By Raghav Behl
I was roasted by Modi’s fans when I called his government the most statist and interventionist since liberalisation, that is, in the last quarter century. But seeing Modi’s fuel folly over the last 24 hours, I feel vindicated, but also mighty sad, because, with one, unthinking stroke, the government rolled back a reform that took years of courage to construct. Here are the facts:
- Scared by a huge public outcry to reduce outrageously high petrol/diesel prices, Modi cut central excise by Rs 1.50 per litre, causing a revenue loss of about Rs 10,000 crore over six months, from now until the end of the financial year, i.e. March 31, 2019.
- It was a puny concession, as his government had increased excise on petrol by Rs 7.63, and on diesel by Rs 9.36, per litre, since coming to power in 2014.
- And then it made a shocking call. It ordered public sector oil companies to reduce prices by Re 1 per litre! In one foolish, impulsive moment, it rolled back the major reform of freely priced fuel, achieved so painstakingly by the UPA in 2010 (for petrol) and Modi in 2014 (for diesel).
- The markets reacted furiously to this betrayal/repudiation. Within one hour—over 13 minutes yesterday until the markets closed, and in 45 minutes of trading this morning—public sector oil companies wiped out over Rs 1 lakh crore of investors’ wealth. Ordinary shareholders lost Rs 48,000 crore and Modi’s government was poorer by Rs 55,000 crore.
- What is even more astonishing is that Modi rolled back a fundamental reform – i.e. freely priced fuel – to save a minuscule Rs 7,000 crore! Yes, had his government cut the excise by an additional Re 1, and taken the entire hit of Rs 2.50 per litre on its own account, the government’s revenue loss would have increased from Rs 10,000 crore to Rs 17,000 crore over six months; instead, by instructing oil companies to cut, the government violated its own solemn policy commitment. The markets punished this folly by destroying Rs 1 lakh crore of investors’ wealth within an hour!
What would you call this government decision? An honest mistake, an oversight committed without realising the downstream consequences? No sir, I don’t think the Modi regime deserves this benefit of the doubt. In my mind, this just confirms what I’ve asserted before: this is India’s most statist and interventionist government since the liberalisation of 1991.
Modi’s ‘Original Petrol Sin’
Narendra Modi was Napoleon’s proverbial “lucky general”, the first to enjoy a single-party majority after India freed its economy in 1991. His fortune was compounded when Brent crude collapsed from $108 per barrel in 2014 to $30 per barrel in 2016. His government got a windfall gain of nearly Rs 7 lakh crore, or $100 billion, over three years. Just imagine if it had gifted this largesse to consumers by cutting fuel prices at the pump? What a tax stimulus it would have been for private demand and corporate investment.
Or if Modi had used the hundred-billion-dollar war chest to create a TARP-like(*) facility for stressed banks and infrastructure companies? With one stroke that would have solved our “twin balance sheet problem”, unlocking the fetters on growth.
(*) TARP was the Troubled Asset Relief Program launched by President George Bush and Federal Reserve Chief Ben Bernanke to handle the sub-prime crisis in the U.S. in 2008.
Instead, Modi doubled, even trebled, the taxes on oil to soak up the bonanza; and made the problem worse by spending it on grand welfare programmes that are notoriously inefficient and leaky.
Oppressing Minority Shareholders And Capturing The Regulator
Modi has continued to be cavalier about the country’s oil economy. Early this year, the government was woefully short of its disinvestment target. It needed emergency cash. So, it thought up this awful fix for its failure.
The public sector oil exploration behemoth, ONGC, was coerced to pay nearly Rs 35,000 crore to buy the government’s shares in HPCL. Then, it virtually oppressed the rights of minority shareholders.
Under the law, ONGC was required to make an open offer for 26 percent additional shares, providing an exit to HPCL’s shareholders who wanted out of this transaction. But the Modi government trotted out a 40-year-old law, the Nationalisation Act, to claim that the “public sector character” of HPCL had not changed, even though control had passed from the Ministry of Petroleum to ONGC. The Securities and Exchange Board of India queued up and waived the open offer!
Such a naked regulatory capture was the forerunner of yesterday’s unfortunate decision, the sheer arrogance of “big government” as it cancelled a free pricing reform that had been won through years of political turmoil.
Raghav Bahl is the co-founder and chairman of Quintillion Media, including BloombergQuint. He is the author of two books, viz ‘Superpower?: The Amazing Race Between China’s Hare and India’s Tortoise’, and ‘Super Economies: America, India, China & The Future Of The World’.
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