The Government, cowing like a wimp to pressure from its Left coalition partner, had tried to bury its hydra head in the sand staving off hikes in petroleum products and trying to escape the facing of reality. That left oil marketing companies gasping for breath, with no money left to buy petrol and diesel, which were under threat of being rationed, including to the armed forces. Last week the Government faced (partly) the reality of the situation and raised petrol prices by Rs 5/litre, diesel by Rs 3 and LPG cylinders by Rs 50. Even with this, the hikes absorb only about 9% of the total under recoveries estimated at Rs 245,000 crores. Fifty five percent is borne by issuing oil bonds, which is simply passing on to a future generation the cost of profligacy of the current one. Reprehensible policy!

What followed was a sheer hypocrisy by other political parties. The CPM and Trinamool Congress called bandhs in Kolkata on two successive days, never mind the hardship imposed on people or the futility of such a bandh on the decision. Price increases are not going to be reduced because of the bandh; instead, West Bengal’s GDP will suffer.

It was the Left parties, supporting Government from outside without taking the responsibility of joining it, that were, in fact, responsible for the apparent steepness of the hike. Had the Congress mustered up the spherical objects to raise petrol prices by, say Rs 1/litre five times instead of once, it would have been far more acceptable.

The fact that it did not indicates the invertebrate nature of Prime Minister Manmohan Singh’s government. Being an economist he ought to have been able to convince others of the folly of defying economic reality; sadly politics and the lack of backbone prevented it.

The BJP’s protests of economic terrorism also smacks of hypocrisy. During its incumbency, the BJP Government had raised prices of petrol and diesel to the same extent as the UPA Government, despite the fact that crude oil prices hadn’t increased as dramatically as they have under this Government. So its claim that the UPA Government has unleashed economic terror is only posturing for the next election.

Finally the Prime Minister’s appeal that ministers cut down on air travel and on unnecessary usage of cars is another display of crass hypocrisy. It does not take the public protest of a petro product price hike to make these sensible suggestions. Any good leader must prepare for bad times instead of making senseless gestures after they have arrived.

The consequences to the economy and to Government financing will be bad. For preparing the country for a future of high energy prices with shortage, even worse. By artificially curbing prices of petroleum products, the Government has not allowed demand to be curtailed, as it would be, if prices were raised. The export growth of 31.5% in April 08 (over April 07), to $ 14.4 b. seems impressive until juxtaposed with the 46.2% increase in oil imports to $8 b. and of 36.6% in total imports, to $ 24.3b.

This relates to pricing, but availability of fossil fuels is a bigger concern. An alternate energy basket has to be developed, with urgency. One of the options was to use nuclear energy, essential if India is to grow at 9% or more. However, once again politics takes precedence over sensible economics and long term planning.

The conclusion that all political parties care only about power and not about the country, thus becomes inescapable.

The upstream oil companies, ONGC and GAIL, have to bear Rs 45,000 crores, or 18% of the total underrecovery of Rs 245000 crores. This means that ONGC will not be able to make the investment in both developing and acquiring, energy assets to the extent of the subsidy burden it bears. Once more example of succumbing to political follies and jeapordising the future.

Auto companies will be hit. None of the auto companies have bothered to develop alternate fuel products, including CNG, electric hybrids or other hybrids. Years ago this columnist had written to the CEO of Maruti Udyog asking why Maruti did not provide factory fitted CNG car options and why was it necessary for a consumer to bear the risk of a CNG kit not working. It was, after all both a consumer need (to cut running cost) as well as a national priority. His reply was that there wasn’t enough demand to justify the investment! How on earth would there be demand without a product on offer? Even foreign manufacturers like Toyota, with its popular Prius electric hybrid, have been slow in introducing it. Auto makers are also faced with the prospect of a 30-40% hike in contracted steel price for high grade steel.

Immediately following the price hikes, road transport freights have been hiked by 10-15%, which would add to inflation. Middlemen will take the opportunity to hike prices of e.g. vegetables, by more than the freight hike, taking advantage of the situation. It is hard to imagine inflation coming under control fast.

One hope for inflation to be reduced was in the delivery of PMT gas. This would substantially reduce the feritiliser subsidy as cost of producing fertiliser using gas instead of naphtha would be much lower. A fire at the PMT gas field has affected production of oil and gas, which may cut supply by 6 and 20 % respectively.

Lastly the effect on the fiscal deficit. To cushion the popular backlash of the petro price hike, the Government cut excise duty on petrol and diesel by Rs 1 and customs duty on crude oil by 5%, and on petrol/diesel by 2.5%. This will deprive it of revenue. Combined with a farmer debt waiver of Rs 71,000 crores, and the hike to Government servants by the sixth pay commission, the fiscal deficit will probably exceed the limit set by FRBM. It surely will, if the fudging of accounts through issuance of oil bonds, and fertiliser bonds, which do not go into the budget and hence don’t reflect in the fiscal deficit, is counted.

Meanwhile the US Fed has signalled an end to interest rate cuts and may well raise them in order to defend the dollar which Bernanke has expressed a concern over. The RBI would also follow suit. That would act as a dampner to equity markets.

Last week the sensex fell 843 points to end at 15572 and the Nifty was down 242 points to end at 4627. Should 14,500 on the sensex crack, there could be a fall of another 2000 points. India’s growth story remains intact, despite all political parties doing their hypocritic best to derail it. The strains and contradictions of coalition politics will be evidenced as elections approach; as the saying goes, it is only when the tide goes out you discover who is swimming naked!

Source: Political Hypocrisy on Display

After an initial teeth jarring fall of 726 points on Monday, the sensex seemed to steady itself, but got another shock when an inflation figure of 7% was revealed on Friday, causing it to slide 489 points. Of the weekly 1028 point fall, L&T contributed 176, HDFC 118 and ICICI 115. Inflation would be countered with a hike in CRR, and a tightening of credit which has affected such heavy industry and financial sector companies.

A big part of the problems with our economy can be laid squarely at the doorstep of bad public governance. No, make that abysmal. Take the oil industry, where stupid Government policies have turned the scenario into a tragi comedy! Three PSU marketing companies, IOC, HPCL and BPCL have been converted from being ‘navratnas’ (nine jewels in the PSU crown) to seas of red ink. The losses on account of subsidies they are forced to bear are partially covered by giving them oil bonds (which defers liability of payment to a future Government).

Now the condition of the 3 companies has become impossible, and they have to borrow to continue paying wages. They could, of course, sell the bonds and continue operations, but for some reason the Government has capped sale of bonds to 25% in any quarter! Not only that, but it refuses to grant the bonds the SLR status that would allow banks to invest in them (banks are forced to set aside some of their funds into SLR securities, but oil bonds don’t qualify for some inexplicable reason). So the market for the bonds becomes restricted, and the bonds have to be sold at a discount.

In essence, therefore, the Government subsidises prices of petroleum products which benefits the intended beneficiaries less but helps truckers lower their costs (by adulterating diesel with kerosene and causing environmental problems), helps restaurants cut costs and helps private sector financiers get bonds at a discount whilst bleeding PSU navratnas. If this cannot be called a Pavlovian tragi comedy, what can? Remember, the bill for all this is to be paid by a future Government.

It is the same in every sector the Government is preponderant in. Industry is hampered because of a shortage of power, some 40% of which is wasted through theft! Soft politics to favoured constituencies and corrupt administration doesn’t allow this issue to be tackled firmly, as it should. In an election year, it would be even tougher. Result? The consumer is paying, and will continue to pay, higher charges than necessary. Wonder why inflation is high at 7%?

Where a large part of the industry is in the private sector, the Government is able to pressurize companies to reduce prices, which, in an election year, becomes of paramount importance. Steel companies had raised prices some 20% in March, partly as a result of rising input costs of power and coal, largely under Government control. They have acceded to the request to roll them back.

On top of this, we have had unseasonal rains in some parts of the country, which would impact agricultural output. Interest rates will rise, to combat inflation, which will add to the debt servicing cost of industry.

Expect, therefore, the stock market to have a bumpy ride this year. It would be advisable to get light on every rise. Foreign investors are not likely to come rushing in because the financial sector problems in the US have yet to be fully played out. UBS wrote down $ 19 b. of losses last week. Other worms will emerge from the woodwork.

In India, there would be problems with FX derivative contracts. Mid size companies have entered into these contracts and are now suing banks that advised them to. These losses may now be required to be shown in the accounts; hitherto they were not immediately required to. So maybe results for Q1 of 08-09 may start reflecting such losses, which would also impact the market.

All in all, prudence is the better part of valour and one should become lighter on rallies. In an election year, vote for caution.