Policy muddles galore from aviation to retail to telecom

Wal-Mart's withdrawal is only the latest in the series of bunglings


Alam Srinivas | October 11, 2013

In an earlier article in this magazine (‘Trouble with reforms’ January 1-15), I had argued that the policymakers in UPA-II had rapidly tumbled from policy paralysis to policy chaos. In their hurry to push through proposals to woo investors and improve business sentiments, they created complete confusion. Now, it seems that the stalwarts of reforms, such as PM Manmohan Singh, FM P Chidambaram and planning commission’s Montek Singh Ahluwalia, are incapable of articulating coherent policies.

From organised retail to telecom, aviation to oil & gas, and Aadhaar to food security, the decisions taken in the past few months smacked of an inability to think clearly or intelligently. The PMO, respective ministries and the concerned departments and regulators were repeatedly caught off-guard as they were unable to gauge the implications of what they announced. In fact, what the UPA-II proposed was quickly disposed either by the opposition parties, judiciary or investors.

A combination of factors led the public to feel that this government is incapable. In some cases, like aviation and Aadhaar, the government did not realise the constraints of its own policies. In a few instances, like telecom and oil & gas, different wings of the regime went in their own direction; the left hand did not know or understand what the right hand did, forget about the legs. And in areas, like food security and retail, no one thought about the practical realities.

The new aviation policy stated that foreign direct investment (FDI) would be allowed in *existing* airlines. And then the government went ahead to approve a 'new' joint venture between the Tata Group and Air Asia. Subramaniam Swamy went to the court against this decision since it did not adhere to the FDI rules. Now, the aviation minister has nonchalantly announced that the policy would be changed to accommodate Air Asia, as well as Tata’s second venture with Singapore Airlines.

Similarly, when the government was unable to push through the unique identification (UID) bill in parliament, which would give legislative support to Aadhaar, it used its executive powers to make UID mandatory for the state’s welfare schemes. The supreme court stated this was unconstitutional. In a single stroke, the apex court derailed the UPA-II’s attempt to make Aadhaar the underlying foundation to push through direct benefit transfer (DBT), or cash transfer, for subsidies. Now, the cabinet has approved a new bill on UID to be introduced in the winter session.

When it comes to telecom, one has witnessed several topsy-turvy decisions over the past few years. Once the supreme court cancelled the 122 2G licences as it felt that spectrum was doled out cheaply to private players in 2008, the government swung into action. The regulator, TRAI, proposed an expensive floor price for the next auction, which fizzled out as not many players bid for the spectrum. The finance ministry and planning commission criticised TRAI and said the floor price was prohibitive. The two used the failed auction to take digs at CAG, which had calculated the loss due to the sale of spectrum in 2008 at cheap prices to be a mammoth Rs 1,76,000 crore.

In its own wisdom, a few weeks ago, TRAI reduced the spectrum’s floor price. No one understood why as nothing much had changed between its last recommendation and the present one, except of course, the failed auction and criticisms by Chidambaram and Ahluwalia. And then what happened? The telecom commission and the department of telecom (DoT) rejected TRAI’s new, lower floor price. The commission asked the regulator to review its recommendation, which is expected soon.

Similar was the case with the oil & gas sector. For years, after their 2005 pact when Mukesh Ambani agreed to sell gas from his KG-D6 fields in Andhra Pradesh to his younger brother, Anil, at a low price, the previous regime, UPA-I was caught in a quandary. It supported its policy to lease oil & gas fields to private players as per a cost-profit formula. Under this calculation, the private explorer could recover his costs first through sale of oil or gas, and then share the remaining profits with the government.

But less than two years after the supreme court agreed with the formula and stated that the government could fix the prices of the fuels, and decide who would buy them in what quantities, UPA-II did a U-turn. In Budget 2013, Chidambaram changed the policy. From a cost-profit formula, he imposed a revenue-share agreement, as is applicable in telecom, where the private explorer has to give a percentage of the annual revenues to the government every year.

Obviously, the finance ministry felt that the oil ministry’s earlier policy was ridden with holes. And now petroleum minister Veerappa Moily has publicly claimed that the revenue-share model would attract higher foreign investment in the sector during the next auction of oil and gas fields. So, which is the correct model? Who is right and who is wrong? Possibly, Chidambaram should answer this as he indirectly supported both the cost-profit and revenue-share models!

Retail is probably the best, or worst, example of this government’s inability to think through a policy. The government shouted from the rooftop about its decision to allow FDI in both single- and multi-brand retail. It opened the doors for the entry of global giants such as IKEA and Wal-Mart. Two years after the announcement, the potential investors and different ministries are still unclear about the nitty-gritty of the policy. They have still not sorted out their differences.

The reason: the government had no idea how its FDI policy would pan out in real life. Let us take the example of just one clause – the insistence that the foreign retailer needed to source 30% of its purchases from small and medium enterprises (SMEs). This created several sets of problems. Would such purchases include only domestic sales or exports too? If a specific SME vendor graduated to a higher level because of sourcing from a foreign retailer would the latter have to purchase from a new SME? Would imports by an Indian trader, who supplied to a foreign retailer, qualify?

After going back and forth, the government eased some of the norms related to SMEs. For example, it increased the investment limit for entities to qualify as SMEs, so that there could be a longer-term relationship between the foreign retailer and vendor. Still, the investors remained unhappy. They felt that the policy was impractical. A senior Wal-Mart executive told the media that it was “not tenable”, and hinted that the company may withdraw from its joint venture with the Bharti Group.

Commerce minister Anand Sharma retorted that Wal-Mart can take its own decisions, but FDI policies cannot be tailored to suit a company. But now, Chidambaram has said that the government is still willing to talk to Wal-Mart, and that the company’s indication of exit is not final. The policy makers are still amenable to make further changes. There can be some merit in the argument that Wal-Mart is twisting the government’s arms since it knows India is desperate to woo foreign retailers.

Well, all the state governments, both ruled by UPA and otherwise, understand that the central regime is anxious to implement the Food Security Act. Along with DBT, cheap food grains for the poor would be the second critical plank for UPA-II to garner votes in the forthcoming national elections. Therefore, the respective state governments have decided to push the envelope; they have demanded that the centre should fund the entire expenditure on food security.

This is something that Chidambaram cannot afford to do. He is under pressure to manage the fiscal deficit within the budget estimates. The government’s revenues may fall below his estimates due to a second year of slow growth. Even with the FM’s measures to cut expenses, the expenditure budgets may balloon further. If the burden of food security is dumped upon him, his financials will go for a six. But the UPA-II has caught the food grain tiger by its tail, and doesn’t know what to do.

Clearly, economic policies are caught in a conundrum. This is not what one would have expected from policy makers, like Singh, Chidambaram and Ahluwalia, who have grappled with reforms for over two decades. One would have thought that they would have had the experience and clarity to set an agenda that’s futurist and doable. Instead, what we have got is a mish-mash of policies that are ill-thought-out, not-thought-out, and thought-out differently by different wings of the government.




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