Thursday, March 7, 2013

Playing the fiddle and crying wolf

Why has India failed to overhaul, modernise and transform its infrastructure sector? The answer is threefold – poor policy making, poor regulatory oversight, and extreme levels of crony capitalism!

THERE is such a torrent of information, news, PR stuff that passes as news, analysis, opinion and pseudo punditry that it becomes almost impossible to stitch together the seemingly diverse strands to weave a coherent picture. But once you just making a list of the seemingly unrelated events, you cannot escape looking at the big picture. And the big picture is a frightening one of the entirely unnecessary and destructive implosion of India’s ambitions to take its infrastructure at least above Third World levels. Just consider the following news reports or opinion pieces that you might have read in newspapers- more often white than pink-in recent times:

1. In the second half of 2012, it was reported that India actually lost about 60 million mobile connections. So instead of marching towards a subscriber base of one billion, India now has less than 900 million phone subscribers. The reason given is that mobile service providers are disconnecting ‘inactive’ numbers to boost bottomlines. Of course, you must have also read that MTS abruptly disconnected 1.8 million customers by shutting down its services in Mumbai claiming it was forced to do so because of Supreme Court orders.

2. Some time late last year and early this year, the infrastructure group GMR announced that it is withdrawing from a prestigious and crucial highway project that is supposed to link Kishannagar in Rajasthan with Ahmedabad. GMR officials stated that the group was withdrawing from the project because the National Highways Authority of India was taking too long to acquire land for the highway project. In contrast, NHAI officials complained that the group is withdrawing because it is facing a financial crisis and is using tardy land acquisition as an excuse. Another infrastructure group from the state of Andhra Pradesh, GVK also withdrew from similar highway projects.

3. Sometime in July 2012, the entire northern and eastern grids of India virtually collapsed resulting in massive power cuts and outages across vast swathes of India. Life literally came to a standstill as even trains stopped dead in the tracks. As is wont in India, there was a furious blame game with the Power Grid Corporation accusing some states of irresponsibly overdrawing power from the national grid. Around the same time, you must have read news reports or rumours that the Gandhi family had requested the Akhilesh Yadav government in Uttar Pradesh to ensure uninterrupted power for Amethi and Rae Bareilly as loyal voters were up in arms against prolonged power cuts. Of course, you must be aware that soon after the collapse of the power grid that made India a laughing stock, the Union Power Minister Sushil Kumar Shinde was ‘promoted’ to the post of Union Home Minister in a cabinet reshuffle.

4. Television news channels that telecast live a press conference addressed by Aam Aadmi Party stalwarts Arvind Kejriwal and Prashant Bhushan have been reportedly served defamation notices by Reliance Industries Ltd. During the press conference, Kejriwal and Bhushan had made a series of allegations against Reliance Industries related to the KG basin gas project and accused the central government of protecting the interests of Reliance Industries at the cost of national interest. Most of you would have either seen the press conference or read about it in newspapers. But the drama of the live telecast diverted our attention from a crucial fact: according to the Directorate General of Hydrocarbons, gas output from this critical source is slated to decline from last year’s level of about 37 million standard cubic meters per day to about 27 mmsd in 2012-13 and even further to about 22 million mmsd by 2013- 14. A host of power and fertiliser plants dependent on gas from the KG basin are effectively crippled. Meanwhile, there is a running battle going on between the CAG and Reliance Industries over audit of the project, with no resolution in sight. You might recall that Sushil Kumar Shinde was given the Home portfolio after the power grid disaster. In this case, after persistent rumors that the then Petroleum Minister S. Jaipal Reddy was being tough on Reliance Industries Ltd, he was shifted as Minister of Science and Technology.

5. Just recently, the Supreme Court of India pulled up the Central Bureau of Investigation for the tardy pace at which it was investigating the alleged coal block allocation scam. The CAG had opened a virtual can of worms in 2012 when it accused authorities of massive irregularities in allocations of coal blocks. There are many who seem to think that the alleged coal allocation scam is even bigger than the 2G scam, though media interest in the issue seems to have tapered off after an initial flurry of reports and speculations. But once again, allegations and counter allegations over the alleged coal bloc allocation scam had diverted our attention from a crucial and deeply distressing fact: according to a recent Reuters story, India imported more than 72 million tonne of coal in the period April-December 2012. That is an almost 50% jump compared to last year. The same Reuters story quotes analysts saying that coal imports during fiscal 2012-13 will be about 107 million tonne and climb further to 115 million tonne by 2013-14. That is because domestic coal production is simply failing to keep pace with growing demand. By the way, India has the third largest reserves of coal in the world and such massive imports are putting a further strain on India’s already serious trade and current account deficits.

6. Some of you might have read a surprise story in February 2012 which stated that Kingfisher Airlines surprised employees by paying one month salary to its employees. Employees of the airline claim that they have not received salaries since May 2012. Of course, we all know that Kingfisher Airlines is effectively grounded and shut down. There are reports that banks that have lent money to the airline are sure they can recover only a part of the amount even if the courts liquidate the airline. In many ways, the virtual demise of this high profile and once celebrated airline is symptomatic of how the once soaring civil aviation sector in the country is in danger of a crash landing. According to a study by the Centre for Monitoring the Indian Economy based on data released by Airports Authority of India, passenger traffic will actually decline by 2.5% in 2012-13 as compared to the previous year. This is mainly because of a steep fall in domestic air traffic.

7. The Chief Minister of Delhi, Sheila Dixit, was featured in newspapers on February 25, 2013, for a strange reason. She was quoted as apparently saying those residents of Delhi who complain of high power tariffs should consume only what they can afford. When the distribution of power was privatised in Delhi in 2002, there was hope that private firms will ensure that the then figure if 55% T&D loss – an euphemism for theft – would be drastically reduced. That in turn would actually lead to lower tariffs for consumers in Delhi. Of course nothing of that sort has happened and power shortages as well as high tariffs have become a political hot potato for the Sheila Dixit government. But Delhi is only symptomatic of the entire country. According to the Central Electricity Authority, India is looking at a power deficit of more than 10% in the current year. Power cuts range from about one hour a week in states like Gujarat to about 30 hours a week in states like Tamil Nadu. Mind you, both are industrialised states. The less said about the so-called poor states, the better. The reason given by the authority is critical shortages of coal and gas – two things we have already mentioned above.

8. In 2012, Union Commerce Minister Anand Sharma admitted to Parliament that only 154 out of 587 Special Economic Zones approved under a 2005 policy were operational. In contrast to the promise of creating millions of jobs and creating China style manufacturing jobs, the actual number of jobs created was just about 800,000. The minister stated that SEZs accounted for about a quarter of exports from India. What he didn’t add is that most of these export earnings came from software firms that had shifted base to SEZs to available tax exemptions. Even a child knows that even a fraction of the Chinese miracle has not been repeated by Indian SEZs, with most of them becoming speculative real estate deals.

9. Things were not looking so bad once upon a time. When Atal Bihari Vajpayee was the Prime Minister of India, he implemented a cess on sale of petroleum products to exclusively finance the expansion and modernisation of India’s highways, including the prestigious Golden Quadrilateral project. He gave the responsibility to implementing the scheme to Major General B. C. Khanduri. Even critics of BJP and the then NDA government reluctantly admit that the highway modernisation project was one of the genuine success stories delivered by the Vajpayee government. Around the time the NDA lost power in 2004, India was adding about 18 kilometers of spanning new highways every day. Today, that figure has dropped to a measly 2 or 3 kilometers at best.

Clearly there is something seriously wrong with the infrastructure sector on India. One top level industry analyst recently told me why he thought that the recent policy to allow FDI in the retail sector is more of a joke than a revolutionary step. He simply laughed at the idea that global chains like Wal-Mart will invest huge amounts and transform India agriculture as well as food processing industries. His logic: Wal-Mart is not going to invest money to build power plants that will allow cold storages to function. Nor will it invest dollars in building roads that will connect the rural hinterland to urban markets. He further said that one of the key reasons for the rate of GDP growth crashing from more than 9% a year to just about 5% a year now is because of India’s appalling and inexcusable failure to overhaul, modernise and transform the infrastructure sector. According to him, this failure is going to haunt India for many many more years to come. That is because infrastructure projects take years to come to fruition and even a dramatically charged up UPA regime cannot do much in the immediate future in terms of concrete results.

What actually went wrong? The answer, without beating about the bush, is threefold. The first is poor policy making. The second is poor regulatory oversight. And the third is extreme levels of crony capitalism. Look at how the UPA government adopted policies to allocate spectrum in telecom and coal blocs on the mining sector. The policies were inherently flawed and bound to generate controversy and confusion. The results are there for all to see. Something similar happened with a policy decision by the civil aviation ministry to allow airlines only with at least five years experience of domestic flying to launch global operations. Something worse is happening with the proposed Land Acquisition Bill that will make it a nightmare for investors to acquire land for any infrastructure project. There doesn’t seem to be any hope too of this government paying heed to common sense voices and adopt sensible and transparent policies. The second key reason for this unfolding nightmare is poor regulation. The Delhi Electricity Regulatory Authority is a classic case. One year, the body accuses the private power distribution firms of unethical behaviour and refuses to entertain their demands for a fare hike. The next year, it mysteriously allows an even bigger hike despite widespread protests. The Directorate General of Civil Aviation has similarly failed to look either after the interests of the consumers or behave in a consistent and rational manner. We all know what has been happening and what is happening with the telecom regulator TRAI. Then again, it did appear as if the regulator for the petroleum industry the Directorate General of Hydrocarbons was sleeping even as gas production from the KG basin started falling alarmingly.

But poor policy making and poor regulation are mere manifestations. The real reason is crony capitalism. There have been so many allegations of scams during this regime that it is difficult to keep track of all of them. They seem to come out as regularly as pot boilers starring Akhsay Kumar. But there is one common strand in almost all the allegations of the scams. They are related to the infrastructure. Power, SEZ, telecom, highways, coal blocks, gas fields and civil aviation seem to to be sectors that have been the worst affected by scams. The sad thing is: there seems to be no end to this brazen practice of crony capitalism. The implosion of India’s infrastructure sector will continue.