1. Column: Getting those investors back

Column: Getting those investors back

If India’s largest firm has filed its fifth arbitration against the government, there is a very serious problem

By: | Updated: February 24, 2015 11:30 AM

Whether it was the Sangh parivar’s ghar wapsi or the lack of condemnation of churches in Delhi being vandalised or calling Christmas “Good Governance” day, or simply the fact that Arvind Kejriwal was in the trenches months before the BJP even deigned to start campaigning, the Delhi election rout makes it apparent the electorate is an impatient one and won’t give prime minister Narendra Modi too much time to start delivering on economic growth and jobs. Which is why the Budget simply has to push really hard on economic reforms, and not be incrementalist like the last one. If it is, and people don’t start seeing signs of growth picking up—and we are not talking of the CSO theatrics that even top notch economists like the chief economic advisor and RBI Governor find difficult to believe—and jobs, it is difficult to see how Modi can hope to deliver other states to his party.

To be sure, as finance minister Arun Jaitley has said on various occasions, a lot of the government’s time is being taken up in simply cleaning up the mess left by Sonia Gandhi like the Land Acquisition Act as well as the retrospective tax, but it is to fix this that Modi got the majority he did. And it is also important to remember the UPA also left behind some fantastic legacies like Aadhaar and the DMICDC development—there would be no Modi smart cities if DMICDC had not been conceived and Amitabh Kant not done some major work on it during the UPA tenure. It is also worth keeping in mind the NDA has added some pretty big bloopers of its own. It raised a needless hue and cry on the issue of hiking gas prices and brought exploration to a halt and went and messed up the telecom sector equally badly, and that is, primarily, the subject of this column.

When India’s largest corporate files its fifth arbitration suit, as FE reported on its front page yesterday, the government must know it has a serious problem. And it needs to be fixed fast. Instead, the government has wasted a precious eight months and appears no closer to a solution—indeed, with Kejriwal at the helm in Delhi, it is possible the government will chicken out of taking an early decision to hike gas prices to levels where it is viable to explore for gas.

Debt

While one of Reliance’s arbitration suits relates to the government not fixing gas prices, the others broadly relate to the same issue, of government action being arbitrary. The latest, for instance, is about the government forcing Reliance and its partners to surrender large parts of its gas fields even while it was still working on them. Given there is a difference between how Reliance and the petroleum ministry view the production sharing contract (PSC) that governs this, surely the government could have got a neutral party like the attorney-general to review this quickly as it did in the Vodafone and Shell cases that the taxman wanted to keep going? Apart from the legality which is critical, there is also the issue of practicality—how does the country gain from getting a Reliance to give up its acreage since the firm finding more oil/gas here benefits the country (read “Having your gas and eating it too”, goo.gl/Gg2qeT for this columnist’s view on the dispute).

If it was only Reliance having a problem with the petroleum ministry, that would be one thing, but other firms are facing a similar problem. Cairn’s petition to have its PSC extended so it can take out the new oil/gas it has found continues to hang in the balance for two years now; no decision has been taken on allowing it to export its oil which will give Cairn a higher price—the company has lost $2 billion on this till date—despite the fact that the PSC allows free-market pricing of oil/gas; and, like Reliance, Cairn has an ongoing dispute over $1 billion of expenses in its oil exploration so far.

At some point, the government will have to wake up to whether the petroleum ministry is helping or hindering oil/gas exploration since, under the UPA tenure, when the political class had taken a call to hike gas prices, it was the oil ministry bureaucracy that ensured the price hike never got implemented even though a decision had been taken by the Cabinet many months before the general elections—it was similar bureaucratic delay, during the UPA years, that ensured no FDI in retail came about even though the government had cleared a policy allowing this! In other words, the bureaucracy continues to thwart investment efforts in many areas.

Indeed, after Modi won the elections, FE put out a series of graphics called Low-hanging Fruit, and two of the investment areas highlighted were petroleum and telecom, both are areas where investors want to put in money now; coincidentally, both are areas where investors are united in pointing out the policy is all wrong. In the case of telecom, how difficult can it be to understand that (a) India has too little spectrum, (b) this makes it inefficient, (c) drives up its prices and makes companies bankrupt and (d) affects the government’s plan for Digital India. This is something companies as well as the regulator have been crying themselves hoarse over, but the government doesn’t seem to be in any frame of mind to even listen.

Nor is it fair to blame the petroleum and telecom ministries alone. Not removing Pranab Mukherjee’s retrospective tax may have kept Parliament on the NDA’s side, but the consequences have been horrendous since this means that until courts take their decisions, the retrospective tax cases will continue. And how do you deal with a case like Cairn Energy Plc that, as FE reported, has had $1 billion worth of shares frozen for over a year, and this despite not even getting a formal tax notice—a meeting with the finance minister and the revenue secretary a few weeks ago resulted in airing the usual platitudes but no solution. And while the finance minister has done well to say he will not challenge cases decided against the taxman by courts—hence, Vodafone and Shell—what about the 2.7 lakh income tax disputes between the taxman and assessees, when are those going to be tackled?

Nor has there been much headway in the issues plaguing the banking sector, without which there can be no real investment in the country. The gyan sangam would have highlighted many issues, but to mention a few that came up in the FE Best Banks debate recently: banks do not have the freedom to negotiate sales of stressed assets, the legal process is tortuous and favours defaulters, banks cannot take more than 30% of the equity of a project as collateral from borrowers and the price of these shares is ruled by a formula that ensures a very high price even if the company is tanking—this is why SBI bought Kingfisher shares in 2011 at a price 60% higher than the then market price.

The short point is that, as the Delhi elections showed, people have heard enough speeches, they need action—what is the point of talking about India and the US having resolved the nuclear impasse if this doesn’t result in US firms firming up plans to set up power plants, what is the point of talking about economic reforms if there is no perceptible change in the investment being made (see graphic)? While turning around an economy of India’s size takes time, the budget needs to take some bold steps to convince investors the government means business, and line ministries like coal, electricity, petroleum and telecom need to follow up with action on the ground—actually auctioning coal mines to commercial miners would be a great start to ending Coal India’s crippling chokehold on the sector.

sunil.jain@expressindia.com

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