No quick fixes

PMO's approach to reviving economy needs rethinking

For a year or so now, there have been some indications that the Prime Minister's Office, or PMO, has been seized of the need to ensure that private sector investment starts moving again to push the economy out of the doldrums. A large part of that is ensuring energy supplies - the lack of a secure supply of energy has been a major constraint on India's growth. Large amounts of capacity had been added to India's coal-fired plants, but the private sector operators were unwilling to operate them because coal had become more expensive than they had bargained for. Meanwhile, gas-fired plants that had been built on the assumption of plentiful and cheap gas from the Krishna-Godavari (KG) basin stood at a standstill, thanks to the sudden decrease in output from there, especially from Reliance Industries' wells in KG-D6.

The approach that the government took was, in each case, to placate the private sector player. It was suggested that the price of imported coal and domestic coal be "pooled" so that even those plants that had been bid out to private sector operators on the assumption that they would use foreign coal would benefit from the fact that domestic prices had become lower than international prices (which went up as a result of the introduction of new taxes and surcharges by foreign governments, among other things). Meanwhile, a committee headed by the chairman of the Prime Minister's Economic Advisory Council, C Rangarajan, examined the question of gas pricing and suggested, in effect, that the government raise the amount it paid Reliance from $4.2 per million metric British thermal units (mmBtu) to approximately $8.8 per mmBtu, based on a formula that took into account spot prices of gas elsewhere in the world. These seemed to be speedy ways to get inputs flowing again - essentially, quick fixes.

The limits of such quick fixes are now clearly visible. Several ministries have objected strenuously to the Rangarajan Committee's recommendations , which, as this newspaper previously pointed out, make little economic sense. Meanwhile, coal pooling was subject to a sustained attack from state-owned Coal India Limited, as well as from those coal-rich states that would essentially lose out from pooling. In each case, the approach of the prime minister and his advisers received so much pushback from other stakeholders that it appears difficult to see the changes going through. Essentially, instead of going for proper reformist moves - such as ending Coal India's monopoly over mining, introducing a transparent pricing mechanism or even reviewing the bidding process for awarding such projects to private sector players - a quick-fix approach was preferred, and has been found wanting. This newspaper has also reported that the PMO has written to the relevant ministry suggesting that a new policy that recommended preferential market access for Indian high-tech companies be put on hold. This policy, meant to help build up an Indian high-tech base, faced angry complaints from foreign companies. Again, a longer-term approach is being sacrificed at the altar of short-term solutions.

Last week, the government advocated the need for speeding up implementation of projects, arguing that no new reforms were essential before the general elections. Clearly, this is only partially right. In particular, if the speeded-up implementation consists of allowing the private sector to win every time a contract hits a hold-up situation, then it is politically and administratively unsustainable - as well as a source of longer-term problems. The PMO needs to rethink its approach.