The big solution to reducing India’s imports is privatising PSUs, not imposing import duties : 15-10-2018

While commerce minister Suresh Prabhu deliberates on how to reduce imports—he heads an inter-ministerial committee on this—he would do well to look at a strategy different from the one followed so far; basically, the strategy has been to hike duties on various imports in order to lower consumption. Apart from the fact that import substitution hasn’t worked as a strategy over several decades, it makes Indian industry uncompetitive.

A more meaningful strategy is one that lowers imports in the long run and, as the same time, makes the country more competitive. Privatising inefficient PSUs and removing the monopoly for them, as it happens, is the only way to lower imports; sadly, prime minister Narendra Modi has steadfastly refused to move on this. Indeed, after promising to open up the coal sector to commercial miners in the private sector, opposition from Coal India’s unions have made him backtrack.

India’s largest imports, as is well-known, are those of crude oil that, at $87 billion in FY18, rose by 24% over the year and comprise around a fifth of the country’s imports. Indeed, despite the prime minister’s plan to reduce import dependence on oil/gas by 10% over the next five years, imports have risen—India imported 77.3% of its crude oil in FY14 and this rose to 82.8% in FY18. In the case of natural gas, this rose from 33.2% to 45.4%.

While the policy was initially to give the best acreages to ONGC and OIL, even after private firms were allowed, the policy has always been unfriendly. The best example of this is Cairn finding more oil and asking the government to extend its lease to allow it to extract the oil—the government allowed this, but only after telling the firm it had to pay 10 percentage points more of its profits to the government. This is when the government already takes away 70% of profits of oilcos by way of royalties, cesses and revenue-shares; there is then the high corporate tax to be paid. If, even after this hostile treatment, private sector Cairn is able to raise its share of India’s oil production 3.5 times over the past decade—ONGC’s share fell from 76% to 62% over this period—it just goes to show India’s import-containment strategy has to revolve around privatising ONGC and coming up with a more friendly oil/gas policy.

In the case of gold, the country’s second- or third-largest import, as this newspaper has pointed out earlier, the strategy has to revolve around getting the gold bond scheme right ( since mineral deposits are quite poor.

The same, though, cannot be said of coal, and in this case, the protection given to PSUs is near-complete. Despite several grandiose announcements of how Coal India’s performance is to be improved, the country remains starved of coal, even jeopardising several lakh crore rupees of investments made in the thermal power sector. While Coal India’s production rose from 452 million tonnes to 567 million over the past five years, imports have soared due to the storage; from $9 billion in FY10 to $22.9 billion in FY18, and by 28% in April to August this year, to just under $11 billion. Apart from the fact that private firms are not allowed to do commercial mining, a related problem here is the inability of the government to come up with an effective mining policy that ensures responsible mining and that enough money is spent on reforestation and for looking after displaced communities. Just recently, the Supreme Court pulled up the government for the fact that `90,000 crore remained unspent of the Compensatory Afforestation Fund Management and Planning Authority (CAMPA) funds and while `18,500 crore has been collected under the District Mineral Foundation (DMF)—DMF funds are to be used to benefit local people affected by mining—only `3,552 crore has been spent so far.

The same problem of inefficient PSUs can be seen in most other areas. Take aluminium where, at $4.6 billion in FY18, imports are less than 1% of the country’s total import bill; even here, though, FY18 imports grew 29.5%, and this rose to 35.9% in April to August this year. In this case, too, production of the state-owned Nalco hardly grew while that of the privately-owned Hindalco soared (see graphic). Nalco’s production of aluminium remained flat over the last five years while Hindalco’s rose 2.6 times; in the case of alumina, Nalco’s output rose by 16.7% versus Hindalco’s 1.2 times.

When 30% of India’s import bill is made up of minerals excluding oil—this rises to over 52% once oil is included—the country simply cannot afford to have rich deposits in the hands of inefficient PSUs. Each mineral is different, but to put the urgency in perspective, Coal India’s output rose by just around 4.6% per annum over the last five years, Nalco’s alumina by 3.1% as compared to 17.4% for Hindalco and Nalco’s aluminium grew by around 1% versus Hindalco’s 21.1%. Private sector Hindustan Zinc’s zinc production rose by around 3.1% per year over five years while its lead grew 7% and silver 7.8%. In the case of crude oil, while ONGC’s output contracted 1.8% per year over a decade, Cairn’s grew by 15.3% per year. If Suresh Prabhu’s over-arching recommendation for lowering imports is not privatising PSUs and ensuring more friendly policies for mineral extraction, he’s just wasting his time.

Source : Economic Times

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