Anil Sharma

Bikram, Patna

Aspects of India’s Economy

A Modest Proposal regarding Subsidies

Prime Minister Manmohan Singh has faced considerable criticism for his recent remarks regarding the sale of ‘2G’ telecom licences to corporate barons at a massive loss to the exchequer (equivalent to 1.2 to 3.5 per cent of India’s GDP, according to different estimates). Addressing a rare press conference, he said:

I am not in a position to say that there is a foolproof method in which one can determine the extent of the loss. It is very much a function of what is your starting point. And also depends upon our opinion. We have a budget which gives subsidy for food, Rs 80,000 crore1 per annum, some people may say these foodgrains should be sold at market prices. Will we say then… because they are not sold at market prices, because you are giving them a subsidy, it is a loss of Rs 80,000 crore. We subsidise the price of kerosene to an extent which is greater than many other subsidies, that imposes burden on our oil marketing companies, should we say then that… that there is loss of revenue.

Some expressed shock at the Prime Minister’s comparing subsidies on the subsistence consumption of the poor with gigantic underhand give-aways to top corporate firms. However, they appear to have missed the point. The economist in Manmohan Singh has stripped away the pretense that the sale of 2G spectrum was a commercial sale at all: rather, it was a provision of subsidy, a channel of financial assistance from the State to particular persons.

This is indeed a refreshing perspective. It should not be restricted to the 2G sale. It needs to be extended to our understanding of a wide array of so-called ‘scams’. Once we grasp that these ‘scams’ are in fact methods by which the State channels financial assistance to the private corporate sector, we can dispense with calling them ‘scams’. This step itself will dispel the clouds of doubt and uncertainty that have darkened the present investment climate.

Below we apply this perspective to three very prominent examples of ‘scams’, or rather, non-transparent subsidies, which have made national headlines in the last few months. Every subsidy, of course, has a broader social objective. In the case of the subsidies under discussion here, the purpose is to enrich a microscopic section of society. The test of the subsidy is how efficiently it meets that objective. As we shall see below, while these subsidies have certainly succeeded, there remain problems of transparency, efficiency, targeting, and vulnerability to political attacks.

We proceed to outline a modest proposal for reform of the system of subsidies to the private corporate sector, so as to provide them in a transparent, well-targeted fashion, reducing some of the ‘leakages’ to non-targeted sections. We further enumerate some of the benefits of such transparency.

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I. 2G

Take what is referred to as the 2G ‘scam’, or in the Prime Minister’s words, subsidy. “2G” is short for second-generation wireless telephone technology. The Government allocates the exclusive right to broadcast at particular radio frequencies to various entities such as the armed forces, police, civil aviation, radio stations, television stations, and telecommunications firms. In order to carry on the business of mobile telephony, a firm needs to hold radio spectrum, which is thus very valuable. In January 2008, the then minister of telecommunications, A. Raja, issued 122 new licences for mobile telephony (which come bundled with spectrum) on a single day. Only certain firms, on the basis of advance information, were able to fulfil the minister’s new conditions in the half a day he provided. These firms, most of which had hitherto not been in telecommunications but in unrelated fields such as real estate, obtained spectrum at absurdly low prices (based on 2001 prices for mobile services licences). Further, firms which had licences for CDMA technology were given licences for GSM technology, along with additional spectrum.

The fact that the sale was at much below market prices was confirmed by the Comptroller and Auditor General (CAG). The CAG employed three different methods to discover the market price: the price offered in November 2007 by a prospective licencee; the prices at which the new telecom firms, having won spectrum, sold their shares shortly thereafter to foreign firms; and the price at which the next sale of spectrum took place (in 2010), by public auction. The first two methods put the loss to the exchequer at between Rs 57,666 crore (Rs 577 billion) and Rs 69,626 crore (Rs 696 billion); the third method put the loss at Rs 176,645 crore (Rs. 1.77 trillion). Even the lowest estimate is nearly one-third of corporate income tax payments in 2007-08 (Rs 192,911 crore, or Rs 1.93 trillion).

Now, in 2007-08, when the 2G sale took place, total food subsidy was Rs 31,328 crore (Rs 313 billion), and fertiliser subsidy was Rs 32,490 crore (Rs 325 billion). Thus the combined subsidy on these two items amounted to roughly the same figure as the lower estimates of subsidy to the corporate sector that year on just one item, i.e., 2G spectrum.
Some question the use of the term ‘subsidy’ for what the Government spends on items such as food distribution. They point out that, in the first place, the political economy of India operates to grind down so low the incomes of the very people who generate the wealth of the nation that they are unable to afford food itself. In 2004-05, the median income in the rural areas was just Rs 15 per day, and in urban areas, just Rs 262 (the ‘median’ income is that of a person at the midpoint of the population, i.e., with half the population ranked by income above her, and half below). By contrast, the per capita income (i.e., the GDP of India divided by the population) that year was Rs 82 per day – pointing to the extreme concentration of income at the top. These persons claim that, in fact, the suppression of the incomes of the working majority works to subsidise those at the top; and a few crumbs are tossed back in the form of food ‘subsidy’ and other welfare measures. However, an exploration of this subject is beyond the scope of this article.

Who were the beneficiaries of the 2G subsidy? Among them were some of the largest firms and business houses in the country – Reliance ADAG, Tata Teleservices, Essar, Videocon, Unitech, and so on. Their owners include numbers 4 (Ruias), 8 (Anil Ambani), 30 (Dhoot of Videocon), and 51 (Chandra of Unitech) on the Forbes list of Indian billionaires. (Ratan Tata’s name is not on the list, but for all practical purposes he is in fact among the wealthiest men in the country.)

Such hidden subsidies to the Forbes list dwarf the sums allocated by way of ‘subsidies’ to the poor. We have discussed this several times in Aspects, including in the previous issue. The point here is that these subsidies to the wealthy are given in a non-transparent manner, disguised under various other names and heads, leaving them vulnerable to criticism.

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II. KG-D6

After the initiation of ‘reform’ in 1991, the public sector firm Oil and Natural Gas Commission (ONGC) saw a sharp slide in its performance, largely as a result of systematic underinvestment, on Government instruction. It should be noted that ONGC once had considerable experience and expertise in exploration, and had discovered the Bombay High field. Moreover, during the 1990s, it had large cash reserves. Despite these thousands of crores lying idle in the bank, ONGC’s investment in the decade after the initiation of ‘reform’ was exceedingly low. As a result, not only did its crude oil production drop during the 1990s, but its exploration activities came to a virtual halt. This was not accidental: The Government was preparing to hand over prospective areas to the private sector.

In 1999, the Government announced the New Exploration Licensing Policy (NELP) with the stated objective of attracting private investment in domestic oil production. On the basis of groundwork done by ONGC in collecting geological data and mapping blocks for exploration, various blocks in identified oil and gas fields were offered to private operators on lease for exploration and production. In 2000, in the very first round of the NELP, Reliance Industries Ltd (RIL) won bids for 12 such blocks in the Krishna Godavari (KG) basin. By contrast with ONGC, at the time RIL had no experience in exploration.

There are two main strands in the following story: the sharing of the revenues from natural gas between RIL and the Government; and the price at which Reliance would sell the gas to industries which required gas as an input.

(i) Inflated investment: Under the NELP, private operators sign a production sharing contract (PSC) with the Government setting out the terms of their lease. The PSC for the KG basin lays down that RIL is to pay the Government only 10 per cent of the total revenue until it recovers 1.5 times its investment; thereafter the Government’s share is to rise slowly, until RIL recovers 2.5 times its investment. At that point, the Government share rises steeply.3 Hence, by overstating its investment, RIL stands to gain revenue at the expense of the Government. In the words of the head of the official committee on natural resource allocation, former finance secretary Ashok Chawla, this system gives “incentive to (an operator to) increase his investment4 – that is, incentive for fraud.

In 2002, RIL announced the discovery of very large reserves of natural gas in the D-6 block of the basin (today estimated at 14 trillion cubic feet). It estimated the required capital expenditure for the field at $2.4 billion. It did not bother with irksome details such as the submission of a comprehensive field development plan, as required by the contract.

In 2004, V.K. Sibal, for whom RIL had thoughtfully bought a house, was appointed Director General of Hydrocarbons (DGH). His approval, under the NELP, was required for any increase in capital expenditure. Two years later, Murli Deora was made minister for petroleum and natural gas, his chief qualification being his intimacy with first Dhirubhai and now Mukesh Ambani. That year, RIL got the DGH to approve a massive upward revision of capital expenditure, from the original $2.4 billion to $8.8 billion. (The revised capital expenditure was approved by a management committee of four – two junior officials of the ministry of petroleum and DGH, and two representatives of RIL.) As such, a much larger share of revenues would go to recovery of RIL’s investment than under the earlier approved expenditure, and the Government’s revenues would correspondingly decline.

The delivery of subsidy to RIL, then, was proceeding smoothly according to plan, and would have continued to do so if another corporate chieftain’s interests had not been affected. In 2009, Anil Ambani, when denied cheap gas by Mukesh, retaliated by publicising the fact that the capital expenditures of KG-D6 had been inflated. As a result of the public controversy, the Government was forced in 2009 to order a CAG audit of the production shareing contracts (PSCs) for onshore and offshore oil blocks, including the KG basin.

The CAG draft report was leaked to the media in June 2011. Its first finding confirmed emphatically what was already well known since 20095: namely, that the capital expenditures of the KG basin D-6 block had been inflated, with virtually no Government scrutiny. The second finding was new, and equally sensational. The contract had stipulated that, of the area RIL won for exploration (7,645 sq km), it would retain only the discovery area, and return to the Government those areas it had not drilled (i.e., 95 per cent of the area). This would have allowed the Government to re-tender those areas, from which it would earn a much higher price than it received from RIL for the entire area in 2000, as the discoveries in the interim period would lead to a presumption that the remaining area too contained hydrocarbons. However, using its clout with the DGH, Reliance held on to the entire area, and got it classified as ‘discovery area’ – which, correctly speaking, includes only the actually drilled area.6 The loss to the Government as a result of ‘gold-plating’ its investment is very large, but theoretically possible to calculate (Anil Ambani estimated it at Rs 37,000 crore7, or Rs 370 billion). On the second count, i.e., RIL’s failure to return the excess area, says the CAG, “The undue benefit granted to the contract through this irregular and incorrect decision is huge, but cannot be quantified.”

(ii) Inflated price: In 2003, the National Thermal Power Corporation (NTPC), a public sector body which supplies power to state electricity boards, invited bids for the supply of natural gas for its thermal plants. RIL won with an offer to supply gas at $2.34 per million British thermal units (mBtu) for 17 years. When the Ambani brothers divided the family empire in 2005, Mukesh got control of the petroleum and natural gas division, while Anil got control of the power division. As part of the split, Mukesh agreed to supply Anil gas for his power units at the same rate as it was to be supplied to the NTPC.

Later, taking advantage of the rise in international gas prices, RIL reneged on its Letter of Intent to supply NTPC at $2.34/mBtu, and proposed a steep increase in the price at which it would supply gas from the D-6 field. The Government promptly formed an Empowered Group of Ministers in September 2007, which approved an increase to $4.20/mBtu. In this fashion the Government undermined the case of its own public sector unit. The argument on the basis of which it did this was ingenious. Diverting attention from NTPC’s case, it focused instead on Anil Ambani’s claim that he should receive gas at $2.34, according to the family agreement. The Government now righteously declared that the country’s natural resources were not the private property of the Ambanis to be divided between them, but belonged to the country, and hence it was the Government that would set the price of gas, in order to claim the public exchequer’s rightful share of the revenues. This argument might have carried more weight if the Government had not agreed to RIL’s inflation of its investment (without even an official audit of RIL’s expenditures!), thus reducing the Government’s effective share of the revenues.

Government officials did not need to tax their own brains to think up this argument: As has now been confirmed with the leak of the “Radia tapes”, it was Mukesh Ambani’s lobbyist, Nira Radia, who plugged the “national resources” line. In her conversation with Vir Sanghvi, leading journalist and “media adviser” to the Hindustan Times, she complains that the Bombay High Court verdict in favour of Anil Ambani “is a very painful thing for the country because what is done is against national interest.” Sanghvi assures her he will plug this line in his column: “That message we will do. That allocation of resources which are scarce national resources of a poor country cannot be done in this arbitrary fashion to benefit a few rich people.” However, Radia is aware this argument can backfire – someone might question why the field should be in private hands at all:

Sanghvi: So I’ll make those points. The people, because the system is so corrupt and open to manipulation, by manipulating the system, by not paying anybody you can get hands on resources. Therefore the only way Manmohan Singh hopes to survive is to get a handle on the resources and have some kind of way of allocating them that is transparent, fair and perhaps done by him.

Radia: But there you will be attacking Mukesh only, no.

Vir: Why, why, why, explain that.

Radia: You see, because a resource has been allocated to Mukesh in this case.

Radia then dictates a more nuanced version to Sanghvi: the distribution cannot be decided by a family MoU, but must be dictated by national interest. Singhvi phones her later to tell her: “Wrote it… I’ve dressed it up as a piece about how the public will not stand for resources being cornered, how we’re creating a new list of oligarchs”. “Very nice, lovely, thank you, Vir”, replies Radia. Not only did this line of argument dominate the media discussion of the issue then, but it was adopted by the Supreme Court in its judgment on the Ambani vs Ambani case, decided in favour of Mukesh Ambani in May 2010.

Radia then dictates a more nuanced version to Sanghvi: the distribution cannot be decided by a family MoU, but must be dictated by national interest. Singhvi phones her later to tell her: “Wrote it… I’ve dressed it up as a piece about how the public will not stand for resources being cornered, how we’re creating a new list of oligarchs”. “Very nice, lovely, thank you, Vir”, replies Radia. Not only did this line of argument dominate the media discussion of the issue then, but it was adopted by the Supreme Court in its judgment on the Ambani vs Ambani case, decided in favour of Mukesh Ambani in May 2010.

RIL admitted in Bombay High Court that it would make profits even at the price of $2.34/mmBtu. In fact, according to the calculations made by Anil Ambani’s firm, RIL’s costs per mmBtu, including not only capital and operating expenditure but interest cost and royalty, come to just $1.43. Thus at $2.34 RIL’s profit margin would be over 60 per cent.8 At $4.20, it would be over 190 per cent.

According to the NTPC chairman, the price differential between the gas price of $2.34 and that of $4.20 would amount to Rs 24,000 crore (Rs 240 billion) over 17 years. Moreover, whereas the existing contract with NTPC was for 17 years, RIL now proposed a contract for only five years, allowing a further upward revision in the price at that point.9 RIL’s executive director P.M.S. Prasad blithely says that “NTPC doesn’t lose anything. The reason is NTPC being a public sector undertaking, for them the fuel cost is a pass-through. So, if they buy fuel at X dollars, that X dollars will be passed by NTPC to the state electricity boards.”10 That is, it is not really a problem for NTPC as such: either it will result in higher prices for the consumer, or increased losses for the state electricity boards.

Yet the losses incurred by the SEBs are routinely termed “subsidies”, resulting from failure to hike tariffs; for example, the Economic Survey 2010-11 calls for “a strong political economy decision by all states to revise electricity tariffs to economic levels and reduce subsidies and cross-subsidies”. (p. 262) Similarly, natural gas is a feedstock for the production of urea fertiliser, and accounts for two-thirds of its cost. Any steep rise in the price of natural gas would either require a hike in urea prices or in fertiliser subsidy. Between them power and fertiliser account for three-fourths of the consumption of natural gas in the country. Since NTPC is to shell out an added Rs 24,000 crore (Rs 240 billion) on just one-fifth of the total D-6 production, the total increase in D-6 revenues as a result of the price hike would amount to Rs 1,20,000 crore (Rs 1.2 trillion).11 Thus, even if the Government were to increase its revenues by charging more for gas, it would ultimately have to extract these revenues from the consumer, or pay larger subsidies on power and fertiliser. The subsidy to Mukesh Ambani has been converted into a defence of the “national interest”; by contrast, the required hike in the subsidy to the consumer to offset hiked costs will no doubt be termed “unsustainable”, “inefficient”, “draining resources”, “not targeted at the deserving poor”, and so on. (In fact, there are signals in the media of an impending series of tariff hikes by state electricity boards, as well as of further fertiliser price hikes.)

RIL’s gains from KG-D6, as well as from other blocks, are huge. While oil and gas exploration and production (E & P) account for less than 6 per cent of RIL’s latest quarterly sales, they account for almost a quarter of its earnings before interest and taxes (EBIT).12 Earnings from D-6 are projected to rise steeply in the coming years, as production rises. In 2010, Morgan Stanley attributed more than half of the target price of RIL’s shares to its E & P business.13 In February 2011, RIL announced that the global energy giant BP would be investing $7.2 billion for a 30 per cent stake in 23 blocks operated by RIL, including D-6. BP announced that it had valued RIL’s E & P business at $25 billion (Rs 1,12,500 crore, or Rs 1.13 trillion); Goldman Sachs analysts put it higher, at $29 billion (Rs 1,30,500 crore, or Rs 1.31 trillion).14

Apart from the revelations in the CAG report, a further controversy has recently arisen: RIL has deliberately violated the interim field development plan of KG-D6, by refusing to drill the stipulated number of wells. Under the plan, RIL had assured production of 62 million metric standard cubic metres per day (mmscmd) by April 2011 and 80 mmscmd by 2012 from two fields in D6 block. In fact, thanks to the shortfall in drilling and its deliberate policy of underproduction, it is producing only 42 mmscmd from these two fields; moreover, production from even these fields has fallen over the last year. RIL and its Canadian partner Niko Resources say that it will take a minimum of 34 months, and up to 44 months, to connect the new wells and start production.15

RIL stands to benefit from this fall in production. RIL wants much higher prices for the gas, and gas prices are due for revision only in 2014. It simply refuses to pump out gas now at lower prices when it can postpone production and secure higher prices later. It is revealing that, even as RIL announced a sharp drop in production, and claimed that less gas was available than earlier believed, it managed to sell a 30 per cent stake in all its exploration blocks to the global oil giant BP for an attractive price. According to one unnamed official, “If RIL finds it is able to increase production when the price of gas is revised after 2014, people may ask whether BP, which invested billions, might have been privy to this eventual ‘re-discovery’”.16

Although the Central Bureau of Investigation has now registered a case against the DGH and several other officials of the Directorate for favouring private firms, no case has been registered against the corporate chiefs and officials who have bribed these officials. Instead, on June 24, 2011, in the wake of the leak of the CAG report, Manmohan Singh granted a private audience to Mukesh Ambani; neither the PMO nor RIL offered any details of what was discussed. Not a single major media outlet questioned the propriety of the Prime Minister meeting the Prime Accused in this fashion. Rather, they celebrated when, on July 22, the Cabinet Committee on Economic Affairs, headed by Manmohan Singh, cleared BP’s $7.2 billion investment in 21 of Reliance’s 23 oil and gas blocks, including KG-D6 – signalling that the Government has no intention of proceeding against RIL in the matter.

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III. Mining as transfer of wealth

Such transfers of wealth to private corporate firms are standard in the mining sector. One important form of this transfer is what is called ‘illegal mining’. While the term suggests that this is something done surreptitiously, under cover of darkness, by fugitives, and on the margins of respectable, ‘legal’, mining, nothing could be further from the truth. ‘Illegal’ mining is one of the great success stories of India’s exports and its corporate sector in the last five years. According to the report of the second report of the Karnataka Lokayukta on illegal mining in Karnataka, illegal exports of iron ore from the state between April 2006 and December 2010 amounted to 30-33 million tonnes. During 2009-10, ‘illegal’ exports from this small region may have accounted for about 16 per cent of India’s iron ore exports,17 which were among the country’s fastest growing exports in that period. In fact, all this was done, not surreptitiously, but under the careful supervision and protection of the concerned Government authorities. In the words of the Karnataka Lokayukta, Santosh Hegde,

Imagine, in one night, nearly a thousand vehicles go without proper permit to a port and export the iron ore without proper permit. All this is supervised by the forest department, by the mining department, by the policy, by the road transport department…. There is a checkpost everywhere, but nobody stops them. At the port, you have to show the port security valid documents, here too they don’t do anything at all. Then there are forest officers inside the port, who are supposed to check whether these minerals are from the forest area, whether they have taken permission from the forest department or not. Rule 162 of the Karnataka Forest Rules says the port authority has to satisfy himself before he allows (the consignment) to go outside the port area. Then there is the customs department which has to collect the customs duty. Nobody does anything.18

The spurt in international prices of steel and iron ore during recent years made the mining and export of high quality iron ore from Bellary, Tumkur and Chitradurga districts of Karnataka very lucrative. While the average cost of production of iron ore at around Rs 150 per tonne, and the royalties to be paid to the Government just Rs 16.25 per tonne, Indian export prices have averaged around $94 (approximately in the past five years19 — a profit rate of 2400 per cent. The Lokayukta report states that

The Government [in its notification of March 15, 2003] de-reserved for private mining an area of 11,620 sq km in the state, meant for State exploitation/ mining by the public sector, and notified the surrender of an area of 6832.48 hectares of prime iron ore bearing lands,… which has paved way for distribution of public assets to select private individuals/ entities without regard to their professional or technical or business background. The entire exercise was undertaken in a manner so as to benefit only a select few individuals/entities…. [I]n the name of issuing temporary transportation permits to lift and transport iron ore in patta lands (which by itself is not permissible in law), large scale illegal mining activity was allowed to be carried out for certain period, even in the forest areas, having no link to the survey numbers of patta lands and for transportation of the illegally mined ore from the forest areas on the strength of such forest passes/ transport permits….

The ‘Bellary brothers’, Janardhan, Karunakar, and Somashekhar Reddy, are the leading ‘illegal’ mine owners in Karnataka, and also are co-owners of the Obalapuram Mining Corporation (OMC), through which they carried out their exports of the ore illegally mined in Karnataka (the OMC has also been engaged in illegal mining in Andhra Pradesh). Two of them are ministers in the state cabinet (one, conveniently, is the minister-in-charge of Bellary district); they are major funders of the BJP in Karnataka; and their patron is the BJP leader Sushma Swaraj, leader of the Opposition in Parliament. In 2009, they blocked an attempt to curb their power by threatening to bring down the government, forcing the chief minister to retreat. The chief minister himself soon joined the payroll of the Reddy brothers. So complete was the rule of the Bellary brothers that when the chief conservator of forests visited the district to investigate the illegal mining, one of the brothers asked him whether he had taken the permission of the minister in charge of Bellary before visiting the district. Indeed, Hegde titles a chapter of his report “The Republic of Bellary”.

Much of the money, it would appear, has left the country. The report alleges systematic under-invoicing (understating of the value of exports, so that a portion of the proceeds can be parked in foreign accounts), and provides the trail of firms set up by the Reddys in tax havens such as the Virgin Islands in the Caribbean and the Isle of Man (Britain).

Karnataka accounts for only a part of the illegal mining of iron ore in the country. There are major mining scandals in at least five states – Karnataka, A.P., Orissa, Jharkhand, and Chhattisgarh. The Andhra Pradesh chief minister, Y.S.R. Reddy, was a partner of the Bellary brothers in the Obalapuram Mining Company, located in Ananthapur district, A.P.. After Y.S.R. Reddy’s death, the A.P. government suspended the mining leases of the OMC and began an investigation into illegal mining. The former chief minister and mines minister of Jharkhand, Madhu Koda, is being investigated for receiving bribes connected to mining in the ore-rich state. Raids by the Enforcement Directorate gathered evidence indicating that he had amassed a fortune of Rs 4,000 crore (Rs 40 billion) in his short spell as chief minister, much of which he had sent abroad. His commissions would have only been a very minor share of the profits of the mine operators. In other words, the chief ministers of at least three states – Karnataka, A.P., and Jharkhand – were directly profiting from ‘illegal’ mining.

After large-scale, decade-long illegal mining in Keonjhar district came to light in 2009 and created a scandal, the government of Orissa was forced to take some action. It stopped work at 128 mines (including 20 in Keonjhar) for failing to fulfill various statutory requirements such as obtaining a mining licence, environmental clearance, and so on. Illegal mining had been going on on such a large scale that, after the Orissa government’s action, the daily average loading of iron ore rakes by the East Coast Railway in Keonjhar dropped from four to less than one. Production in a number of steel plants, including Tata Steel, was hit by the closure of illegal mines. A later relaxation by the state government provided them relief. The Supreme Court’s order in July 2011 suspending mining operations in Bellary district has badly hit a number of steel firms, including JSW, which claims to be the country’s largest private sector steel producer (in terms of capacity) and is owned by the fifth-richest Indian, Savitri Jindal (mother of Sajjan Jindal). The Lokayukta’s report has also levelled charges against Adani Enterprises Ltd (AEL), owned by the sixth-richest Indian, Gautam Adani, and Sesa Goa, owned by the 12th-richest Indian, Anil Agarwal (Vedanta Resources).

There are reportedly nearly twice as many illegal mines in the country as legal ones.20 But even this may not in itself indicate the scale of the ‘scam’. Legal mines are used as a cover for illegal mining – digging deeper than the permitted 6 metres, encroaching beyond the area of the mine, extending into forest areas, extracting beyond the amount sanctioned by the Indian Bureau of Mines, mining after the expiry of the lease. Hegde describes the modus operandi in Bellary:

Right from the time when a mining lease is applied for, there are certain guidelines under the Central and the state enactments. At that stage itself, they have to give a sketch of the area where they are going to mine. I found out that sometimes the areas have nothing to do with the sketch that are given with the applications. Nobody crosschecks these things. Therefore, this is the first stage where illegality takes place. Then they take the permission, say, for 150 hectares. Those 150 hectares may be in a prohibited area, like a forest area. But they show it as a revenue area, go to the forest area and start mining there. Therefore, you degrade the forest. Then there are Indian Bureau of Mines rules and regulations which control the type of mining you can do – like, you canot go more than six metres because it may be dangerous ecologically. But they don’t care. Therefore, where they are allowed to take 100 metric tonnes, they will take out 1,000 metric tonnes. The entire area surrounding the mining area is totally devoid of greenery and has no agricultural activity. People there have no other vocation. God knows what will happen to them when the mining is stopped or controlled21

An indication of the scale of illegal mining is that 27,000 cases of illegal mining were reported in the period April-September 2010 alone; in that period, just 900-odd First Information Reports were filed, or about 3 per cent of the cases; the fines realised were just Rs 94 crore (Rs 940 million).22

In brief, illegal mining operates under the benign gaze and active protection of the authorities. The profits of such mining are a gift – or, to use Manmohan Singh’s term, a channel of subsidy – to the mine owners.

However, it is not only ‘illegal’ mining that constitutes a gift or subsidy, but ‘legal’ mining as well. For example, till 2009, the rate of royalty (the payment by the miner to the mineral-rights holder – here, the State) was just Rs 27 per tonne for the best grade of iron ore lumps. Despite the fact that price of iron ore rose from Rs 300 per tonne in 2002-03 to Rs 5,000-7,000 per tonne in 2005-06, royalty remained at the same flat rate. Since 2009, it has been changed to 10 per cent of the sale price on an ad valorem basis.23

Given that all other costs amount to only 10-20 per cent of the current sale price of iron ore, this too is very generous to the miners.

For the case of [the Korean steel giant] POSCO in Orissa, it is best to look at some specific numbers to understand the amount of profits involved. Let us assume that POSCO’s costs for extraction, processing and transport for the iron ore would be double those in Karnataka, that it will pay an ad valorem royalty (royalty based on value), currently fixed at an absurdly low rate of 10 per cent of the pre-shipping price, and that the market price it gets will be the historically low price of Rs 4,500 per ton and not the Rs 7,250 per ton projected by UNCTAD or the BHT Billiton estimate of Rs 10,000 for 2011. Based on this, POSCO stands to make a profit of Rs 3,330 per ton. For 20 million tons per annum that comes to profits of just over Rs 6,500 crores (Rs 65 billion) per year (about 1.5 billion USD). So, as one can see from the calculations above, POSCO will recoup the entire $12 billion ‘investment’ that it is projected to make over the next 30 years within the first eight years of operation. After that, even if it has to pay taxes, everything it makes will be pure profit, which can be conservatively estimated (based on the discussion above) to be at least Rs 6,500 crore (Rs 65 billion) per year, and is likely to be much higher, year after year for the next 20-plus years, and potentially for the next 40-plus years if POSCO exercises its option to extend the project for another 20 years. And all this from the mining operations alone.

Even this is not the entire story — in POSCO’s case the giveaway is even more egregious because not only is the state dedicating 600 million tons of iron ore for POSCO’s exclusive use for 30 years at the steel plant it plans to build in Jagatsinghpur district, but the agreement in the MoU also allows POSCO to extract and export 400 million tons for use at its steel plants in South Korea. That much ore will produce enough steel to build an entire city larger than Delhi and Bombay put together, or replace Indian Railways’ entire rolling stock – about a quarter million railroad cars and 8,000 engines – more than 25 times over.24

There are further subsidies hidden in the Memorandum of Understanding between the Government of Orissa and POSCO:

The MoU further commits the Orissa government to building multiple roads, highways, and railroad lines for the benefit of POSCO…. Similarly, not only are limits on POSCO’s use of water missing from the MoU, the agreement allows POSCO to set up its own water supply system and draw as much water as it needs – in effect, free water. The MOU even commits Orissa to building special police stations just to provide security for POSCO’s facilities!

POSCO may mark a shift from one sort of giveaway – permitting ‘illegal’ mining – to another sort, a legalised, formal giveaway. The Karnataka government too is moving in this direction, as evidenced by its ‘Global Investors’ Meet’ in June 2010, where it signed Memoranda of Understanding (MoUs) with steel firms such as ArcelorMittal, POSCO, and others for Rs 2.2 lakh crore (Rs 2.2 trillion) of investment in steel plants, to be based in Bellary-Koppal. The largest project is that of the Reddy brothers, at Rs 36,000 crore (Rs 360 billion). At the meet, the state government announced iron ore leases on 5,000 acres in Bellary, with more to come. As yet unknown is how it plans to provide water for these giant plants in a water-scarce region. As for land, the Karnataka government announced that it has identified 90,000 acres for a ‘land bank’ for industrial projects, whereby land is identified and notified for acquisition in advance of investment; acquisition has been initiated for 40,000 acres.

*

A proposal in favour of transparency and efficiency

It is striking that in all the three ‘scams’/subsidies we have described – relating to 2G spectrum, KG-D6, and iron ore mines – the channel of subsidy to the corporate sector is the transfer of natural wealth. The advantage of this channel is political: The authorities can claim that they have obtained the correct price of these resources, and that there is no subsidy.

In this sense, this mechanism is similar to the privatisations of public sector units, all of which have been carried out at much below market price, in many cases with free gifts of land and natural wealth as part of the deal. Any attempt to question such transactions can be met with a barrage of arguments and figures suggesting that, in fact, the public interest had been benefited, the gains to the private party were the result of his entrepreneurial drive and innovation, and so on.

This particular mode of transfer to the corporate sector has been the hallmark of the period of ‘liberalisation’, or the neo-liberal era. It is not that subsidies to the corporate sector did not exist before the initiation of ‘reforms’ in 1991 – for example, unlimited cheap bank credit, investment by public sector financial institutions in private firms, subsidised inputs/intermediates for the private sector produced by public sector units, guaranteed purchase of fertiliser at an inflated price (arrived at by gold-plating fertiliser investment), padded export incentives, and so on. However, they were paltry compared to the post-liberalisation giveaways, particularly because the post-liberalisation give-aways frequently involve the handover of entire assets, natural wealth, and sectors. Thus ‘scams’ have grown dramatically in recent years, to the point where people have difficulty comprehending the sums involved.

In that sense, given the State’s social objective of enriching a microscopic section of society, the transfer of natural wealth and public assets has been a very successful policy. Of the 55 Indian billionaires in the 2010 Forbes list, almost half of them are involved in sectors which have directly benefited from privatisation and transfer of land and natural wealth (iron and steel, oil and natural gas, commodities, mining and metals, telecom, power, infrastructure, and real estate). Between 1996 and 2008, wealth holdings of Indian billionaires are estimated to have risen from 0.8 per cent of GDP to 23 per cent of GDP.25 A recent study of “Ultra High Net-Worth Individuals” (with a minimum net worth of Rs 25 crore, or Rs 250 million) put their net worth at 57 per cent of GDP in 2010-11.26

However, as we have seen in the recent past, this method has its drawbacks. All three cases described above have become the subjects of controversy. The Government has been forced to order the arrest of several prominent officers of firms involved in the 2G case. A CAG report has appeared regarding KG-D6, which has been the cause of some embarrassment for the Government. The Bellary case has led to the resignation of the Karnataka chief minister (true, he was succeeded by his hand-picked replacement), the suspension of iron ore exports from Karnataka, and possible criminal cases against a number of underlings. True, none of these actions will result in either punishment of the law-breakers, and it does not appear the Government is even considering forcing the firms to return to the exchequer the cash equivalent of the subsidy. Nevertheless, these developments have led to a partial breakdown of the subsidy mechanism. Moreover, the Government has been forced to appoint a committee to formulate a procedure for the allocation of natural resources, which may introduce some further, albeit temporary, complications for delivering the subsidy.

Now, against this background, we recommend that the Government provide subsidies explicitly to the corporate sector through the Union Budget. In one sense, of course, it already does so: The Budget papers for the last five years have provided a remarkable document, a Statement of Revenue Forgone. Thus in the latest Budget papers we find that, in the year 2010-11, the total revenue forgone on account of special tax rates, exemptions, deductions, rebates, deferrals and credits in corporate income tax, personal income tax, excise duty and customs duty amounted to Rs 511,630 crore (Rs 5.12 trillion). Note that this figure is not much less than the total tax actually collected that year (Rs 710,543 crore, or Rs 7.11 trillion). With admirable clarity, the Statement says that these concessions

may be viewed as subsidy paymentsto preferred taxpayers. Such implicit payments are referred to as ‘tax expenditure’ and it is often argued that they should appear as expenditure items in the Budget. In this context, the basic issue is not one of tax policy but one of efficiency and transparency – programme planning requires that the policy objectives be addressed explicitly; and programme budgeting calls for the inclusion of such outlays under their respective programme headings. Tax expenditures are spending programmes embedded in the tax statute. (emphasis added)

Accordingly, if we included tax expenditures in the Budget expenditures, the figure for total expenditure would rise by 42 per cent. This form of subsidy would then amount to almost 30 per cent of total expenditure.

Taking a cue from this, we suggest that the Budget itself explicitly transfer such other subsidies to the corporate sector as are now being channeled through transfer of natural resources, privatisation of public sector companies, and the like. The advantages would include the following:

i. The subsidy would be delivered in a more transparent and efficient way. In this way, it would not be vulnerable to the unseemly charges being levelled against the present subsidy mechanism. For example, the entire campaign of the middle-class anti-corruption brigade led by Anna Hazare would be deflated, since the target of this campaign is not the economic policies in favour of big capital, but merely the corrupt implementation of policies. Once corporate subsidies are made the explicit object of policy, and are scrupulously implemented, it should even be possible to win over many of these campaigners.

ii. Targeting subsidies to the ultra-rich poses no significant administrative problems. The Government already has databases of the corporate sector. Moreover, the overwhelming bulk of the subsidy is to be targeted to the top 500 firms on the Bombay Stock Exchange. Private databases could be tapped: the Forbes list of Indian billionaires,27 the Business Standard billionaires’ club,28 (containing 657 names), and the client lists of firms servicing “Ultra-High-Net Worth Individuals” (UHNIs).29

Compare this simple and elegant exercise to the gargantuan, messy exercise being attempted by the Unique Identification Authority of India (UIDAI) to fingerprint, iris-scan, and one day DNA-sample every Indian in an effort to restrict food, fertiliser, fuel, power and other subsidies to a smaller and smaller circle. The UIDAI is now working on schemes to convert subsidies to cash transfers to the poor, who, even the Government admits, number in the hundreds of millions. By comparison, cash transfers to 657, or even 60,000, individuals, is child’s play. The recipient would be given the option of receiving the cash transfer in India or abroad (where, according to recent estimates, the Indian rich have $462 billion in illicit accounts30).

iii. If our proposal is adopted, leakage to non-targeted sections can be minimised. Under the existing mechanism, the targeted sections are forced to pay various officials whose cooperation is required to clear ‘illegal’ activity (economists term the activity of officials ‘rent-seeking’). The Lokayukta report into illegal mining in Karnataka provides many such instances, one of which forced the resignation of the chief minister of the state. A computer seized from an office of Adani Enterprises Ltd (AEL) revealed that payments to officials were so systematic as to be the pride of any accounts department. Only payments to Members of Parliament and of the Legislative Assembly were less systematic, being made “once in a while in a lump-sum amount”:

In regard to Port Department, it is stated that the payments were made on Ship-wise basis and different rates were fixed for different level(s) of officer…. Further, the general mode of payment were: Port Director, Rs 50,000 per ship sailed; Port Officer, Rs 25,000 per ship sailed; Deputy Port Conservator, Rs 5,000 per shipment; and Port staff Rs 5,500 per ship sailed…. payments to Customs officials was done on the basis of number of shipments, as well as, quantity exported. The general mode of payment to Customs Department was, before 26/5/2006, Rs 12,000 per ship; between 26/5/2006 and 11/1/2008, Rs 6,000 per ship plus Rs. 0.50 per metric tonne; and from 11/1/2008 and onwards, Rs. 0.50 per metric tonne plus Rs 1,00,000 quarterly to AC-Custom. In regard to Police, it is very interesting to note that Superintendent of Police receives Rs 1,00,000 bi-monthly; Additional Superintendent of Police receives Rs 25,000 monthly; Deputy Superintendent of Police receives Rs 10,000 monthly; Circle Inspector of Police receives Rs 14,000 monthly and Outpost receives 2,000 monthly. Mines and Geology officials were paid in lump-sum amount at regular intervals. MLAs/MPs were paid once in a while in a lump-sum amount, particulars of which are at Annexure-6 of Chapter-2…. The payment of bribe amounts to different departments has progressively increased from the year 2004-05 to 2007-08, which was Rs 23 lakh (1 lakh = 100,000) in the year 2004-05; Rs 48 lakh in the year 2005-06; Rs 66 lakh in the year 2006-07; Rs 1.28 crore (Rs 12.8 million) in the year 2007-08.

The consequent leakage of subsidy involved is substantial. The Lokayukta report names literally hundreds of officials and politicians involved in the illegal iron ore exports from Karnataka. Further, the whole process of bribing can sully the images of corporate chieftains – as, for example, when Ratan Tata recently attempted to explain the Rs 20 crore (Rs 200 million) payment a Tata trust was to make to a hospital associated with the erstwhile Telecommunications Minister as a mere charitable donation.

Counter-arguments
There are, however, substantial arguments against our proposal. For one, it may emerge that, if the Budget were to convert all such asset transfers into explicit cash payments, as well as record all tax concessions as subsidy payments (along the lines mentioned earlier), there would be little room left for any other expenditure in the Budget. Such a stark revelation of the real character of the entire Budget exercise would create political turmoil and make it difficult to rule. So it is necessary, at the very minimum, to set aside enough Budgetary funds for military and police expenditure.

A second, equally weighty, objection is that the amounts that can be transferred by way of transferring assets is far greater than can be achieved by Budgetary transfers. Budgetary transfers depend on Government revenues or borrowings, which sets a limit on the size of total transfers. Whereas assets represent either the accumulation of many years of past labour (such as a factory or building), or natural wealth (land, minerals, rivers, air waves) which cannot be generated by human effort, and for which there is therefore no clear method of ‘valuing’. Given the enormous urgency with which, in the present phase of both the Indian and global economies, the ruling classes are out to enrich themselves, mere Budgetary transfers, while a useful supplement, do not suffice. Wholesale transfers of assets are required, regardless of the fact that they may be seen as ‘predatory’, and spark popular opposition.

A third important counter-argument is that the politicians and officials, or the ‘netas’ and ‘babus’ as the media mockingly call them, cannot be so easily excluded. Rather, they constitute an indispensable part of the entire neo-liberal programme. While the programme nominally calls for ‘laisser-faire’ and the ‘retreat of the State’ from the economy, in fact the netas and babus have acquired even greater importance. Under the present dispensation, they are required to navigate the entire exercise of stripping the country of its assets and transferring these assets to chosen hands. This is a far more challenging task than their role in the past. The reward they obtain for their services is a relatively small percentage (except, of course, when the politician and the corporate chieftain are combined in the same person), and cannot be seen as an inefficiency. It must be remembered that amid this hectic activity they have also to maintain social order.

While we acknowledge the weight of these objections, we nevertheless place our proposal in the public domain with the hope that it will give rise to debate.

source: http://rupe-india.org

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