governance, political economy, institutional development and economic regulation

Posts tagged ‘Gujarat’

Some more onions please

Onions comprise less than 1% by value of India’s agricultural production. The average Indian consumes less than 800 grams of the stuff per month. Onion is a seasonal fruit. Supply traditionally dips during July to September as only the stored winter crop, harvested around March, is available for consumption.

No dearth of onions

onions

photo credit: http://www.washingtonpost.com

India is the second largest producer of onions after China. We produce more than we need and export around 10% of production unless weather events adversely impact the crop. This year unseasonal rain, during harvesting, damaged the winter crop.

But demand is inelastic

Demand is relatively inelastic. Why don’t consumers say no when prices increase? First, onions are to palates in the North, Central and Western parts of India, what fish is to Bengal and curry patta and coconut is to the South. Food, chips even Uttapams taste better with onions. Onion, like Garlic, is also valued for its therapeutic value. Second, onions give a big bang for the buck. An average family spends around Rs 100 per month on the stuff. If price doubles, the burden is irksome but not a killer. Just economizing on pre-paid phone calls can make up the difference. But onion is the key savory for low income households.

It’s the politics stupid!

The fuss about onions is more about politics than economics. The political footprint of onions was established in the 1980 elections. Mrs. Indira Gandhi, on her comeback trail, after her post-emergency election debacle, shrewdly used the price rise in onions to drive home how uncaring of the ordinary person and how incompetent, the government of then Prime Minister Chaudhary Charan Singh had become. This clicked. The Congress won 67% of the Lok Sabha seats. In 1998, a sharp price rise in onions, dethroned the BJP government of Chief Minister, Madanlal Khurana in Delhi thereby establishing a new metric for good governance – the price of onions.

Delhi CM Kejriwal fingers the BJP for price rise

Delhi Chief Minister, Arvind Kejriwal has fingered the Union government for failing to control hoarding and speculation leading to the current price rise. Delhi government flooded Delhi markets in mid-August with onions at Rs 30 per kg. It plans to hold the price line just below Rs 40 per kg through public sector retail supply versus a market retail price of Rs 70 to 80 per kg.

Union government on the back foot

But the Union government claims this is too little and too late. More nimble footwork by the state government could have prevented the steep rise in onion prices in Delhi. The Union government had made available a Price Stabilization Fund of Rs 500 crore in April 2015 which state governments could use by contributing an equal amount to buy onions for retail supply at reasonable rates.

On July 2, when wholesale prices were still around Rs 20 per kg in Lasalgaon, Maharashtra-India’s largest onion mandi, the Union government brought onion under the Essential Commodities Act, thereby enabling stock limits to be enforced on wholesale agencies. It also enforced a Minimum Export Price of Rs 30 per kg to discourage exports.

In todays’ intensely adversarial, no-holds-barred competitive politics no government can ignore a public challenge. The traditionally business friendly BJP government, at the center, is particular sensitive when “hoarders” are fingered for the price rise. Maharashtra, Madhya Pradesh, Gujarat, Haryana, Andhra Pradesh and Punjab- all BJP/allies governed states – account for more than 60% of national onion production.

Grow more onions, reduce trade margins & transaction costs

Per a NCAER 2014 paper selected productivity enhancement can boost roduction. Three big onion producing states- Maharashtra, MP and AP- account for 50% of production but produce less than 17 kilo gram per Hectare against 27 and 21.5 kg/Ha in Gujarat and Punjab respectively. Again all three are ruled by BJP/NDP. Increasing productivity in just these three states can boost production by 20% ensuring sustained exports and no domestic shortages. Doing more on reducing the trade margin (better storage, faster transportation, lower market fees) can also leave more of the money with farmers whilst lowering domestic prices.

Clearly the government needs an effective and transparent mechanism, which provides the right price signals and rationalizes expectations for both farmers and consumers.

Killing export or killing farmers

Increasing the Minimum Export Price, as the government has done again this year, is the standard response. But such intervention in the market, even as it helps consumers by diverting supply to the domestic market, robs farmers of the gains from export. It also disrupts any attempt to develop export markets. Similarly, importing onions to keep consumer price low reduces the incentives for farmers to grow onions.

The fall back-leaky public distribution

But both these options are less intrusive than using the public procurement and subsidized retail supply template used for food grain. Such publicly managed mechanisms are invariably highly inefficient and ineffective with cascading losses in procurement, storage, transportation, distribution and retail sale. Sometimes inept government managed imports flood the market after the seasonal supply dip has passed and just as the new crop arrives- with disastrous impact on farmers’ incomes.

Can private distribution agencies do better?

Why not appoint a private trading agency for marginal but politically sensitive food crops, mandated to import, export or arrange for domestic distribution to balance market led demand and supply and keeping retail prices within a pre-defined retail trading band, which meets the twin needs of both farmers and consumers. This is what the RBI does for our currency to avoid excessive volatility.

Private trading agencies would charge a hefty commission for their services but it would be considerably less than the cost of direct administrative action to purchase, stock and supply onions along the Food Corporation of India model.

Onion diplomacy anyone?

Alternatively, use onions as a vehicle for building bridges with our neighbours – particularly Pakistan, which loves the stuff almost as much Punjabis. Why not negotiate a stand- by, bilateral onion supply agreement to meet onion deficits in either country on preferential terms? A similar arrangement is possible with our larger northern neighbor- China whose onion productivity exceeds ours’s. Onions can add a savory flavor to Track 1.5 – B2B- diplomacy.

Say no to expensive onions

Isn’t it high time the government bit the political bullet and said no to being bullied about the price of onions? They are not a necessity, which the sovereign is obliged to supply. The Jains don’t even touch the stuff.

To show that onions are dispensable, the entire cabinet should voluntarily say no to fresh onions during the lean period. PM Modi could launch a social media campaign to entreat well-off folks to substitute fresh onions with dried ones or switch to other seasonings, during the lean period. This can reduce demand and hence prices for those, to whom onions are the only savory they can afford other than salt and chilies.

The core of sustainable living is to adapt to what is seasonally available locally, rather than store, pack, can or transport food compulsively to cater to a menu plan made universally available but at a high cost to the environment.

Politics trumps economics hands down

But the catch is that Bihar is a big consumer of onions. People are unlikely to be amused if they can’t get their daily fix of onion, before they go to vote in November. This is one election the BJP needs to win. Visible, strong, centrally managed administrative action to lower retail prices is therefore likely to win over better options – after all the metric of good governance has to be met.

Adapted from the authors article in Asian Age August 31, 2015

Why did the Economist bark?

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The Economist is an impeccably written newspaper with a distinct right of center slant and a preference for global solutions for reforming economic fundamentals in trade, climate change, democracy, private investment and markets. It advocates efficiency before equity. It believes correctly that in a resource constrained world, a concern for equity, as bleeding hearts socialists wear on their sleeves, without the fundamentals of economic efficiency in place, is nothing but lip sympathy and is not sustainable. In short a government without resources cannot alleviate poverty. This is also Modi speak.

Usually, it does not peddle political agendas, beyond those related to the global fundamentals mentioned above. This week it departed from that sensible policy by recommending to Indians that they should not vote for Modi and that a government headed by Rahul would be better for India. (www.economist.com. Can anyone stop Narendra Modi? April 5, 2014)

The Economist prefers Rahul to Modi purely because of the single incidence of Godhra in 2002, and because Modi is a product of the Rashtriya Swyamsevak Sangh-RSS, which supports Hindutva, a concept perceived, rightly or wrongly, by Muslims to be proactively anti-Islam.

For a paper, celebrated for rational analysis, it is puzzling that the article does not explore why there were no further riots against Muslims in Gujarat after Godhra (2003 to 2014) whilst Modi was the Chief Minister and the consequences thereof. Two obvious conjectures which present themselves to explain why there were no repeat riots are explored here.

First, once Modi became the Chief Minister, it was no longer in his interest to ferment communal trouble or support it in Gujarat. If this indeed is the case, and if Modi has the controls which can conjure up and extinguish communal violence at will, then surely he would become even more empowered as Prime Minister. Gujarat has only around 4% of the national population of Indian Muslims. If protecting Muslims was important for Modi in Gujarat, it becomes even more important pan-India. Why then would be change once he becomes PM? Modi as PM would be good for Muslims and in fact bad for virulently anti-Muslim, Hindu fundamentalists. Surely this is the best reason why all Muslims and all secular Indians must vote for Modi, not reject him.

Second, an alternative conjecture could be that once Modi became the Chief Minister of Gujarat in 2002 he unleashed a wave of terror which either forced Muslims to migrate or frightened the Muslims into submission so completely, that they became second class citizens in their own homes. Being reduced to slaves, they were no longer a social or economic threat to Hindus.

This conjecture is not supported by data, which suggests that high, consistent growth in Gujarat has made the Muslims prosper more in Gujarat than in any other state in India during this period. This conjecture also does not gel with the safeguards against genocide in India’s institutional framework. Multi-party political architecture; the fact that there are a number of Muslim political parties; the option for any citizen to seek direct redress from the Supreme Court through a Public Interest Litigation; the fact that the Congress has remained in power in the Central Government since 2004 with all the premier national criminal investigation agencies available to it and finally, India’s free and vibrant press and media all militate against a possible secret, ruthless suppression of Muslims, by Modi in Gujarat, over twelve long years since 2003.

More importantly, the 2001 census recorded 4.6 million Muslims in Gujarat. Their population grew to 5.4 million by 2011. Migration across states is a common phenomenon for work; to flee a threat to life or property or to escape from rigid social norms dictated by caste or religion. The conjecture of an anti- Muslim wave of suppression is not supported by the steady increase in Muslim population in Gujarat.

If neither explanation leads us logically to support the recommendation to reject Modi, one is forced to conclude that the Economist has relied solely on its “gut” feel against Modi.

Interestingly it does not voice similar “gut” preferences in the UK Parliamentary elections (its home) about PM candidates. Nor does it do so in the case of the US or Germany. It tends to recommend political agendas only in the case of the poorer, post-colonial countries or those, like China, which march to a different drum beat than liberal democracy. Its veto against a particular PM candidate is unprecedented.

One does not know what drove the Economist to favour Indians with its recommendation on who they should vote for. But if their intention was to help Rahul to form a government, they just shot the Congress in the foot.

The Congress chief Sonia, who is more truly Indian than the staff of the Economist, knows that Indians (as I believe would any other nation) do not like to be preached at by those who do not share their context. The Economist does not function out of India. If it did and if its owners were Indians, with stakes in India, it would possibly have a more nuanced view on the merits and demerits of various political parties and candidates in the forthcoming electoral contest.

The purpose of this blog is not to argue for or against the recommendation of the Economist. After all, India may not have the best roads or 24X7 electricity (except in Gujarat) or clean water supply but we do have the freedom to express our views publicly, including in Gujarat.

The purpose of this blog is to mourn the fall from grace of the Economist for three reasons.

First, the blatant disregard for facts and logical thinking is not in keeping with its own traditions of rigorous analysis based on facts. If one wants to be prescriptive, even greater care needs to be taken to lead the reader through the analysis which informs the conclusion. In this edition, the Economist has failed miserably against this single measure of responsible journalism.

Second, by completely ignoring the possibility that any other political coalition, other than the BJP or the Congress, could form a government, the Economist has failed to read the tea leaves correctly. BJP and its allies may not get the absolute majority to form a government. Congress may end up getting no more than 50 to 60 seats, or just 13% of the seats in the Lok Sabha. In this event it may not want to form the government. It may prefer to support a regional party, like that headed by Amma or Didi or another consensual leader. It would prefer this to avoid the additional opprobrium of continued poor governance, which is the most likely outcome of a coalition government. It would keep its powder dry for a re-election, within two years, once it has regrouped and Rahul is more firmly in charge of the party.

Third, the Economist has fallen into the trap of equating the Indian electoral system with the Presidential form of government in the US. By hectoring readers to reject Modi, it wrongly projects the election as a Presidential fight between Modi and Rahul. However, it does retrieve its high reputation subsequently by arguing that should the BJP win (despite its recommendation), it must not choose Modi as the PM. This indeed is unprecedented. It is either, imperious, journalistic, vigilantism at its most inefficient and immoral worst or is the result of disagreement, within the Economist staff, leading to a committee writing the article.

Economists, like Sherlock Holmes, look closely every time a dog fails to bark. They should give similar attention when a dog barks, seemingly without reason. Is the Economist both helping the BJP to win by predicting its victory whilst making Modi lose by raising the bogey of Hindutva? If so why and at whose behest?

Gas and Power: shine a light please on “deals”.

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Elections are around the corner. Babus are petrified of taking decisions. But government is burning the midnight oil to grant “relief” to Reliance, Tata and Adanis to compensate for the poor planning and foresight of these companies under the guise of “protecting consumer interest”.

The Central Electricity Regulatory Commission (CERC) decided in April 2013 that Tata and Adani (coal based mega power plants in Gujarat) should be permitted to rupture their agreement with Gujarat and Haryana to supply electric power. The reasoning was that the cost of imported Indonesian coal had increased more than could not have been foreseen. A dissenting order by a member; Mr. Jayaraman points out that nothing in the bidding document compelled these companies to bid a fixed tariff. They could have opted to bid a variable tariff, which would have passed through the changes in fuel cost; both increase and decrease. They choose not to do so and hence forfeit their commercial rights to come back for a tariff revision. Other bidders whom they outbid did opt for variable costs and possibly were outbid on these grounds. We will never know for sure since bid details are not publicly shared on the net which incidentally is bad procurement practice.

The argument of acting in consumer interest is even more farcical. It states that since the bid tariff is no longer commercially viable, sticking to it would force the developers to abandon the project. No mention here of the penalty the developers would have to pay if they were to quit. No mention either that NTPC could happily buy the projects, just as it bought the ENRON project or Delhi Metro took over the Reliance Delhi Airport metro line when it did not make expected profits or that the National Highway Authority may have to take over the Gurgaon Expressway. The CERC argument is that the new developer would in any case have to charge more to consumers so why not just do a deal with the existing developers, since the poor consumer would have to pay more in any case. Sounds familiar to us aam admis and aurats (AAA) a circular argument which suits everyone except us. If a “deal” is to be done non-competitively then let us do it with the public sector. At least the resultant earnings will accrue indirectly to the MOF

Allowing such retro tariff revisions in competitive bidding not only knocks the concept out of the window, it is rich future pickings for CAG, CVC and CBI. To dilute this possibility the favorite ploy of babus has become to kick the problem over to an irreproachable, external entity; in this case Deepak Parekh of HDFC, who is in danger of fast becoming the MMS of Indian Gas and Power. Deepak apparently has headed (we don’t really know since neither the Gujarat nor the Haryana Government websites tell us about this) a committee, mutually agreed between the developers and the procuring state governments, to work out what should be done. This report has been submitted to the CERC in mid-September 2013, but is not on the website of CERC and even worse has not been made available to PRAYAS a NGO specializing in energy and water, which is on the Advisory Board of the CERC. See their plaintive cry for information:  http://www.livemint.com/Industry/9NOJM6JwuwPwAw2i2l0DFP/CERC-suggested-to-hold-public-hearing-on-tariff-issues.html.

The implication us AAAs will draw is that had Mr. Jayaram not dissented, the CERC would have meekly passed through the additional cost to consumers. My Jayaraman, consequently, whilst not a whistle blower, since there is no allegation of graft, is certainly a rudder for the Rule of Law prevailing over egregious commercial considerations. In September 2013 Ministry of Power amended its tariff guidelines by making fuel cost a pass through. The term “pass through” is intriguing because it seems to undercut the powers of the CERC to determine tariff in a holistic manner. The new guidelines only require the power developer to be prudent while purchasing fuel. Fuel cost can constitute 50 to 70% of the tariff. Well known transfer pricing tricks, especially in imported fuel, militate against relying on a broad test of “prudence”, to protect consumer interest sufficiently.

A similar tactic has been adopted in gas production, where the price at which Reliance will sell its gas has doubled (by the cabinet this time) on the argument that the government administered price is far lower than the prevailing international price for gas. This being true does not explain why Reliance has failed to meet its investment commitments which are the prime reason for a decrease in gas production way below the optimum levels. Even worse, the Ministry of Petroleum’s view is falling on deaf ears that retro advantage of gas price increase should not be given to Reliance on prior production commitments. All this again in the interest of consumers, ofcourse, who in the absence of a deal with Reliance, would have to pay imported prices for gas! Admittedly, Reliance (like Enron) has the disadvantage of its public image working against it. Any babu ruling in Reliance’s favor, is automatically suspect in the eyes of us AAA’s though, mysteriously, very few babus who have the guts to do so, live to regret their decisions.

 As in the case of power, a committee headed by Mr. Kelkar, aided by the hapless and overworked Mr. Parekh is meanwhile looking at the gas pricing regime. Oddly, as in power, the entire exercise is being conducted in the cozy confines of the government, CII, an NGO which ostensibly works on fuel studies and research (but for which not a single paper comes up in a Google search) and the Boston Consulting Group (BCG), a consultancy. Presumably BCG was appointed after a competitive bid. We will never know because such trivia is never shared with us AAA’s. The entire oil exploration and production process is kept tightly under wraps. Exploration, development and production contracts are never made available on the website and “commercial confidentiality” conditions of the developer are routinely cited as a reason.

 The international literature on natural resource management is rife with the need to introduce transparency and citizen participation in this sector. The reason is obvious. Oil and gas contracts involve huge sums paid and received between private developers and government. If AAA’s are not kept informed of what were the obligations of the developer versus actual delivery on the one hand and what was owed to the government and what was actually received, the instant apprehension is potential leakage of government revenue or of motivated bias in favor of the developer. Compare our non-transparent and secret regime for the oil and gas production sector with what even Ghana puts on the web: http://www.gnpcghana.com/_upload/general/saltpondfield_sopcl.pdf. Key details of the contracts and delivery on commitments, including penalties levied for shortfalls in developer obligations. In 2012 the EU made it compulsory for all extractive industries (including oil and gas firms) to share data publiclly on revenue and payments to governments. http://europa.eu/rapid/press-release_MEMO-13-541_en.htm.

The governments of India, Gujarat and Haryana all profess a commitment to “good governance”. The essence of good governance is to expand access to information for the public and to encourage their direct participation in decision making. True AAAs, like me, are clueless on technicalities like a Gas Production Sharing Contract but we sure like to be kept informed and we have technical experts who can work in our interest, independent of governments. Democracy is all about giving people a choice. Give us the information and let us use it the way we want to. Please don’t hide behind the shield of the RTI (which allows notional access to information) and force us AAA’s to seek hard copies of information from the relevant ministries. If the websites of governments have the space to trumpet their many achievements, surely they can also instantly share with us information on what contracts have been signed, with whom and the key obligations therein?

When you light a lamp, it illuminates everything around it. Please light a lamp in Indian power and gas deals. 

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