Friday 25 April 2014

Election2014: The Modi myth and Indian political reality

Pratim Ranjan Bose

She came to power in 1966; converted the Congress into a family propriety by elbowing out party heavyweights; was ruthless to her political adversaries and; in June 1975 when she was held guilty for misusing power for winning election, The Times described it as "firing the Prime Minister for a traffic ticket". 
Sadly for India, Indira Gandhi went on to announce the Emergency. India slipped into dictatorship - for the first and the last time in its 65 years of history.
Two years down the line when democracy returned, her government was removed from power. The “Empress of India”, as The Economist once described her, became a target of the nation for gross violation of civil liberties during the Emergency.
But, just when the elite thought that it was end of the road for Indira Gandhi, voters decided in favour of her gritty administration over a bunch of weak and regressive political opponents. She returned to power in 1980.
By any measure, Narendra Modi, the popular Chief Minister of the industrially developed state of Gujarat, is no Indira Gandhi. But the stance taken by a section of intellectuals over his selection as the prime ministerial nominee of nationalist Bharatiya Janata Party’s (BJP); brought the corollary into relevance.

Training the Gun

“He will probably become India’s next Prime Minister. But, that does not mean he should be,” The Economist said on April 5, days before India went to a nine-phase poll that will come to an end on May 16.
A clear favourite for the hot seat in Delhi; Modi is living with the mixed identity of a poster boy of economic growth and symbol of sectarian politics, since the post-Godhra riots in Ahmedabad in 2002.
Though no amount of judicial scrutiny could find him guilty, intellectuals stuck to their opinion that Modi was “an artful faker” - a threat to democracy.
And, the more he was criticised, Modi’s stock went soaring, especially among the rising share of young Indians who, as the same publication claims, having more faith on GDP than Hindutva.
The question that comes to mind therefore, will Indian voters risk the secular contours of the country – which has the second largest Muslim population after Indonesia – for GDP? Or, are they merely looking for stronger and better government than the existing ones, within the existing framework of constitution?
The Manmohan Singh government of Congress-led United Progressive Alliance (UPA) was brought in power for a second term, in 2009, on the back of high economic growth and a huge social sector initiative, most importantly the employment guarantee scheme, taken in the first term (2004-2009).
A highly disarranged BJP, suffering from a leadership crisis, made Congress’s win easier. 
But, the UPA simply failed to live up to the expectations of electorate. While growth rate plummeted to less than 5 per cent; a series of scams that surfaced in the second term, simply eroded its credibility, leading to a complete policy paralysis at the Centre.
To make it worse, the economist Prime Minister, who had limited control on government from the beginning, completely lost the plot in the second term. The Indian electorate now wanted a change.

Modi sees opportunity

Modi is of course not the best Chief Minister in India. Neither Gujarat is the best in governance. Also there were also a few other BJP leaders (like Sushil Modi and Shivraj Singh Chouhan) and who had a decent track record in administration. But they led economically less important states. Naturally, they are lesser known and have little clout in Industry circles – that is a prerequisite to hold high offices, anywhere in the world, in modern times.
Narendra Modi’s incorruptible image and, his grit and determination to run the show successfully, ignoring opposition from all sides; opened an opportunity before him. He seized the opportunity - exactly in the same manner as Indira Gandhi once did in the 1960’s.
In a repetition of history the yesteryear's BJP heavyweights like L K Advani or Murli Manohar Joshi turned into mere paperweights - bringing an end to inner party factionalism. They had lost their relevance long ago. Modi’s arrival confirmed it. The advantage went to BJP that is now expecting a return to power, after a decade.

Restructuring leadership

The entire approach is vastly different from BJP’s rise to power in 1996 (for 13 days), 1998 (13 months) and 1999 (for full term); riding high on Advani’s Ram Janamabhoomi campaign beginning late 1980’s – an agenda that died a natural death, during the party’s stay in power.
The credit goes to Indian electorate.
Beginning 1977, voters gave rise to regional forces. The VP Singh government in end 1980’s disintegrated the Hindu vote bank paving way for rise of Dalits (lower caste Hindus) as a distinct political force. The opening up of Indian economy by Narsimha Rao in 1991, made the population upwardly mobile.
Naturally, when a BJP-led National Democratic Alliance (NDA), finally came to power, it used economic growth as the common plank. Once a strong critic of opening up Indian economy to Bideshis (foreigners), the BJP turned the biggest proponents of FDI and privatisation.
The BJP-led NDA government was removed from power in 2004 as people felt a Congress-led UPA could ensure more prosperity. Now that Congress is failing; they want a change. If the baton is finally transferred to Modi, it would be to ensure prosperity but not to jeopardise it.
The only thing sacrosanct here is, prosperity and more prosperity, not ideology. Look at the entire political spectrum in India and the move is apparent. Growth and development remained the key factors in deciding the fate of almost each and every election – either to form State or Central governments – across the country, since 2004.
The trend is irreversible – Modi or No Modi. Politics has to adjust to it

Outreach plan

The political reality is clear to Modi.
Modi is reaching out toIndia's Muslims – and they may vote for him,” wrote Zahir The Guardian in April 23. Critical to Modi, the writer notes the Gujarat Chief Minister has an appeal on young and aspiring Indian Muslims.
Janmohamed, a Ahmedabad-origin Muslim, in
 "I know about the riots, I know about the problems Muslims face in this country, but I am going to vote for Modi. He is good for the economy and if Modi becomes prime minister, he will be able to improve the economy in time for my graduation in 2016 when I start searching for a job," Janmohamed quotes a first time voter.
According to some pre-poll studies about 15 per cent of Muslims in Gujarat and approximately 8 pert cent in the key state of Uttar Pradesh will vote for Modi.

Adding to his popularity?

And, that takes us to the next big question, did a concerted attack by intellectuals ended up improving Modi’s poll prospects?  
I think it did.
For fair part of his rule in Gujarat, he had to face political adversity from Congress government in Delhi that does not have any better record when it comes to riots. (The glaring example is 1984 Sikh riot that took place under Congress rule, right in the national capital)
Throughout this period Modi was under the scanner of the central investigation agencies that had not left any stone unturned to implicate him, albeit unsuccessfully. And, the allegations against him, often reached frivolous proportions (for example the latest accusation of his involvement in Prajapati fake encounter case).
By joining the chorus, that too in a poll season, the intellectuals may have helped Modi to attain mythical heights, in public eye. More often, negative publicity is a good publicity. 

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Monday 7 April 2014

Is India offering the highest well-head price to gas producers?

Pratim Ranjan Bose
  
The query is innocent. But, it had hit the nail right on its head.
On April 4, the Supreme Court asked the Indian government to explain why they chose the “complex” Rangarajan formula for natural gas pricing that tried to establish a market price of natural gas in India by linking it a) with the netback price of imported LNG on long term contracts; b) the weighted average of prices at trading hubs like Henry Hub in the US and National Balancing Point (NBP) in the UK and the netback price at the sources of LNG supply for Japan.
C Rangarajan. Source: http://topnews.in

Netback is a theoretical approach to determine the true value of a commodity, minus cost associated with bringing it to the market place.
Apparently, the Rangarajan Committee resorted to such a complex theoretical exercise to strike the utopian balance between a regulated economy and an open market. The aim was to make gas exploration in difficult assets - as in the deepwater of Indian Ocean or Bay of Bengal – more attractive.
In the end, however, it proved to be a deadly toy in the hands of E&P companies to extract windfall gains.
In a controversial decision inJuly 2013, the Union cabinet decided to implement Rangarajan formula with effect from April 1, 2014.

Sharp increase in prices

The well-head natural gas prices are doubled from $4.2 to $8.4 for every million metric British thermal unit (over $ 6 per mmBtu in North Eastern states that enjoys special concession), to be revised on a quarterly basis.
Though the implementation is now postponed (by the Election Commission) till end General Election in May; the recent turmoil in Ukrain and firming up of gas prices in Europe, indicate Indian consumers may have to pay to the tune of $ 8.6 per mmbtu, once the prices are revised in June.

Costliest gas in the world?

To start with, unlike oil, gas markets are by nature regional. It is therefore impractical to link Indian price to either Henry Hub or National Balancing Point (NBP).
Moreover, prices are generally higher in Europe (than in the US) both due to its heavy usage in power generation vis-à-vis over dependence on Russian supplies. The regular increase in gas prices by Gazprom of Russia is a major stumbling block in improving relations between the two sides.
And, yet landed cost of Russian gas in Europe is lower than the price paid by an Indian consumer for domestic gas!

The Russian gas is delivered to Europe at approximately $ 9 per mmBtu. This includes the cost of transportation all the way from producing fields in Siberia. In other words the well-head price of Rusian gas must not exceed $ 6. It might be lower.
In comparison an Indian steel or ceramic producer located right on the well-head in Andhra Pradesh will now pay close to $ 9.5 per mmBtu or more ($ 8.4 well-head price + transportation) for Reliance KG-basin gas in the East coast.
Supplies to consumers in Gujarat or Maharashtra, on the West coast, will be costlier by approximately $ 2 per mmBtu, meaning that the final cost of the domestic gas is more or less same to  
Russia is no exception.
RasGas of Qatar delivers long term LNG to India ports at $ 12.5, including approximately $ 3 per mmBtu spent on liquefaction and sea freight. Exclude the trade margins and the cost of pipeline transportation from production field to sea-port terminal at Qatar, the well head price is much cheaper than $8.4 as enjoyed by Indian producers.
  The anomaly arises, because the pricing mechanism did not factor in the cost of producing the gas, so much so that the shallow-water D-6 gas of Reliance or GSPC is now priced higher than the deepwater gas produced in Brazil.
Source: http://vungtauoil.com/

Development of deep-water assets is considered costlier than the shallow water assets. And, development of an onshore asset is substantially cheaper than in the off-shore.
Ironically the Indian gas prices will not reflect this difference in cost structure.

Planned economy or market economy?

In an open economy price of gas is decided based on the cost of production and the market opportunities.
The new LNG coming out of Australia, for example, was priced exorbitantly high at $ 18 per mmBtu. This is partly to take advantage of the opportunities created after Fukushima disaster, in 2011.
But, Japan’s decision to take a re-open the nuclear power facilities and the scheduled Shale gas exports by the US beginning 2017; forced Australian producers to take a re-look at their pricing strategies. Last heard, Japan is renegotiating its contracts with Australia.
The point is open economy prices may move on both ways and consumers enjoy the liberty to plan its purchases.
Sadly, the Indian measure does not leave any such option before the consumers. Here the adopted methodology offers strong support to prices, making it apparently unidirectional.
And, the scores of Indian fertiliser or power generation facilities who planned investment at the prevailing gas price of $4.2 are now forced to take delivery of costlier gas through a “take or pay” clause.   
The Indian state of Tripura that has the largest onshore gas reserves in the country is the worst sufferer ofthis planned economy approach. To encourage E& P activities here, the government increased gas prices by nearly three times in the last decade. The price increase was applicable for both the existing and the new fields.
Source: www.decisionrisks.com

Considering the limited market opportunities (due to low industrial base of the state as well as inadequate pipeline logistics), the lead producer, the state-owned ONGC, is also allowed to tap value across the energy value chain - either by setting up a power station or fertiliser unit.
If that was not all, gas producers are now offered another hike in prices ($6 per mmBtu), eliminating the competitive advantage of this industrially backward border state.
The big question is: Could producers expect such super-normal returns, in Tripura, in an open market scenario where prices are a factor of demand and supply. Tripura is a test case. But the question may be valid for the country as a whole.
It might be worthwhile to ask, if the government introduced the new mechanism to give producers best of both worlds - the Open and closed market scenarios.

The unanswered questions

The Supreme Court has rightly asked why “simpler methods” like “cost-plus pricing” or “revenue-sharing” could not be considered for fixing price of natural gas.
In a different context through the question was raised early in the last decade, when Reliance Industries planned to sell a sizable chunk of its estimated daily production of 80 million standard cubic metre (mmscmd) from D-6 gas to a group power generation outfit at $2.8 per mmBtu.
The government objected to it on the ground that such a ‘low pricing’ would deprive India of its revenues.
Many felt the problem could have been solved by fixing a notional price of gas and claiming share of revenues on the same – the same principles as is applied in collecting taxes and duties in real estate – while leaving the rest of the decision making on the producer.
But the government had a different idea. They allocated the same gas at 50 per cent higher price at $ 4.2 per mmBtu. Reliance’s stock value soared in anticipation of higher profits.
The company started gas production in March 2010. Output soared upto 60 mmscmd in the following financial year. And, since then its only a downhill journey.
Source: http://02varvara.files.wordpress.com

D-6 is now producing only 13 mmscmd of gas. Consumers ended up wasting millions or billions of dollars in unutilised plant and machinery. But Reliance’s earnings are will be boosted by doubling of gas price to $ 8.4 per mmBtu.
Reliance is not the sole gainer of this pricing decision.
GSPC and ONGC too once shouted from the roof tops about the ‘rich finds’ they have struck in KG basin. None could establish their claims in reality, and will now find a shelter behind escalated gas price.
The proponents of gas price hike claim that it would boost domestic gas production in the long run. Time will tell, if they are correct.
For now, it helps a few.


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