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Home > India > News > Columnists > T V R Shenoy

Where is the money going?

June 06, 2008

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Say hello to double-digit inflation! And to think that it comes at a time when the prime minister of India happens to be someone who was once India's most touted finance minister!

Or is it? At least part of what we are seeing today is directly due to the failure of leadership at the top, of how poor politics made for worse economics. India will be paying the price for a long time to come.

But first things first, I agree that the Indian customer could not be indefinitely shielded from rising global petroleum prices. However, both the timing and the reasoning that is being dished out leave much to be desired.

We all know that oil recently touched an all-time high of $135 per barrel. But, true to form, the Manmohan Singh [Images] ministry announced the hike in prices when, on Wednesday the fourth of June, prices had fallen to $123 a barrel. Talk about bad timing!

It gets worse. Even the 10 per cent hike announced by the UPA regime is not enough to offset the losses made by the State-owned oil companies. The total losses were an estimated Rs 245,000 crore. They are still going to be losing money despite the increase in prices and the cut in duties. Now there is talk of floating oil bonds, in other words taking money today to be repaid, with interest, of course, by our children and grandchildren.

It is no secret that the price of crude oil had been rising. Nor was it unknown to our economist prime minister that his government was running out of money to subsidise the oil companies' losses. So why did he wait until June, by which time the chief executives of the oil firms were warning that their cash would run out in four months?

The answer lies in the electoral compulsions of the Congress. Elections were due in Karnataka, to be followed by a slew of assembly polls in winter, and a general election in under twelve months. Under the direction of the Congress president, the prime minister and his finance minister had cooked up what everyone called a populist Budget, offering sops to one and all. (Does anyone remember P Chidambaram explaining how he would find money for the farmers' loan waiver?)

There was simply no way to wave the 'Aam Aadmi' flag yet simultaneously raise fuel prices. (Or, alternatively, cut the subsidies.) Thus, for the sake of winning the Karnataka assembly, the oil companies were forced to incur mounting losses -- until they were in danger of running out of money altogether.

The results of the Karnataka polls demonstrated that the voters weren't falling for the Congress's promises. But the party apparently believed that there were still plenty of people who might be fooled. (There is a general election looming up after all!) The Karnataka results came out on May 25, but it still took ten additional days before the Union Cabinet could raise fuel prices -- and crores were lost on each of those days.

Do the price rises of 4 June signify the end of economic insanity? No, not really!

Did you know that India continues to export diesel even today? India has imposed such an insane web of taxes that the private refiners, Reliance [Get Quote] and Essar, find it impossible to sell diesel inside the country. I am sure the prime minister knows this perfectly well, so why has he done nothing to ameliorate this? Enabling both firms -- possibly others too who come in -- could bring down transport prices. (Most freight firms use diesel, not petrol.)

If the timing of the fuel price increase was poor, the reasons that are being trotted out are nonsense.

The Union finance minister was claiming, shortly after his last Budget, that government revenues are hitting the roof. So why can't he find the money to continue fuel subsidies? Because, so say the Congress spokespersons, there isn't enough to fund both development activity and oil subsidies.

This really is the root of the problem. What development activities are they talking about? Are you getting an assured supply of electricity, without wild fluctuations? Do you get clean water around the clock? Have the potholes in the roads in your town been filled up? Does anyone believe that the local government schools or the primary health centres are functioning adequately? (Or functioning at all!) So where is the money going?

One weak excuse being trotted out is that the funds are being targeted at rural areas, whether in the form of loan waivers or the National Rural Employment Guarantee schemes. This is a joke.

The reaction of the banks to the enforced loan waivers announced in the last Budget was best expressed by the State Bank of India [Get Quote] two weeks ago; the bank announced that it would make no more loans to farmers who wanted to buy tractors. State Bank was forced to retract under political pressure but the message is loud and clear -- the waiver does not mean that any fresh funds will be injected into the rural sector.

What of the NREG? Sonia Gandhi's [Images] pet ploy to win votes is coming a cropper. On May 14, this year a man named Lalit Kumar Mehta was murdered in Jharkhand. The police tried to pass it off as a case of robbery, but the real facts soon emerged. Lalit Kumar Mehta was an activist in the Vikas Sahyog Kendra, which works for adivasis. At the time of his death, he was carrying out a social audit of the local NREG. scheme, and his father, Jagdish Mehta, insists that he was carrying a CD-ROM with hard proof of misuse of funds.

Please note that this particular social audit was being carried out not by just another unknown non-governmental organisation, but under the direct supervision of Professor Jean Dreze (the Belgian economist associated with Dr Amartya Sen). Media reports confirm the Vikas Sahyog Kendra's suspicions about the daylight robbery passing off as NREG schemes. And this, I am fairly certain, is being replicated all over in India.

Let me sum it up. There is no money for fuel subsidies because it is, supposedly, being used for developmental activities. But nobody can see any effect of these activities. (The highway development schemes started in the days of the Vajpayee ministry, for instance, have practically ground to a halt.) I repeat: Where is the money going?

The simple fact is that neither the prime minister nor his finance minister have the political clout to ram through harsh economic decisions, such as raising fuel prices before a crucial assembly election. Nor can they ensure that all wings of the government run with the same rectitude that they themselves practise.

The Union finance minister boasted in February that the deficit would be in the vicinity of 2.5% but economists privately say it will be at least three times that. Meanwhile, inflation - real inflation, not the official figures - is the highest it has been since 1995. (Guess who the finance minister was back then!)

When the UPA took over the reins in 2004 it introduced a system of dyarchy -- Dr Manmohan Singh to handle the economics and the administration, Sonia Gandhi to tackle the actual politics. With prices going out of control and the party losing a string of polls, would it be fair to say that the system just hasn't worked?


T V R Shenoy




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