What investors need is certainty on laws and rules, said the Supreme Court while deciding the Vodafone tax case against the government a year back.
By this yardstick, the non-policy of diesel deregulation-that-is-not-quite-deregulation announced by the UPA government replaces one kind of half certainty with half-uncertainty.
When P Chidambaram returned to North Block in August last year, it was expected that he would be empowered to use his reform broom to sweep the cobwebs out of UPA’s bare cupboard. But the Chidam-broom is merely kicking up dust to confuse the markets on reform, instead of really cleaning.
Near certainty on oil subsidies has now been replaced by clear uncertainty on deregulation. Earlier we had the certainty of subsidy (though delayed), but the policy was bankrupting the government and the oil companies and clearly unsustainable. Now we have the certainty of neither subsidy nor deregulation. Like Trishanku, policy is suspended between heaven and hell. This cannot be good for the economy or investors.
Not only that, we cannot even be certain that the current half-reform will solve anything at all. We do not know if the government will persist with it if global oil prices rise or if elections loom. After a few months, the government may find that it has bartered precious political capital – which is in shorter supply today than FII capital – for almost no economic gain.
Between them, Chidambaram and Petroleum Minister Veerappa Moily may yet pull defeat from the jaws of a draw.
Yesterday’s non-policy is more dangerous than the previous one not because it is manifestly wrong, but because it needs extraordinary luck to pull it off. Underlying it all is not a belief in reform but the hope that global oil prices will fall, and the losses made by oil companies will somehow be neutralised quickly without anybody noticing. (Oil company losses could still top Rs 1,60,000 crore this year, despite these moves).
This much is evident from Finance Minister P Chidambaram’s statement yesterday that “I am looking at the same subsidy bill as was expected earlier.” This may be prudent, but then what was the point of the reform anyway?
The statements of Moily and Petroleum Secretary GC Chaturvedi do not give any confidence that the government is fully committed to deregulation – even for later. While Moily, who must at least be complimented for setting the ball rolling, merely said oil companies were authorised to “make price corrections from time to time”, Chaturvedi was clear this was not deregulation: “If we were to deregulate, then diesel prices will have to be raised by Rs 9.60 a litre, which is not the case. Only a small quantum of change has been permitted over a period of time,” BusinessLine quoted him as saying.
So there is no clarity on how much prices will be correct, and how slowly.
What we possibly have is deregulation subject to frequent political pullbacks, exactly of the kind we had on petrol till recently. The next 15 months will see a heavy calendar of elections with the grand finale set for May 2014. So, it is not guaranteed that the UPA will have the political gumption to press ahead with its tentative deregulation.
Now let’s look at the details and see how this reform is not significantly better than no reform in some ways.
First, the move is not going to even begin solving the budget subsidy bill problem this year, since the gains have been neutralised by increasing the LPG subsidy bill by 50 percent (six cylinders to nine), and oil companies have cut petrol prices to bring down the disparity with diesel. Neither the budget nor oil companies will thus benefit greatly from this move.
Second, we have full deregulation on sales to bulk buyers of diesel, who will now pay nearly Rs 9-10 more per litre. Bulk buyers means the railways, defence, some private companies using diesel generating sets, and state road corporations. Of the Rs 10,000 crore in subsidy that will be saved on this in a full year, half of the market price increase will be reimbursed by the government itself. The railways bill will rise by Rs 2,500 crore, and defence and other government-owned public sector companies running diesel gensets will have to pay more.
Third, one can almost guarantee that pilferage and corruption will rise in the short run. When you have two prices for diesel – one at the pump and another much higher price for bulk users – who can guarantee that subsidised diesel will not be sold by pump owners to bulk buyers on a wink-and-a-nod? Why would a pump owner who gets diesel cheap not sell it for Rs 5 more to a bulk buyer and make crores in black money? Do we expect pump owners to be saints?
Fourth, this deregulation on bulk buying may not help the public sector oil companies much. Reason: deregulation means it is now worthwhile for private oil companies like Reliance and Essar to supply bulk consumers at competitive prices. What is the chance that the public sector oil companies will reap the full harvest of this deregulation? Almost zero. They will probably gain less than half the benefits. The private sector will muscle in.
Take these points together, and what we have in not just half-reform, but dangerous quarter reform.
The Economic Times, which has taken on itself the job of market cheerleading, headlined the story with an ecstatic “Tanked-up govt finally zips past diesel barrier.”
It has zipped past nothing. The truth is reform has been partially stopped at the gates, and there is no certainty that it will reach its logical conclusion in an election-studded year.
“Oily” Moily may have set the ball rolling on quarter-baked reform, but we can’t give him or Chidambaram three cheers. It is one cheer at best.