Demonetisation unlikely to bomb Indian economy but politics will change

Pratim Ranjan Bose

While liberalising India in 1991, P V Narasimha Rao predicted the end of the road for political and economic monopolies, ensuring growth.

Part of his expectations came true.

Congress, which nearly monopolised power till 1980’s, turned anaemic. The benefit mostly went to regional parties. The GDP of India grew more than five times in 25 years. Hyderabad became an IT city and Chennai is now auto-hub.

But, Rao didn’t anticipate the rise of ‘politics of cartelization’ that dominated India in the last decade.

National and strategic interests, including a defence deal with Sri Lanka, became hostage to micro-interests. Parallel power centres bred reckless corruption. And growth became a casualty.

Rise of corrupt India

Many investors are now avoiding Chennai because politics has become too greedy and every successive party in power is asking for a higher cut– anything in excess of 10 percent of project cost.

The typical fallout is a dramatic rise of the cash-economy. According to the largest banker, SBI, its daily cash dispensation increased manifold over the last decade.

A parallel rise in the share of high denomination notes of Rs 500 and Rs 1000 from 46 to 86 percent of total currency circulation, between 2006 and 2016, indicate part of this cash was stored.

The increasing cash intensity was disproportionate to India’s stagnant tax-GSDP ratio of nearly 17 per ent – lowest among BRICS – and low Income Tax base. According to NITI Ayog, only one per cent Indians out of 1.2 billion pays taxes. 

Compare this with the dramatic rise in unofficial election expenses in India and you know, politics encouraged tax evasion and black money generation for own benefit.

Reimaging India

The prevailing paradigm had raised some serious doubts about the efficacy of democracy in delivering public policy goals and ensuring better life to its people vis-à-vis the single party-ruled China that has 50 percent more forex reserve than India’s GDP.

In China in 2010, when they were still discussing political reforms, as was promised by Deng Xiao Ping, I noticed strong resentment of the Chinese against the Indian democracy. They felt it’s a chaotic system that they could do without.

Narendra Modi of BJP came to power in 2014 with a landslide victory – the first of its kind since 1984 – promising a change of this political narrative.

Over the last two years, the government gave options to bring money stashed in abroad and disclose unaccounted earnings. Treaties were entered with tax-heavens like Cyprus and Mauritius. Switzerland agreed to exchange account information on Indians from 2018. 

Some responded to these warning signals but most didn’t. Despite encouragements, cashless transactions staggered at around 10 per cent in volume terms. According to SBI, daily cash dispensation increased by 60 per cent over last three years.

Clearly, the cash economy thought it is too big to be messed with. Modi decided to do the unthinkable. He bombed them to redefine the image of India and Indian democracy that was considered toothless.  

On November 8, the nation was awestruck to hear the Prime Minister announcing a midnight ban on high denomination notes, constituting 86 percent of the currency in circulation to flush out idle, unaccounted cash or black money.

The demonetised currency of Rs 500 and 1000 are replaced by the new currency of Rs 500 and 2000. The partial demonetisation scheme is scheduled to be over on December 30.

India is literally forced to adopt cashless options, leaving money trail open for scrutiny thereby reducing the scope of tax avoidance and corruption.

Huge step

Politically, the ferocity of the decision is comparable to the nationalisation of coal, banking and insurance sectors, between end 1960’s and early 1970’s taken by Indira Gandhi.

Some were unhappy that government is infringing on their ‘democratic right’ by setting (temporary) withdrawal limits to ration the new currency and, literally forcing them to take cashless transaction modes like plastic or digital money.

The politics of cartelization that was put on the back foot over the last two years, saw a danger. Leftist dominating the intellectual space breathed fire. Nobel laureate Indian economist,

Amartya Sen –a known political adversary of Modi - referred the decision as ‘despotic’. One might wonder how Sen would react to Chinese President Xi Jinping’s decision to close down 100 million tonne steel and nearly 500 million coal production - robbing millions of jobs – to correct market anomalies.

Forbes had taken a high moral position. In China Xi had put them on double muzzle, as part of his political consolidation and crackdown against corruption since end 2012. They will sing in tune if Modi can make India stronger. 

‘Unusual decision’

American economist Paul Krugman described Modi’s decision “unusual” as it didn’t follow the textbook principles of replacing high-value currency by low lower denomination notes. This made Krugman sceptic about the gains. He, however, didn’t trash the initiative.

As a journalist who had been tracking the issue closely, I don’t have much explanation for issuing the Rs 2000 bill either. But I have a hunch that it’s bait for further action. Only time will tell if I am correct.

Meanwhile ‘demonetisation Guru’, Kenneth S. Rogoff of Harvard is watchful.

“Over the long run, there will be a lot of studies: Is it a success? Is it something people are going to remember? Does it inspire other laws and other changes that energise people against corruption?” a The New Yorker columnist quoted him saying. 

He has little doubt that higher degree of corruption is behind India’s poor show vis-à-vis China. “If you want to know why India has not grown as much as China, as bad as the corruption is in China, it’s worse in India.”

He also has two specific observations to make on the move. (a) Modi is “aiming, really, at the psychology”. And (b) this disruption should reduce India’s appetite for cash in the future. “When you take bills out of circulation at short notice, that’s going to cut cash demand in the future,” he said.

And, I think he is correct on both.

India changing

While detailed information is not yet available. A snapshot of transactions through major banks in the East, the most cash-intensive part of the country, says non-cash transactions increased from 10 per cent to 25 per cent of total. 

Even the predominantly cash-based agri-input trade is now turning cashless which means the planners will have a much realistic data sheet on money trail and purchasing power of the rural economy in the future.

If I am not wrong, the rise in cashless transactions will give the central bank room to cut total currency requirement. This means the government will have more headroom to fund mega infrastructure projects. We are likely to get a direction on the same in the annual Budget.

As demonetisation has brought idle money into the system, banks will be under pressure to increase credit flow. This, in turn, means interest rates should fall, if not today them tomorrow surely.

The other big impact is, once the share of black in the economy is down, there will be less incentive to pay in black. It means maladies of the real-estate sector will be addressed to a large extent.

If the current trend is of any significance, pressure will intensify on the corrupt,  in the days to come. The exemplary raid onTamil Nadu Chief secretary’s office and residence is a case in point. 

The recovery of Rs 135 crore in cash and 177 kg of gold from a sand mafia also from Chennai, on the same day, should make many sweating in their pants. 

More changes coming

A day after announcing demonetisation, Modi went a step ahead to declare his next big war against the unaccounted holding of gold and property through frontmen. His government has already strengthened Benami Transactions Act in October.

On Sunday, December 26, barely four days ahead of the December 30 closure of the demonetisation scheme, Modi reiterated that this is just the beginning of the firework.

“I am not going to stop at this. I will expose the history of corruption of 70 years since Independence,” he said 

There is reason one should believe this is no empty threat. First, having taken the ‘unusual step’, Modi created a huge psychological impact. It would be foolish for the government to lose the advantage. And, he is no fool.

Second, in cricket – the most popular game in India – once the batsman steps out of the crease, he has to either hit the ball or else be stumped. Modi has to win this game. 

It doesn’t mean the contest will be one sided. The experience of last 45 days shows that the government failed to judge the tremendous resilience of cash hoarders in finding newer ways to launder money.

Large hoarders hired services ofthe poor, for a cut, to split the booty and avoid tax glare. 

This is why more than $10 billion were deposited in zero-balance financial inclusion accounts. Some were fool enough to deposit in crores even and will now face tax authorities. 

Finally, it brought out the weaknesses of Indian banking system to the open. In August 2014, the Prime Minister launched a financial inclusion programme. The scheme was enticed by low-cost life insurance coverage.

But banks clearly took it easy. At least 60 percent of 1.7 million tea workers in Bengal and Assam and a substantial chunk of 400 thousand jute workers didn’t have accounts when demonetisation was announced.

Demonetisation also exposed corruption in banking circle. Many bank officials diverted new currency to hoarders through the backdoor, while legitimate customers kept waiting at the counter.

Nearly a dozen such cases are unearthed by investigating agencies over the last few weeks. And many bank officials were sacked.

Economy is not bombed

Many pundits believe in his effort to bomb the corrupt, Modi actually bombed the economy. I don’t believe this.

First and foremost, the rural economy that pulls consumption is largely unaffected. I have personally travelled in the hinterlands and monitored reports from Eastern India and, I didn’t find many traces of impact on agriculture and small trade.

It doesn’t mean disruption didn’t affect them. It only means they absorbed the shock, too soon. 

The funniest part is responding to the media speculation on agriculture, the government immediately relaxed import norms for wheat. Now the same media is criticising the decision as there is a bumper wheat crop this year.

The crackdown will surely impact the sections of the informal economy that were avoiding a cleaner business model by choice. Sand and stone miners, wholesalers, SMEs, jewellers, labour contractors, textiles industry, truck operators - fall in this category.

They are no small fellows. They became rich by dodging tax and/or flouting laws. Garments industry in Jalandhar and Ludhiana thrived by paying workers less. Years of fine policy making couldn’t deter them, due to political patronage.

That jute and plantation industry were dealing in cash for so long is a glaring example. Crude force saw them giving way to the much-awaited change  There are more fundamental reasons why I think the economy will recover from the temporary shock, sooner than perceived.

Modi inherited an economy in tatters in 2014. Excessive greed created huge idle capacities in the power sector; road and highway construction was stalled impacting job creation and blocking huge bank finance that in turn was creating liquidity-crisis.

The gas sector was in disarray in every front. Fertiliser was in short supply.

Series of scams dislodged private mining activity. Courts were running shadow government with policy U-turns becoming a norm. The government had low credibility. And, no investor was ready to invest. Most were out of money. The world community was losing interest in India.

The government couldn’t address every problem. Private investment in manufacturing, for example, is still low.  But the achievement is not insignificant either.

The buoyancy in PSU coal mining activities covered slow movement in captive coal and iron ore mining, solved energy crisis, brought idle power capacities back into the fray, lowered coal import requirement to nearly half thereby releasing pressure on current account and, even triggered growth in mining equipment sales.

Merger and acquisition are back in power, unlocking resources in banking. There is no fertiliser crisis anymore. Steel prices are showing signs of firming up. And, highway construction is back in full swing.

After five long years of de-growth, construction equipment market is witnessing 40 per cent growth in sales. It means two things a) job creation is back and b) overall growth will be back soon due to the common multiplier effect.

Here are three examples to prove my point a) Robust growth continues in Infrastructure equipment finance b) Bloomberg quit reports after 20 per cent fall in November car sales up by seven per cent in December. 

c) Micro-finance institutions report normal recovery, except in three big States where Opposition is pushing for a farmers’ loan waiver. MFIs operate in the rural and get payments in cash.

Will Modi win this game?

This is a big question that will be answered amply in the four-corner UP polls where caste and creed rule the roost. BJP in my assessment was the second most popular party here until November. If they do any better it will be for public support to demonetisation.

The party meanwhile won the civic polls in Chandigarh and attributed it to demonetisation 

My personal reading based on the travels to the hinterlands of Eastern part India - that is most averse to change and is the biggest victims of the corrupt politics of cartelization – is Modi’s fight against corruption won the hearts of majority voters irrespective of class and creed. The support is most overwhelming among the poor.

But even if he doesn’t win, politics will surely change hereafter as Modi’s actions affected illicit resource flow to every party including BJP. They have to brace for change.

Pause in private investment: A cause of serious concern for Modi government

Pratim Ranjan Bose

(An edited version of this blogpost was carried by Financial Express, Dhaka on September 24, 2016.) 

This is bad. I didn’t write blog for three months. Surely I wasn’t idling around. May be I was too busy with too many projects or problems in hand. But the bottom line is, I failed at least on this occasion, blog writing. And that’s exactly the case with the Prime Minister Narendra Modi. 

The parallel is contextual. Ever since, he has assumed power, nearly two and a half years ago, Modi’s NDA government is working tirelessly to tie too many loose ends in the system, left behind by his predecessor, Manmohan Singh of UPA but, he had failed to turn the wheel of investment. 

Financial Express, Dhaka on September 24, 2016

No grenfield investment

Except some mergers and acquisitions, mobile handset assembling, and a host of promises especially from a over-leveraged infrastructure major, there is a near complete pause in private greenfield investment in the economy that is so crucial to lift the industrial production and employment numbers. 

As in July the industrial growth was down to 2.1 per cent, almost half of the same period in the previous year. Electricity is selling at exchanges merely Rs 1.5 a unit (round-the-clock average) or 2 US cents, that doesn’t even recover the converting coal into power. Naturally, coal demand remained flat during the April-August period. 

Some estimates say 20 per cent of the country’s cement manufacturing capacity is unutilized but my guess is capacity utilization is ruling lower. The situation is no better with the steel sector that finds it hard to survive a huge overcapacity in China and the resulting cheap imports. 

After imposition of safeguard duty (for HR coils) and minimum import price (for long) price realization of flat products increased last month. But the prices are still not enough to make profits. But long product price realization is down and thr producers are staring at higher losses this year. 

Screen shot: Financial Express Dhaka, September 24, 201

None of these points at arrivals of good times, as Modi promised. Neither he is responsible for the global meltdown or instability, of a scale that the world hasn’t seen before, that is majorly impacting the industrial performance of India. 

The scene is a few times worse in China. But they operate on a larger scale and has the comfort of sitting on a cash pile created during the three decade long robust export growth. On the contrary, India had a $118 billion trade deficit in 2015-16, nearly half of it is with China. 

And, that tells you a story about years of failure in pushing manufacturing growth (and hyping the consumption led growth) which is not easy to recover. 

Work-in progress

The efforts taken by Modi started yielding results in many areas. 

A BusinessLinestudy says mobile handset manufacturing for example has doubled in last twoyears. Strict imposition of domestic sourcing quota triggered movement among foreign military hardware producers to set up base in India. 

Systemic hazards created by the previous government in pushing the road infrastructure sector are cleared. Highway construction has started moving again this fiscal. Earthmover equipment industry reports a pick-up in demand in January-June period after a gap of nearly four years. But it is yet to touch 2011 high. 

To create momentum the government is pushing the State-owned companies in investing unutilized cash in asset creation. Some of them like Coal India which was sitting on a pile of idle cash was forced to share the booty with the owner to help implementation of infrastructure projects (many or most of which were initiated by the first BJP-led  government during 1998-2004 and were allowed to rot by the UPA), on a mission mode. 

The changing geopolitics required the government to put up a strong image beyond the national boundaries. It has gone on high spending mode in creating infrastructure - especially road, port, rail and power infrastructure - in Bhutan, Bangladesh, India, Nepal sub-region and the CLMV (Cambodia, Laos, Myanmar, Vietnam) and, West and central Asia.  

Once again many of these proposals were initiated a decade ago and UPA lacked the enthusiasm in implementing it, impacting India’s image. It is no splurge either. In the prevailing situation, it is a dire necessity or India’s growth aspirations will be tamed forever. 

Moreover, a good part of this spend is actually creating demand for Indian industry. The Garden Reach Shipbuilders (GRSE), in Kolkata, for example, is making hay on orders from Vietnam navy utilising Indian line of credit. Similarly, the push for rail/road connectivity with Bangladesh is creating demand for Indian infrastructure sector. 

The push for Chabahar port (Iran) construction or the participation in North-South multi-modal corridor connecting Bandar Abbas (Iran) with St Petersburg (Russia) is bound to expand India’s trade map to vast parts of central Asia. 

The moot point is all these initiatives, coupled with path-breaking tax reforms (Goods and services tax) - which was in discussion mode since 2000 – coupled with the corruption-free image of the government (in contrast to a corruption-ridden UPA) should create new growth opportunities for Indian industry. 

Urgent remedy required 

The problem is common voters have little interest in long-term remedies, more so when Modi himself fuelled their aspiration by promising Achhe Din round the corner and, they may now get restless. 

In a democracy ridden with regionalism or fiefdoms, long-term vision is often sacrificed for short-term gains. We have seen that in the unceremonious exits of two of the best governments in last 25 years, one was led by P V Narasimha Rao of Congress and the other by Atal Bihari Vajpayee. 

Rao was an ardent follower of the great Chinese leader Den Xiaoping and brought the country economic freedom. Except for a GST, he was the architect of a majority of the broad-spectrum reforms that the country witnessed so far. To me, he is the father of a modern India. 

Vajpayee pursued Rao’s dream to the maximum extent. If we have any world class infrastructure today in road, port and power sector, the credit goes to him. I don’t think any other Prime Minister realised the importance of connectivity - right from the village, inter-state to international levels - better than him. Be it rural roads or the India-Myanmar-Thailand Trilateral Highway connecting ASEAN, he contributed the most in making India a geopolitical rival of China. 

Yet he didn’t get a second chance. And, that’s democracy, or Indian democracy, unfortunately. Modi may keep that in mind and think of confidence-building among the cash-rich industrial houses in India. 

*** 

From non-cooperation to cooperation, Bangladesh’s political narrative is taking a U-turn

Pratim Ranjan Bose

The misfortune of a Bangladesh is its achievements are always under-reported.

Leave alone global media, which didn’t see much beyond poverty in this part of the world, till about 20 years ago, even the Indian media rarely pays attention to the valiant attempts of this tiny Muslim majority nation, that was once a part of Pakistan, to chart a distinct course of history.

Perhaps this has something to do with its location. Conduct a snap poll in the elite Indian cities of Delhi and Mumbai – which dictate the life of every Indian – any many may be at hardship in locating India’s East and North East - that shares 4100 km border, fifth longest in the world, with Bangladesh.

If you take it as a brag-post, just check out the number of media reports on how Dhaka is scripting a change the political narrative of the subcontinent from Pakistan influenced politics of mindless rivalry to collaborative growth; ignoring pressure from the ultra-nationalist bogey, having substantial control over the nation’s financial system; I don’t think you will find many.

Tremendous achievements

The collective amnesia is surprising, considering Bangladesh’s track record of throwing surprises.

Her freedom from Pakistan, in 1971, was a denial of the ‘Two-nation” theory that divided the sub-continent in 1947. But what is more spectacular is Dhaka’s consistent attempt to rebuild an economy based on principles of democracy and growth. 

The job was, and still is, not easy. The 24-year Pakistani rule had its trailing effect on the economy. From cost inefficient energy economics to army rule; weak democratic institutions to rise of fundamentalism and attack on minorities – Bangladesh undergone the same set of problems that is so common with Pakistan

To add to its problems, the genocide carried out by Pakistani army created a severe intellectual void in Dhaka that was already suffering from landslide out-migration (of Hindus), one of the biggest in the world history, during the Partition.

Islamabad didn’t suffer from this problem. Also, Pakistani cities like Karachi or Lahore were far more prosperous than Dhaka. Add to this the impact of internal colonisation by Pakistan and, Bangladesh was one of the poorest countries in the world in 1971.

But, the striking difference between the two nations is the resilience of Bangladesh (courtesy a rich Bengali cultural heritage), in fighting these odds.

It took Pakistan more than six decades to see a democratically elected government completing full five-year term in 2013. On the contrary, all elected governments in Dhaka completed their tenure from 1990 with army slowly but surely finding the way back to the barracks.

 During the 1970’s and mid-1980’s Islamabad used to take pride in stronger growth numbers than Delhi. Today, it has nuclear bombs but the economy is in tatters. On the contrary, Bangladesh hasgrown at an average of six per cent, throughout the last decade. Leave alone Pakistan; Bangladesh is today better placed than India in many social development indicators.

And, they are craving for more.

The new paradigm

This aspiration is now bringing the most prominent change in Bangladeshi politics through an overt support to India-led regional cooperation initiative.

Delhi’s crucial support to Bangladesh’s Independence, mutual interdependence and strong people-to-people contact notwithstanding; Bangladeshi politics had all through revolved around anti-India sentiments fanned by pro-Pakistan staunch Islamic influencers like Jamaat-e-Islami and/or Bangladeshi Islami Chhatra Shibir.

Though a marginal force in terms of electoral fortunes; Islamists took maximum advantage of Post-Independence roller coaster to champion the cause of hate politics.

Throughout the 1980’s and 1990’s, Bangladesh played host to North Eastern ultras for common purposes with Pakistan and, was noncommittal to cooperation initiatives, to put it mildly.

That the early promise of friendship was engulfed by a sense of enmity can be understood from the fact that the cross-border rail links which were snapped in 1965 were never restored.

I am not passing the entire blame to Dhaka. But, it is history that the P V Narasimha Rao government in Delhi did make a serious attempt to amend the historic deficiencies on the part of Delhi by opening “Tin-Bigha corridor” to Bangladesh in 1992. He was committed to moving ahead with cooperation initiatives for regional stability and growth. But a Khaleda Zia-led BNP government belied his expectations.

Things started changing sometime in early last decade when the same Zia was in power. That the Indian companies started taking the interest in Bangladesh is a key pointer to this argument. The most talked about investment offer during this period was a multi-billion dollar proposal from the Tata Group. It is true that the investment didn’t materialise apparently due to Zia’s failure to clear the deck. But, it is also correct that Dhaka made some attempts to accommodate it.

Asjadul Kibrika a Dhaka-based financial journalist feels, there were “both politics and economics” behind the failure to accommodate the offer. He particularly points out inexperience of his country in handling such mega investment offers. 

Consider India’s failure to pave way for implementation of greater part of the $180 billion investment offer - inmines, minerals, power and steel projects - in Orissa, Chhatisgarh and Jharkhand from the world biggies like Posco or Mittal; and you know Kibria has a point.

Culture is not restricted in the rendition of Rabindra Sangeet (Tagore Songs that the Bengalis are so fond and proud of), it also plays a role in the prosperity of a Gujarat and the poverty of Bihar. And, Dhaka now understands it more than ever.

The Sheikh Hasina-led Awami League government in Dhaka is now out to change the political culture of Bangladesh from the root by formally giving a red-carpet welcome to Indian investments, responding to all connectivity proposals between the two countries and, helping create a common market in the East that can be harnessed by either side for mutual prosperity. 

Emerging possibilities

In a way, Dhaka’s aspirations have many similarities to the liberalisation of the Indian economy in 1991 that had changed the course of Indian politics forever. From 2004, a dominant majority of the elections in India was won or lost on growth issues.

Atal Bihari Vajpayee-led NDA government did enough to ensure future growth but lost the 2004 election as the fruits of such initiative were yet to reach people. The same people voted a corrupt Congress-led UPA government back in power in 2009, courtesy the high growth regime. And, as the growth rates became sluggish they brought in a Narendra Modi-led NDA in power in 2014.

From the communist-led Tripura government to regional Telegu Desam -led Andhra Pradesh every Indian State is today striving for economic prosperity. Even in West Bengal that was an exception to this trend, politics is now revolving around growth.

In many ways, Hasina’s consistent attempt to give cooperation a chance for last six years started impacting life on either side of the border. Bangladesh now sources 600 MW of cheap thermal electricity from India to meet part of the peak 1500 MW shortage. The supplies will increase in the days to come. Similarly, India’s North East is now rejoicing freedom from unstable data connectivity as Bangladesh offered additional bandwidth on commercial terms.

It is not surprising therefore that North Eastern states, especially Tripura is acting as a pressure group on the Indian government to give more leeway to Bangladesh to help Dhaka to fight the ultra-nationalist bogey. And, in the evolving federalism in India, border States will play a role in Delhi’s relationship with neighbours.

Indian Corporates are keeping a close watch on the changing environment and making steady moves. Though not high in quantity, Indian FDI in Bangladesh has increased exponentially in last two years.

But that is just a precursor to the future growth opportunities. Indian tyre major, Ceat is setting up a plant in Bangladesh that will take advantage of zero-duty imports to cater both sides of the border. Hiranandani Group of Mumbai is planning a floating LNG terminal on the coasts of Bengal that will cater the demand of gas on either side through a cross-border pipeline.

For a single product (textiles) country that doesn’t have many home grown brands; Bangladeshi entrepreneurs will take time to take advantage of the easier access to Indian markets. Also, stiff restrictions on capital outflow are coming in their way to tap opportunities in India.

Bangladeshi Prime Minister Sheikh Hasina 

Hopefully, Bangladesh will respond to the need for reforms initiative else, its companies will find roundabout ways to do tap opportunities. 

Bangladeshi food products company, PRAN, for example, invested in India through an overseas outfit. The brand is enjoying a free run in seven North Eastern States which are not duly catered by the Indian companies. Bangladesh is losing the direct dividend.

Many challenges

Dhaka is trying its best to bring in force a business-first policy. But the move forward will not be easy at least not as easy as liberalising Indian economy.

The wall of mistrust built over years will take time to dissipate from the public mind. Dhaka therefore, will most likely face unjustified criticism for entering energy deal with India or nodding to connectivity proposals. They are remains of an era when anything to do with India was opposed tooth and nail. It’s a cultural issue and will not go away easily.

What is more important, the ultra-nationalist and fundamentalist forces have developed strong roots in Bangladesh’s socio-economic-political system. It will take a long time to weed them out. Till then, they will try their best to sabotage collaborative efforts.

The recent spate of killings in Bangladesh may point at a concerted effort to create unrest and spoil growth prospects. It’s a power struggle and may reach brutal end, if it hasn’t already.

Will Dhaka be able to take this in its stride? I am confident it will.

The world and the Indian experience of liberalisation say it is difficult to open up ignoring vested interests. But, once done, it’s unstoppable.

 No one talks about erecting the Berlin Wall, once again.

*** 

(Disclaimer: photos taken from the web. Will be removed in case of any complaint)

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HELP is good. Now liberalise data-acquisition and make the regulator accountable, to maximise oil and gas potential

Pratim Ranjan Bose

One area that has received the maximum attention of the Narendra Modi government during its 22-month stay in power, is removing the discretionary powers of the government - that was most abused by former Manmohan Singh-led UPA government - and make policy frameworks more transparent, especially in the allocation of natural resources. 

The energy sector was a priority, in this context, as it was the hotbed of corruption ever since India was liberalised in 1991. From dishing away creamy assets to the private sector on nomination basis to gold plating of production cost to extract super normal profits – India has gone through the entire cycle.

The dangerous outcome of such malpractices was evident when the Manmohan Singh government unsuccessfully tried to increase domestic gas prices to an abnormal high of $8.4 a mmBtu. If implemented it would have been the highest well-head price of gas anywhere in the world. The anomaly was rightly corrected by Modi government, last year, by adopting an understandable, logical and market-oriented mechanism to fix gas prices.   

The recently announced Hydrocarbon Exploration Licensing Policy, or HELP, is step ahead in ensuring transparency in oil and gas exploration and production. By resorting to revenue (sales earnings) sharing model for all new projects, it had cut the roots of the corruption namely production-sharing contracts.

Additionally, HELP allowed pricing freedom from difficult deep-sea assets and launched uniform license for all fuels. This will help commercial exploitation of alternate sources - like gas hydrates, coal-seam-methane, shale gas and others – if available in any oil and gas acreage.

End of gold-plating

Production sharing means profit-sharing. Theoretically, it allows the government to share the risk of exploration and acts as an encouragement to upstream oil and gas companies to enter the uncharted territories. It was a kind of an assurance to allow explorers recover the capital costs first, in the case of an oil strike. Such policies are in vogue in Indonesia, Africa and parts of Norway.

On the flip-side, it demands strict monitoring to ensure that companies are not inflating costs to deprive the government its due share of profit. This is an old trick in business and is referred as gold-plating. And, in the high-value oil game where money is counted in billions of dollars, it can prove deadly. Talk to oil professionals and you will know such practices were rampant in India. Politicians, bureaucrats made money at the cost of the nation.

We are now moving on a combination of two models. New exploration assets will be auctioned on revenue sharing model, meaning it is the onus of the operator to keep costs low or perish. The government will take away its share of revenue from the word go. The established production regime, where fundamentals are well known, will continue with production-sharing formula. Globally countries are moving to such mixed regimes as it is easier to administer.

What about investment?

All these, however, doesn’t solve the basic issue. Will it trigger investment in oil and gas exploration in India?

India saw huge E&P interests for the greater part of the last decade. Apart from the spike in crude prices that unleashed a global oil hunt; big bang gas strike announcements from Reliance (2002) and GSPC (2004) in the Eastern offshore or Krishna-Godavari basin attracted investors’ attention.

Even the State-run ONGC, that rarely meets success, announced a major gas find in the deep waters of KG offshore in 2006. Cairn too struck oil (2004) in this period but in Rajasthan onshore on the West.

Overnight everyone started talking natural gas (as they spoke about power, iron ore and captive coal mining). Companies sprung up from nowhere - many from the land of industrious entrepreneurs of Gujarat - some in the oil services sector and some others in exploration.

Many minted money through abnormally priced and yet highly oversubscribed IPOs. Foreign companies too swallowed the bitter pill. Most of the world biggies joined the bandwagon to buy exploration assets in India. Eastern offshore, then dubbed as the Indian answer to South Pars in Qatar, was the top draw.

The scene is completely reverse today. And, again it is not merely owing to recent meltdown in oil prices.

Barring the sole exception of Cairn, rest of the big bang announcements (in KG basin) proved bunkum. Many smaller companies have either left the scene or trying to make corners. Big companies have little interest in Indian waters. An oil services company that had Rs 700 crore market cap in the last decade is today valued at Rs 20 crore. The ‘KG gas’ was more gas. Investors are now betting for the next bubble, e-commerce.

Liberalise data acquisition market

At a time when the earnings of the oil-rich countries are in a declining mode, one cannot expect E&P investments to shower in India. No amount of ‘HELP’ and liberalisation of natural gas prices from riskier deep water or complex assets are going to make a difference in the investment scenario. It can at best help some existing players in KG basin turn the corner and create fundamentals for a better tomorrow.

But, to really improve India’s chances we should focus on at liberalisation of a less talked about sector – data acquisition market. Globally there are agencies which collect seismic data. Sometimes such data is collected even as a past time activity in the hope of making money by selling it to a prospective user. Countries like Australia welcome that on one condition, a set of the acquired data must be submitted to the government.

The advantages are two. First, access to quality data attracts prospective investors. Second, a parallel access to the same set of data offers the concerned government a fair opportunity to protect its national interests.

Somewhat like this happened in Indian telecom sector in the last decade. When its handset business was booming, Nokia did GPS mapping of India. The data later found commercial use with other providers even though Nokia lost the handset business. But when it comes to seismic data based on which E&P companies take the all important decisions to bid for exploratory assets; India is a laggard.

According to CEO of a foreign E&P company, seismic data of nearly 85 per cent of Indian territories were collected by State-owned oil companies decades ago using archaic technology. This can be deadly for a business where technology is as dynamic as in telecom sector. That’s not all. The data is inconsistent in nature and quality is compromised. So how does it impact oil and gas investment? Well, the company concerned, burnt its fingers in chasing the structures that barely existed.

To bridge the information gap, the Modi government recently ordered a Rs 6500 crore (nearly $1 billion) 2D seismic data acquisition programme (through ONGC and OIL) that would bring some freshness in the data room. It's a welcome step but not enough. Because 2D is an old technology. India couldn’t go for more modern technologies due to prohibitive cost involvement.

Why don’t they better open the sector to help natural accretion of quality information? 

Make DGH accountable

Modi should also look at the prospects of revamping the Directorate General of Hydrocarbons (DGH), the upstream regulator. In private, oil executives refer it as the weakest link in Indian exploration sector.

A classic example is a dispute between ONGC and Reliance on gas pilferage in KG basin that has been going on for years.  Such disputes are common in oil and gas industry.  But, a lethargic regulator that leaves it on the warring camps to resolve issues makes it an unending debate.   

That’s not all. The entire hype created in the last decade over oil and gas potential points at a serious flaw in the regulatory system. It is a common practice in Indian E&P sector to announce reserve accretion. DGH gives a seal to such activities. The funny part is in many cases such accretions never materialise into production. Check out the rising trend of coal-bed-methane reserve and the dismal production scene and you will get a whiff of it.  

A top oil executive puts the issue in perspective. “When projections go wrong, company executives lose jobs. Have you ever heard DGH officials losing the job for approving hyped up production plans?” The bottom-line is: the government officials - many of whom come on deputation from State-run oil companies - have minimum accountability to the success or failure of Indian oil sector.

And, this must change.

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(Disclaimer: Graphics collected from web. Will be withdrawn if objected)
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