Photo: AP Images
HE MAY be the only world leader who enters Iranian airspace, breathes a sigh of relief and feels his blood pressure fall. Manmohan Singh, India’s prime minister, has arrived in Tehran for a summit of the non-aligned movement. He leaves behind a crisis over an official report into the dodgy award of 57 coal fields to private firms between 2005-2009. It has escalated far above the level of soot and pick-axes to once again bring into question the government’s ability to run the country.Parliament has been in uproar since the report was published (see our initial take here), and remains unable to conduct business. Outside of the legislature the opposition is on the attack, too, not least Narendra Modi, the controversial strongman who is chief minister of Gujarat and a possible candidate for prime minister in the 2014 general elections, who gave some advice on how to run India. Tomorrow, August 31st, GDP figures are due that will probably show growth of only 5% or so, far below India’s potential and a reminder that deadlock has an economic cost. Bankers in Mumbai, having been a little hopeful about reforms of late, are now jittery about another lurch downwards.
Is the government being smeared? It has attacked the report’s maths in an attempt to show that the coal fields given out were not worth much, let alone the $34 billion claimed in the report. An attempt to detonate the accounting, in support of the government, can be found in Surjit Bhalla’s piece for the Indian Express.
There are some valid complaints about the report’s figure (non-trainspotters can skip this paragraph). It is not for adjusted time value—although the report is straightforward about this. It does not consider tax paid on any windfall gains. Other criticisms of the headline figure look bogus, however. For example, claims that the fields were awarded before the commodity boom miss the point. The price benchmark used in the report, that of Coal India’s fiscal 2011 realised price, has been fairly stable, because it is largely fixed by the state. An alternative would to use the price of imported coal, which is market-driven. Since 2007 it has been far above Coal India’s prices, adjusted for quality. So using it would make the scandal look far worse.
Long before the report came out it was a given among Mumbai’s stockbrokers that some firms got valuable coal on sweetheart terms. And one can sanity-check the figures with the market value of Coal India, India’s fourth-most-valuable company. Adjusted for its cash it is worth $30 billion. The coal fields given out for free represent between 5% and 13% of India’s total coal reserves, depending on whether you think the sooty stuff in them is “extractable”, or “proven”, or somewhat less certain than that. Based on Coal India’s worth and share of India’s coal, that suggests a range of $6 billion to $9 billion for the fields doled out for free to private firms. Lower than the report’s headline figure, but still a very large sum indeed.
The government’s second line of defence is procedural. It argues that the screening committee that allocated the coal fields really only rubberstamped recommendations given to it by individual states, some of them run by the opposition. From 2004 onwards, it says, it wanted to auction coal, but was prevented from doing so by administrative fiat, thanks to opposition from the states. That in turn forced it to achieve its end by changing the law, which took far longer. The mining act was eventually amended in 2010.
This second line of defence may well be true but it amounts to a wimpy admission that the government had no grip. Despite the parallels, it sees unlikely that funny business took place on the epic scale of the 2008 2G telecom licences scandal. But it is likely that some dodgy coal deals were struck. Police are reported to be investigating. One government insider admits some fraud probably took place. It is for this reason that the opposition Bharatiya Janata Party (BJP) is unlikely to let up on its attack. There is probably some dirt, and unlike in the 2G scandal, they reckon they can make it stick on the prime minister, who had ministerial responsibility for coal.
For the economy, there are two implications, neither good. The first is that if parliament continues to be adjourned thanks to the opposition’s spoiling tactics, no important bills will be passed. There is a queue of these, including ones on land reform and company law, that some hoped would be able to find their way into law soon.
The second impact is fuzzier, but more important and painful. Because of the election in 2014 and the unreliability of the government’s coalition allies, most key steps to reviving economic confidence require cross-party support. These measures include cutting fuel subsidies to get a scary deficit fiscal under control as well as big-ticket reforms like the promised goods-and-services tax. Sadly the odds of cross-party support now appear to be non-existent. Hence the odds are against a swift return of animal spirits.
My colleague in Delhi tells me that Mr Singh is not going to resign. Still, he will return from Iran to a nasty situation. The politics are dreadful, the economy is suffering as a result and, unfairly or otherwise, he is under personal attack. For a man of 79, it must be awfully tempting to stay on the runway.
(Picture credit: AFP)
Business Insider Emails & Alerts
Site highlights each day to your inbox.