner cooking and lighting options than subsidize what is quite clearly the most inefficient, environmentally disastrous and unhealthy option.

The decision to limit LPG cylinders at subsidized rates to 6 per family however was an antiquated and intellectually bereft decision that one has compromised to expect from this government headed by a renowned technocrat. A two tier pricing structure often leads to a black market. Indian scam-artists' and local politicians' ingenuity would right away lead to a flood of bogus gas connections and quota on those bogus connections would make it to genuine middle class families at 600 a piece compared to the full priced 750 cylinder. Families would be waiting for a long time to get their subsidized cylinders while the 600 a pop would be available instantly. So wait and watch as this latest experiments makes many millionaires while housewives tackle yet another complication in their already stretched tiger mom inspired life.

I would prefer a policy that eliminates all the subsidies on LPG, petrol, diesel and kerosene in return for elimination of import duty on crude, reduction in all central government taxes to the minimum bracket and incentive to private sector to invest in building pipelines and efficient refineries. Inefficient refining adds c. 1.5 a litre to price while inefficient trucks based transport and vested interests in dealer network and marketing adds another 4 bucks of inefficiencies. I would have added investment in public transport to this wish list as well but that would make me an eternal but naive optimist. The wish list above makes me more or less an enemy of socialists but keeps me among sane eternal optimists nonetheless.

India's Competitiveness - A fall of 10 places from 2009-2012

If the news of GDP growth slowing to 5.5 pct last quarter was not bad enough, India's competitiveness in 2012 dropped 3 places to 59.

Quoting from the report:

• Since reaching its peak at 49th in 2009, India has lost 10 places. Once ahead of Brazil and South Africa, India now trails them by some 10 places and lags behind China by a margin of 30 positions.
• The country’s supply of transport, ICT, and energy infrastructure remains largely insufficient and ill-adapted to the needs of the economy (84th).
• The picture is even bleaker in the health and basic education pillar (101st). Despite improvements across the board over the past few years, poor public health and education standards remain a prime cause of India’s low productivity.
• Once ranked a satisfactory 37th in 'Trust in Institutions' dimension, India now ranks 70th driven largely by lack of trust in politicians (106th).
• The macroeconomic environment (99th) continues to be characterized by large and repeated public deficits and the highest debt-to-GDP ratio among the BRICS.

Despite the above, report does point out a couple of strengths:

• Fairly well developed and sophisticated financial market (21st) that can channel financial resources to good use.
• Reasonably sophisticated (40th) and innovative (41th) businesses.

The decline in competitiveness should come as no surprise to anyone given that the current government has been focused in carrying out and then managing the fallout of scandals failing to push through any meaningful reforms, especially in the last 3 years during which we lost 10 places in competitiveness.

In the recent past, we have seen corruption at an unprecedented scale (Commonwealth games, Defense procurement, 2G, Coalgate, Thorium etc), widespread failure in the running and maintenance of existing infrastructure (grid failures, T&D losses, coal mining below potential, railway accidents etc), repeated delays and cost overruns in infrastructure projects (Bangalore Metro, JNPT upgrade, Delhi Mumbai Industrial corridor, numerous power plants and the list can go on) and policy and regulatory gridlock leading to delays and uncertainty in private sector and FDI ($12 Bn Posco steel plant, $9 Bn Mittal Steel plant, multi-billion dollar Himalayan Ski Village project near Manali, Vodafone tax dispute, renegotiation of Mauritius tax treaty. FDI in retail etc). 

Incompetence of this government is so widespread that finding adjectives to describe the tragic state of affairs is difficult. Times Magazine's portrayal of Manmohan Singh (MMS) as an 'Underachiever' and Washington Post's description of him as a 'Tragic Figure' can be characterized as a mild judgement at best. It does not come as surprise that the day India dropped 3 places in competitiveness, this Government was demanding an apology from Washington Post for labeling MMS as 'Tragic Figure' and trying to push through a bill that would kill little remaining meritocracy among government employees.

Reports highlight of the two areas of strength also do not come as a surprise. Reserve Bank of India (RBI) is the only institutions that has managed to remain independent and take tough and independent decisions regarding bank supervision and conduct of monetary policy. While one could argue RBI has been painfully slow in opening up the banking sector to foreign competition and launch reforms that would create a corporate bond market and foster efficiency, it could not be denied that RBI has managed the monetary policy impeccably despite governments push to keep rates low, supervised banks diligently to limit credit risk and been pragmatic in helping them manage cyclical risks in a downturn.

Similarly the vibrancy of our private sector is a hallmark of our culture that places a lot of emphasis on hard work (talking about work life balance is more or less still taboo), education, mobility and most importantly to learn to succeed despite the government.

I am eager to see how long the party continues on these two fronts given that private sector is beginning to feel more and more disenchanted with lack of infrastructure and an extremely inefficient judiciary coupled with an uncertain regulatory environment while government is eager to get RBI into its fold to pander to minorities (islamic banking), direct lending to its cronies and manage an ever growing deficit at low rates.

2011, a Year that was. 2012, a Year that would be.

S&P 500 at 1257.6 ended 2011 where it stared. Globally $ 6.3 trillion was lost in capital markets. Investment bankers, hedge funds, traders and the Wall Street elite continue to mint money though while the 401(k) and the middle class keep getting squeezed. May 2012 be the year when disparity between the real and financial economies see some contraction.

Our Sensex ended the year 25% down, lost the trillion dollar membership and Indian Rupee ended up as the worse Asian currency in 2011 loosing 16% against the American Dollar. Economic growth in 2011 may come at under 7% against the projected 7.6%. These facts however had no effect on our Government that continues to enjoy its ever extended holiday. 2011 was a year of lost opportunities, policy paralysis and continued mockery of democracy. We are yet to get a Lokpal (Ombudsperson) or any other strong counter corruption measure despite the protests and scandals continue unabated. 2011 has been a splendid year for the Politicians and an equally painful one for the public. I wish 2012 turns out to be splendid for the public and democracy starts discovering its real meaning by booting out the corrupt governments in upcoming state elections.

Afzal Guru and Kasab are alive and kicking, feasting in a high security cell on our tax payments. In the meanwhile, we had serial blasts in Mumbai in July and a powerful blast in Delhi in September. 2012 would probably be the year when we release these two gentlemen in exchange for the innocents hijacked.

Globally and in our territory, Pakistan remains the epicenter of terrorism; it came as no surprise that Osama was hiding near their military academy. World continues to find a way to look the other way and ignore the threat while our spineless politicians continue to play politics on how to tackle the threat of a yet another Kargil or 26/11. 2011 was however a year of lateral thinking on this subject; let’s withdraw our army from Kashmir and separatists have a feast in 2012. May 2012 be the year when the world agree on a coordinated response to fight terrorism without giving any concessions to anyone for short term geo-political gains and India gives a fitting response to any act of terror.

The European Union continues to debate how to fix itself. Germany though finally found redemption and achieved the objective of ruling Europe, well almost. France found itself in the unusual position of having some influence even if it was as Germany’s wing-man and the Conservative British Government understandably could not tolerate it. May 2012 be the year when they realize EU in its current form is not an economic failure but a social and political failure. EU citizens need to finally start identifying themselves as Europeans to make a real European Union that works for all and not just Germany.

Coming on to the lighter side of life:

The ever inflating Shah Rukh Khan bubble finally burst in 2011, Karan Johar and Aditya Chopra continued to sink further into oblivion and Salman Khan at 46 continues to be the youth icon. New talent-less and gutless bubbles continue to inflate further - Ranveer Singh, Sonakshi Sinha and Imran Khan to name a few. Bollywood overall continued to churn out mediocre movies with no single title worth remembering. May 2012 be a year when we finally see some talent and get a movie that does justice to the available talent of Amitabh Bacchan, Anupam Kher, Shabana Azmi and Nandita Das.

By winning the Cricket world cup in Mumbai, miserably losing the test and one day series in England and then beating the same English team on their return tour, Indian team cemented its reputation as that of tigers at home and just another team abroad. Sachin is still searching for his century of centuries and Dravid continues to wonder why India loves Ganguly and even Laxman more than him. May 2012 be a year when we lose some and win some on all pitches and under all conditions and Sachin gets his 100th 100.

2011 for me was a year of settling down in a new city and a new job. I continue to thank God for giving me the gift of education which has allowed me to travel the world and live a life that is comfortable, secure, honest and interesting. 2011 was also the year when I stopped being a regular traveler on the NYC-Boston boltbus. Shavi graduated and joined me in NYC. I am ever more thankful to her as she continues to inspire me to be a better man every day. 2012 is going to be the biggest possible year in our lives as we welcome our daughter in our lives and the world. May 2012 be a year when we continue to be good, honest and compassionate human beings and excel in our roles as parents.

Happy 2012 everyone.

Is India really shining?

I have been engaged in a fierce debate with a few Chinese bloggers on the Indian and Chinese political system. Howsoever proud I am of our democratic traditions, I have to admit that this debate has forced me to look at the other side of India - the India thats not really shining but rather sinking.

I wont make this post a comparison with China as there is no comparison left in economic terms - Chinese economy is 3 times that of India and none of the Indian cities can remotely match up to Beijing, Shanghai or Guangzhou - the gap keeps increasing every day.

Economic survey of 2010 says Indian economy would grow at 8.6% in current fiscal year and at least 9% next year. This makes India the second fastest growing economy in the world and the fastest growing democracy as we like to put it. IMF's economic outlook released in Oct 2010 placed India at fourth among world's largest economies after US, China and Japan. This implies Indian economy is bigger than Germany, the UK, France and Russia. A Citibank survey recently said India would become world's second largest economy by 2050 overtaking the US. India had 45 billionaires on the Forbes 2010 billionaires list. These numbers for sure would point to an India thats shining.

When I, however look at statistics on per capita income basis, India ranks 132 in the world trailing Congo, Indonesia, Sri Lanka, Georgia, Namibia and many others. China ranks 100 in per capita terms and 2 in absolute GDP terms.

The most shocking fact of the entire India shining debate however is that India is home to the largest number of chronically malnourished children under the age of 5 - India accounts for world's 48% chronically malnourished children, more than twice than that of Sub-Saharan Africa. I bet no news network or newspaper talks about that. After all its free press and they have a right to ignore these shocking facts. I also have not heard any discussion on this in the political circles or in the entire debate building up to the budget. The Integrated Childhood Development Service (ICDS) scheme put in place in 1975 has not delivered any results even though it claims to be world's largest such scheme. Proportion of underweight children has reduced marginally, from 50.7% in 1992-93 to 40.3% in 2005-06. In the same time, the economy has more than doubled. This points to a highly inequitable growth.

I have been a firm believer in the capitalist system embedded in a democracy. I have always believed that you need to create wealth before thinking about distributing it. Till 1991, our economic system promoted policies that didn't focus on creating wealth but on distributing it from the rich to the poor. Those policies only led to the transfer of wealth from honest rick to the corrupt rich. It however seems like the trickle down effect is yet to set in even after 20 years of economic liberalization. What troubles me the most is that there are no debates or discussions on these relevant issues in the parliament. No one holds the government accountable for grave failures like these.

This brings me to the other side of India - our democracy. While democracy has never been known to be a meritocracy, Indian democracy seems to have taken this to a whole different level. Our democracy has become completely devoid of any ideology. All political parties win or loose elections on caste and region. No politician, not even the highly learned politicians like Arun Jaitley and Kapil Sibbal who gave up highly successful careers to join politics seem to be making a noise around the real problems - that is of malnourished children, sinking urban infrastructure, wide spread poverty in rural India, corruption and the lack of an efficient judiciary.

Our urban infrastructure is in shambles - Mumbai, the city that is home to one of the highest numbers of billionaires is full of filth and slums. I hear none of the Chinese cities have a slum. Delhi's law and order situation is so terrible that women dont even think about stepping out in the night alone. Everyone acknowledges that including the chief minister and parliamentary leaders but no one seems to be doing anything about it.

Our Supreme Court had to recently make an argument in an altogether different case that no government likes a strong and efficient judiciary and that might be why less than 1% of the government's budget is directed to building and improving the legal infrastructure. It is in Government's interest to let cases pending as government is the largest litigator. Court threatened if they should start directing the government on this issue. The sad part however is that no one seems to be bothered about millions of pending cases in the High Courts and Supreme Court.

Corruption seem to have become a part of every day life - while corruption cannot be eliminated completely but there is a difference in paying a bribe to avoid consequences of breaking the law and paying a bribe when you are on the right side of law.

The most worrying part of our democracy is our people themselves for whom the democracy has been built - middle class which forms the backbone of any nation seem to have become oblivious of the real issues and indifferent towards politics. Very few go and use their voting rights - that gives politicians an easy way out to play the caste and regional card and win elections while real issues of the day never come to surface.

When I look at events taking place in the Middle East, I often ask myself if that's what we need in India as well. Whats the use of democracy when more than 60 million children are chronically malnourished. Whats the use of democracy when a woman cant go out alone for a late night meal fearless in the nations capital. Isn't it time someone starts giving a damn about these real issues. We have done a great job in building democratic traditions and institutions and that has held us well for more than 60 years - we are still one country, judiciary is largely independent, media and people have freedom of speech, there is free movement within the country and every 5 years people do have a right to vote for the new government. Its time we make them accountable and efficient. India shining as of today remains just a slogan.

The Great Chinese Bubble

China overtakes Japan as the worlds second largest economy; China becomes the largest automobile market in the world overtaking the US; China will account for a fifth of global economic growth this year; China accounts for 40% of worlds coal consumption; China overtakes US in supercomputing power; China bails out Greece and promises more to other ailing debt ridden countries and the list of these superlatives go on to prove the force that China has become. This when combined with the Military might of China makes it possibly the second hyperpower in the world after the US. History is filled with examples of how economic or military power in isolation doesn't confer the superpower status on one country. Collapse of Soviet Union and what happens in Iraq are examples of that. State planners in China are acutely aware of this and they have therefore built a military that's second to none in the world. China is therefore, like it or not, a superpower today and the worrying aspect of that superpower status is that Chinese are not afraid to use that power.

Recent actions of the Chinese against Japan for release of one of their fisherman alleged to be a state spy by Japan, halting of rare earth mineral supplies to the world and refusal to grant normal and not stapled visas to J&K address passport holders speak volumes on how Chinese are drunk on power and are not willing to play by the rules. US having overstretched itself militarily in Iraq and Afghanistan and having extreme economic and political problems in home is not able to exert any influence on the Chinese. Chinese are well aware of this and that's what has prompted them to react in such blatant manner to a long standing ally of the US, Japan.

There are two crucial things the Chinese are neglecting in all this jingoism. Firstly, it accounts for only 8.6% of world GDP, well below the USA or the EU, which stand at 24.4% and 28.4% respectively. They are therefore far from dominating the world. Secondly, they need to be aware of the reality that their entire economic fortune is dependent on the continued prosperity (read consumption) of the West.

China is a huge importer of raw materiels and intermediate goods and in turn a huge exporter of the final goods. It runs a trade deficit with countries exporting raw materiels and oil and runs surplus with importers of finished goods. Having built a large export base, a natural step would have been to boost domestic consumption. This sadly has still not got the attention it deserves. Chinese seem to discount the fact that in the long term, other large underdeveloped economies s like India, Vietnam, Indonesia etc may catch up with the cost benefits and for sure West cant keep on consuming like there is no tomorrow. Deleveraging in most of the developed world is already pointing to years of no or muted economic growth, Bangladesh and Vietnam are already exerting themselves in labor intensive sectors like Apparel exports and India is catching up in the automotive export sector.

Chinese are smart people and one would expect them to take notice of this trend ahead of the curve but unfortunately this one has stumped them. They are behaving like an addict who doesn't want to let go of the drugs. They already have huge overcapacity across most of the capital goods (power equipment, telecom and network equipment, steel, aluminium etc), real estate and infrastructure industries. This overcapacity is a direct consequence of years of mostly investment led growth rather than a consumption led or balanced growth. China’s real fixed investment has increased at a faster rate than GDP in nine of the past 10 years. Investment is at 70% of GDP and the return on every marginal dollar invested in China is decreasing. In 2000, it took $1.50 of credit to generate $1 of GDP. But by 2008, it took $7 of new credit to generate a $1 increase in GDP. Sad reality despite these startling facts their economic stimulus combined with cheap state financing is leading to creation of more and more capital intensive production capacity. This neither creates employment nor boosts domestic consumption in the long run. It only creates further oversupply and thus deflationary trends across the world.

State directed bank lending has led to credit-to-GDP rising to 140% – levels equal to America in 2008 and Japan in 1991 just before their market meltdowns and credit quality has deteriorated. The truth today is no one knows the real story behind the quantum of bad loans Chinese banks may be sitting on. Chinese government recently took $ 200 billion in bad loans off the balance sheet of its top 4 banks and transferred them to state owned AMCs. How many more of such recapitalization is needed in future is as good as foretelling from a crystal ball.

What further compound the problems is the ongoing suppression of opposing voices and independent institutions. There has been no or little reform of the political system and economic activity continues to be dominated by the state. China’s 10 largest companies, are all state-owned or controlled and as many as 34 of the top 35 companies on the Shanghai exchange are state owned or controlled. While living standard of those living in the cities have drastically improved, those living in the countryside remain sidelined with restrictions on free movement and no outlet for protest.

Every central banker and every reasonably intelligent government is aware of these facts but they have chosen to keep mum on this. The hard reality for them is that China is today the lender of last resort and already owns significant amount of their bonds. Given that many painful years of fiscal correction lie ahead of the developed world and they need the Chinese to finance the deficit and keep interest rate low, they would rather manage the bursting of the Chinese bubble later than now. Key question is, whether the world be a better place with or without the Chinese bubble. Economic pain notwithstanding, this bubble needs to deflate so that the global economy is more balanced and predictable. Plus, a deflating bubble may well open the eyes of the state planners in China to be more respectful of human rights, independent institutions and make them behave more responsibly in world affairs as against their current high on dope I dont give a damn attitude.