Devil's Advocate: Montek on Left, Kamal Nath

How does the government respond to the Left critique of the oil price hike? That is one of the key issues Karan Thapar discussed with the Deputy Chairperson of the Planning Commission, Montek Singh Ahluwalia.

Karan Thapar: Dr Ahluwalia, the Left says that from May 2009, when the UPA was sworn in, till today the international price of oil has only risen by seven dollars a barrel which they calculate comes to only 70 paise per litre. Yet, in the same space of time, your government has increased the price of petrol by Rs 6.44 and diesel by Rs 4.55. How do you justify an increase that is almost ten times the international increase?

Montek Singh Ahluwalia: You know what -- what the Left knows perfectly well but are not bringing out is that the price situation was unviable when the UPA government came in. The big price increase took place over a year ago. Prices were not adjusted, so the prices that were being charged when the UPA government came in were already prices that reflected an international price increase that had occurred (and) was leading to very substantial drain on the treasury. So the rise in price is to correct that—not to correct what was happening in the last three months.

Karan Thapar: You were making up for increases that had happened earlier rather than increases that have happened now?

Montek Singh Ahluwalia: Yes, absolutely.

Karan Thapar: The Left answer to that would probably be this. They say that the government's claim that it has to make up for under-recoveries of oil companies on the basis of import parity pricing of refined petroleum products is simply not true.

They say it would be true if India was a major importer of refined petroleum products but it’s not. India imports crude oil and does it own refining at prices that are considerably lower than the international price. So why are companies being compensated for costs they have not incurred?

Montek Singh Ahluwalia: No, the companies are being compensated today -- with the liberalization of arrangement that has been done. It is actually going to end up being imported crude oil plus -- the cost of imported crude oil, which has gone up a bit -- the cost of margin.

Now the formula that was being used earlier is import-trade parity price which looked at import price of products and some export price rules. You can do it one way or the other--I don’ think the argument changes.

Karan Thapar: Let me give you the telling example the Left actually uses. They say, for instance, a pair of shoes imported from Italy cost Rs 1,000 but if you import the leather and make the shoe in India then the cost is only Rs 600. Then how can the company claim that on the basis of import parity pricing, its actual price is Rs 1,000.

That is not just unfair, the Left says, it is patently wrong.

Montek Singh Ahluwalia: I am aware that they have made that point. The actual fact is that if you build up the price of petroleum products, taking into account the increase that has occurred in crude oil prices and taking into account the need to do some cross subsidization, I don’t think the price being charged is all that wrong.

Karan Thapar: But are you simply doing cross subsidization or actually reflecting an import parity pricing? The fact is that you are charging at the level refining is happening abroad. That is not the cost of refining in India.

So you are certainly over-compensating and you are misleading people.

Montek Singh Ahluwalia: No, no! This needs detailed study of individual cost items. Let me just make one point. Where I think the Left has got it wrong--the Left claims there is no under-recovery and these companies are making huge profits. (But) these profits reflect the fact that a large subsidy is being paid to them.

If we didn’t pay the subsidy these companies would be making a loss. So it is simply not true that left to themselves, without subsidy, these companies were making a profit and the system was viable.

Karan Thapar: Let me even pursue that point. The Left picks up on the fact that the Oil Minister has repeatedly said that if the government had not intervened the oil companies were at the point of bankruptcy.

Now, the Left denies that, citing the petroleum ministry's annual report 2009-10 they actually point out that the IOC made a profit in 2008-09 of Rs 2,950 crores. By the end of December 2009 -- for the year 2009-10 – the profit was already Rs 4,663 crores and the audited financial results for that year show a whopping profit of almost Rs 11,000 crores.

Montek Singh Ahluwalia: But that is exactly what I was saying. Those profits are based on the assumption that the government will make up the under-recovery to a certain extent. Those are the profits after they take credit for the subsidy. So you are basically running a system in which the profits of the oil companies are the result of the government having to bear a subsidy which is not viable.

What the Left are saying is there is nothing wrong with the pricing because they are making a profit—this is false. The profit they are making is because the government is admitting that ‘well, you are not making the full recovery, so we will pay you a subsidy’. The profits that have been shown in the oil companies take credit for a subsidy. We are not supposed to be subsidizing the oil companies—we should be paying for schools, education, hospitals and so on.

Karan Thapar: The other point that the Left makes is that if you look at the structure of the pricing of petroleum and diesel, the reason that it is so expensive in India is because of the impact of government taxation. Do you accept that?

Montek Singh Ahluwalia: Yes, I am aware of that. I am stating that it is true that we have a significant tax burden but let’s be clear about it that you cannot eliminate a tax burden without recouping the revenue somewhere else. You could legitimately say don’t tax petroleum, raise the same revenues by taxing everything else. Would anyone want that?

The Left is giving a completely false picture (that) by getting rid of the taxes we will simply lower the price. You lower the price but you lose a lot of tax revenue, so you won’t be able to finance all the things that you otherwise financed unless you levy a general tax increase on all commodities. You want to do that?

Karan Thapar: Except look at the burden of tax on petroleum, to take that as one single example. In India the price of petrol is determined 51 percent by government tax. Compared to Sri Lanka, where it is 37 percent, Pakistan, where it is 30 percent, and Thailand, where it is just 24 percent.

Montek Singh Ahluwalia: That is a cross-subsidy. In India, the kerosene price is much lower than in Sri Lanka and Pakistan. What is the government doing? The government is subsidizing kerosene and LPG and is raising this money from petrol. I regard that as a sensible form of cross-subsidy.

Either the Left should say get rid of LPG subsidy, get rid of kerosene subsidy and then we can lower the tax on petrol. What I am saying is that we are subsidizing those things that go for the poor and we are taxing things that are consumed by much better off people. I think if you want subsidy for the poor then that is the right thing to do.

Karan Thapar: Let me give you the conclusions that the Left have come to. They say the reasons given by the government for the price hike are totally wrong and misleading. You are saying to me that the Left is completely wrong.

Montek Singh Ahluwalia: I am saying the Left is completely and totally wrong and deliberately misleading. I think they have a lot of good economists and they know that they are making a purely political point. These arguments have absolutely no economic rationale because they are not bringing out the other side of the picture.

Karan Thapar: Except for the fact that on the point of under-recoveries you are accepting that the under-recoveries are probably not as great as the government has given the impression of. When the Left point out that you are ignoring the fact that refining in India is considerably cheaper than refining abroad, therefore, import parity pricing doesn’t work. That is a point that is partly true.

Montek Singh Ahluwalia: No, no! You are missing the point that in the entire structure of petroleum prices we are giving much lower prices for a large number of other items, so some built-in cross-subsidization has to take place.

Karan Thapar: Which accounts for the anomaly on under recoveries?

Montek Singh Ahluwalia: I am not sure, by the way, that the argument you are making would be valid if you did a proper cost accounting. I mean it maybe in a period of global shortage sometimes the market price of products can rise but when you have a global surplus the market price of a product gets much closer to the crude price. I don’t think the system builds in a permanent form of bias.

Karan Thapar: So you stick to your point that the Left is totally wrong and they are totally misleading?

Montek Singh Ahluwalia: I am saying their statements are incorrect and giving the wrong impression. I think if you took a considered view of it, the proposition that the oil companies were making a profit and that there is no reason to raise prices is wrong. The only reason they were making a profit is because we were paying subsidies. The proposition that Indian taxes on petrol and diesel are higher than in our neighbouring counties is correct but that is because Indian kerosene and LPG is much cheaper.

So somebody has to get to pay for it – either it would be paid out of general revenues or it would be paid from petrol. I think it’s better if it is paid from petrol because in any case we want people to move away from private transport to public transport. It is a good idea.

Karan Thapar: Dr Ahluwalia, let us now come to what the press calls (Transport Minister) Kamal Nath’s critique of the Planning Commission. Given that this is an institute headed by the Prime Minister -- he is the chairman of the Commission -- were you surprised and dismayed at the sharp attack by a senior minister?

Montek Singh Ahluwalia: Oh, I don’t think I will call it a sharp attack! I was on the dais at the time, and Kamal had asked me look, I have some problems with the way Planning Commission handles things and I said well, go ahead and express them.

Look, government is about creative tensions. We criticize many things the ministries do. I don’t think there is anything wrong with ministries criticizing us. The Prime Minister also chairs the Cabinet – then on that basis everything we do when we criticize other ministries could be shot down.

Karan Thapar: There is something actually quite interesting in what you said. You said Kamal Nath had actually discussed with you before he went public that he had certain criticisms and reservations and you encouraged him to make them in public.

Montek Singh Ahluwalia: I didn’t encourage him to make them in public but I said if you have any problems with the way the Commission handles different issues I have no objections to you mentioning them.

We have had many meetings with ministries and we actually encourage them to tell us--

Karan Thapar: But to say it in public, in front of an audience and sound critical?

Montek Singh Ahluwalia: We say a lot of things in public--come on! Any thing that is said under the Right to Information Act would be made public anyway, so I think we better get used to the idea. Government is full of intense disagreements -- the notion that government just sits there and agrees on every thing is a dream. And it is good that the government disagrees – these disagreements get sorted out at different levels, there is nothing wrong in that.

Karan Thapar: I am delighted to hear you say that there are intense disagreements in government but the point is that not so long ago the Prime Minister told his ministers they must not air their differences in public.

Montek Singh Ahluwalia: Those are political issues. Kamal Nath, when he was there said – actually the newspapers only reported a part of it. He said he is getting full support from the Deputy Chairman and Sudha Pillai, the Secretary, but there are things the Commission does that he has problems with.

I don’t call that a criticism which has any political resonance. Let me say that when you are trying to do something like bringing on board investors, I have sat with Kamal Nath at public meetings with investors and investors say different things. We ourselves in order to take care of this problem I had set up a committee under B K Chaturvedi to look at these things. As a result of this we modified some of the things that were in our various model concession agreements.

Karan Thapar: At the end of what the press called Kamal Nath’s attack on the Planning Commission you said it was constructive criticism. Were you being polite or were you acknowledging that there was truth in what Kamal Nath was saying?

Montek Singh Ahluwalia: I am certainly acknowledging that we often criticize ministries, and I think we should be willing to hear ministries’ views where they differ with us. All such exchanges are in my view constructive. Now you can pretend that these differences don’t exist and tell us in private. But in a world of Right to Information you could theoretically ask me about any letter Kamal Nath writes to me and I would have to make it public. So why not have a discussion?

He was not, by the way, giving a public lecture. This was a lecture to investors who are investing in roads and he was trying to convey to them that he is very aware of their requirements and he is making their case to the Planning Commission. I said go ahead and do it.

Karan Thapar: Let me then come to the substance of what he said. He said, as far as the press is concerned, three damaging things.

First, that the Planning Commission are arm chair advisors who have lost contact with ground realities. He added that you people maybe very good at writing books but building roads is all together a different matter. Do you accept that?

Montek Singh Ahluwalia: Well, building roads is certainly different from writing guidelines. Let us be clear: we are not an implementing body. Equally, it doesn’t mean that you don’t need advice. I mean accountants are not people who build roads but you can’t build roads without having decent accounts. There is a functional role that the different parts of the government play.

When you are dealing with the approval process, when you are dealing with due diligence, when you are dealing with how bidding is competitive none of this requires you to be knowledgeable about the implementation process.

Karan Thapar: But in making his critique was he overlooking the fact that you need accountants and you do need advisors? Was he suggesting that they are redundant?

Montek Singh Ahluwalia: You should ask him that question. My view is that you cannot run a government only with people who know how to build roads. You have to give them a set of rules, they have got to react to those rules but you have to be flexible. When they say these rules need a bit of tweaking you should be willing to tweak them.

Karan Thapar: What about something else? Kamal Nath actually suggested that the Planning Commission is an obstruction. Citing Terminal 3 which has just been built at the Delhi Airport, he said that he was told that the only reason it had happened so effectively and on time is because the Planning Commission wasn’t involved in any way/

Montek Singh Ahluwalia: Well, it is a very interesting point. In the case of the Delhi Airport it was a public-private partnership and the government’s involvement was prior to the selection of the partner. Many newspapers have pointed out that it was the Planning Commission’s intervention on how to do the competition properly that led to the present operator being selected.

It is absolutely true that once selected we didn’t get involved, nor did anyone else. That is the whole point of (public-private partnership): do the due diligence to select the right people and let them get on with it

Karan Thapar: But Kamal Nath not only overlooked, it seems he deliberately didn’t want to acknowledge the role the Planning Commission played in clearing the way for PPP? He deliberately overlooked it. Doesn’t that offend you?

Montek Singh Ahluwalia: Not at all! You are making too much of statements made in a extempore delivery.

Karan Thapar: Are you not being too generous in overlooking it?

Montek Singh Ahluwalia: If you feel that what he said ignored something you should just ask him.

Karan Thapar: Didn’t Gajendra Haldea, your advisor, respond at once with some amount of dismay?

Montek Singh Ahluwalia: I think he simply responded to point out what I have already pointed out that it was because of the Planning Commission’s intervention that the promoters who built the airport got selected. That is something that has been pointed by editorials in two different newspapers.

Karan Thapar: The last point that Kamal Nath made was to say that from the day he became the Road Transport and Highways Minister, he was told the Planning Commission will not let achieve you a target of 20 kms a day.

He was suggesting that there is a personal dimension to the problem between the Commission and him.

Montek Singh Ahluwalia: No, I don’t think that is at all correct. I don’t think that he actually said that. There is an issue that when you set a target you have to relate that target to the funding that is available. I should tell you, by the way, that one of the principal things the Planning Commission does is to scale down the demands of ministries which are typically 100 percent more than the money available.

I think on that basis if every ministry thought that it could get whatever it needs for funding to achieve whatever it wants, so both the Finance Ministry and the Planning Commission would be blamed for not providing enough funds. Somebody has to do that.

Karan Thapar: You said something interesting at the beginning of that answer: you said all ministries have to set targets. Is that in fact the core and root of the problem between Kamal Nath and the Planning Commission? That he hasn’t been able to live up to his target, or boast as some would say, of building 20 kms a day and the Planning Commission has advised him to set a more realistic target of closer to 7 km.

Montek Singh Ahluwalia: No, that is not correct. I should I think get the facts on this right. In the previous year, 2008-09, the volume of roads that has been contracted – they have contracted a lot more than what was done in the previous year but they haven’t contracted as much they would like or we would like. For the current, that is 2010-11 we have set a target – and we both agreed on it – of something like 9,000 kms of contracting.

How much gets built depends on how the programme rolls out on the ground — 20 kms a day is 7,500 kms a year. So in terms of contracting we will definitely be meeting that target. In terms of whether they get built is too early to tell. You will only know that three or four years later.

Karan Thapar: So you are saying to me that the impression in the press that his (Kamal Nath) pride has been offended by the Commission asking him to scale down and set a realistic target that impression is wrong?

Montek Singh Ahluwalia: I am not going to comment, speculate on what is going on in Kamal’s mind – this is something you have to ask him. But I am merely saying 20 kms a day is 7,500 kms a year. If you treat that as contracting, which is really what we are talking about, we are not scaling that down.

Karan Thapar: So relations between the two of you are fine?

Montek Singh Ahluwalia: Personally? Absolutely no problem.

Karan Thapar: Professionally?

Montek Singh Ahluwalia: Professionally also. I genuinely believe that we ought to be able to discuss these things and people should know that there are different points of view.

Karan Thapar: Different points of view -- some will say that is the truth, others will say it is euphemism. A pleasure talking to you.

Montek Singh Ahluwalia: Nice to talk to you, Karan.

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