The talk about Disinvestment

These days, one reads about disinvestment in almost every other business newspaper. It’s absence in the budget speech is supposed to be one of the main reasons why the Sensex tumbled after the announcement of Indian Budget 2009-10. Let’s try and figure what is the big deal about disinvestment in India.

About Disinvestment

In a layman’s term, it refers to the government selling its stake in a public sector unit. Government has a majority holding in all the public sector enterprises and it may sell this stake to another business entity or to the public. The argument for a disinvestment is that the government should exit out of business and should use the money generated through the sale for public welfare. The argument against disinvestment is especially from the Left parties, who argue that sectors like oil, gas, minerals, transport are of national interest and the government should not dilute their stake or try to privatize it. They are especially against strategic sale, which refers to the sale to another business entity, because the administration or ownership of the company will transfer to another entity. In case of selling shares to the public, the government still remains as the majority holder with atleast 51% stake in the company and will still be responsible for running the company.

What the Budget 2009-10 proposed?

• In the Budget for 2009-10, the estimated proceeds for the entire year were Rs. 1,120 crore. This figure falls short by a great margin from what the Economic Survey, which is a pre-cursor to the Budget, had suggested. The Economic Survey proposed that the figure should be around Rs 25,000 crore per year.
• After a few days, however, there are talks making the rounds that a few public sector units will come under the disinvestment scanner. This has helped in the upward movement of the stock exchange.
• Government has also indicated that it will first dilute its stake in companies that are already listed and the public already has a stake in them. They will further reduce their holdings in such companies.
• The government has not given a clear picture of any target regarding the disinvestment proceeds or for what purpose they will be used.

The way ahead

All eyes are on the list of Public sector units that might be disinvested and the shares of most probable companies have already shot up in the market. Whether the government will proceed with disinvestment depends on mainly 2 factors – politics and economics. Politics will determine the opposition that the government will face from within or its allies or the opposition for going ahead with disinvestment. Economics will determine how the market performs, how good the economic climate is for selling the shares and will the disinvestment fetch good returns in this kind of economic downturn.

What made TCS tick in the April – June 2009 quarter results?

Though TCS is the number one Indian IT company in terms of revenues, it often gets a poor treatment from the stock market compared to its rival Infosys, who is a darling of the stocks. Probably that’s why the markets were surprised to see good results from TCS, especially improvements in its operating margin and hence the profits. The stock market responded by saluting the IT behemoth with a 15% increase in it stock price, the highest for the company in the past one year. Below is a snapshot of the TCS results for the Apr-Jun09 quarter.

Net profit – quarter on quarter growth - +15% to Rs.1534 crore

Revenue – quarter on quarter growth - +0.5% to Rs. 7,207 crore.

You will notice that though the revenue has increased marginally, the profit has increased in double digits. This shows that TCS has implemented huge cost saving measures for bolstering up its operating margin and hence its profits. TCS is known for its lower operating margins compared to Infosys, a factor that results in Infosys showing healthier profits than TCS, even though TCS’ revenue may be higher. It looks like TCS has finally decided to take a hard look at its costs and is tightening its belt in these times of slowdown. It has reported cutting down on major costs like selling and administrative expenses and lowering of costs due to moving work offshore. Many TCSers will vouch for this as they have been facing the brunt of the massive cost cutting exercise taken up by the management.

Another factor that has helped TCS perform well in this quarter is reduced forex losses compared to last quarter. So, forex losses were brought down to Rs 84.1 crore from Rs 781 crore in the last quarter. TCS has also improved it revenue collection mechanism and has brought down the number of receivable days to 75, down from 86 a year ago. TCS customers include trouble auto companies like General Motor, Chrysler and investment banks like Lehman Brothers. Recovering receivables from such companies seem to have helped.

The rise in profit and operating margins maybe good news, but the company faces tough road ahead to increase its revenues. It has added only 26 clients in this quarter, down from 36 clients in last quarter and the total number of clients has also come down. So while this quarter may have fared well for TCS, the road ahead does not look smooth enough.

Understanding common man’s Inflation

Not long ago, we had newspaper headlines highlighting the double digit inflation figures in India and then the world went upside down when it was a hit by a financial hurricane called Sub prime crisis. Today, we are faced with the daunting task of avoiding negative inflation. So what does inflation mean to a common man like you and me and if it is going down then doesn’t it mean good news for general public because goods will become cheaper. According to economic fundas that isn’t right and lets try and figure out why.

I

Inflation is generally referred as the increase in the general price level of a basket or goods and services. It’s different for different countries and for measuring India’s inflation, we have a basket of goods and services specific to India. Again, to make things more confusing for us, there are two baskets and each measure a different index termed as the Consumer Price Index (CPI) and Wholesale Price Index (WPI). The headlines that we generally see refer to the WPI. Now, WPI gives less weightage to food which is the most important price for a developing country like India. Hence you may have a scenario like today when even though, the WPI is hovering near zero, the CPI index is higher as the food prices are high. Hence, to analyse the actual increase in prices, it’s important to study the different constituents of the index you are referring to.

Also, inflation is mainly seen caused due to an increase in demand of a basket of goods and services. Hence, if demand for rice increases or the supply of rice decreases due to poor crop, bad monsoon etc, the price of rice will increase. But it’s always not true. For understanding the inflation funda, we may look at it as a case of ‘too much money chasing too few goods.’ So while there will be inflation if the demand or supply of goods fluctuate but there also will be inflation if the demand or supply of money fluctuates. For example, if the government prints more money or there is an influx of more money in market due to foreign investments, then there will be more money to buy the same quantity of rice and again that will increase the price of rice.

Coming to the next point, that if inflation signifies an increase in general price level of a good then, why is deflation considered dangerous during these times of recession, because shouldn’t I be happy that I will be able to buy goods cheaper. In this case, we have to understand that inflation is caused due to and it impacts a variety of factors and hence it is important to view inflation with respect to the nation’s economy rather than a relation between you and the good’s price. During recession, the demand of goods fall as the income levels of people fall. If the price of goods fall, it means less profit for the industry that is making the goods, lesser salaries to their employees who in turn spend lesser money in market, thus depressing many other industries and hence, a nation’s economy as a whole. This is also the reason why a developing nation like India generally has a high inflation. Because of high growth, the demand of goods among people rises as people now have more purchasing power. Also, the industries start producing more and they start borrowing huge amounts of money from banks to expand their capacity, which results in less money with the banks, technically called the credit crunch and makes an example of too less money chasing more goods causing inflation.

Thus, inflation is related to a variety of factors and while understanding the simple logic of it, let’s leave it to the economists to rack their brains about its complexities.

G-8 Summit 2009

About G-8

The Group of Eight is a forum for governments of eight developed nations Canada, France, Germany, Italy, Japan, Russia, UK and USA. The Head of the states of the member countries meet annually in what is called the G8 summit. The responsibility of holding the G8 summit and the presidency of the group is on a rotational basis among the member states and this year it is with Italy.

About G-5

The 5 emerging economies include the Group of Five, Brazil, China, India, Mexico, South Africa. Several European countries are lobbying to include these in the G8 Summit. These countries currently participate as guests. The G14 is considered as G8+G5+Italy.

About G8 Summits

The G8 Summits generally talk and think about the current issues facing the world and what can be done about it like, the climate issues, world trade, terrorism etc. However, being an informal forum, it does not give out a well cut direction to solve the issues.

G-8 Summit 2009

The G-8 Summit 2009 is being held in Italy in L’aquila, the town recently hit by earthquake. The Summit is a 3 day long affair. The summit has suffered a setback as Chinese president Hu Jintao flew back to Beijing amid continuing unrest in the western region of Xinjiang as China is an important constituent of the discussions. The main topics discussed during the 3 days of Summit involved Climate changes, World Trade, global terrorism etc.

Discussions on Climate Change

G-8 has agreed to try to limit global warming to 2 degrees Celsius (3.6 Farenheit) above pre-industrial age levels (1900 levels) and pledged to cut their greenhouse gas emissions by 80 percent by 2050. But developing nations China and India have refused to reduce global greenhouse gas emissions by 50 per cent by 2050 unless they are given more financial assistance by G-8 countries. Also the developed countries have not given a clear cut path as to how they will be cutting down the emissions. The developing countries think that they have much low per capita emission than developed nations and their development should not be hampered by asking them to reduce their emissions.

What does India say on Climate change?

Indian negotiators said developing countries first wanted to see rich nation plans to provide financing to help them cope with ever more floods, heat waves, storms and rising sea levels. This has been a normal bone of contention between the developing and developed economies where developing economies say that why should they bear the brunt of what is an outcome of the doings of the industrialized nations as going for environmental friendly policies costs them more than the normal ones. The current state of climate change and greenhouse gas emissions is believed to be an outcome of the industrialization carried out in the developed economies that comprise the G-8 in the 50’s. The developed economies, on the other hand, say that, unless the merging economies too come together for bringing down their carbon gas emissions down, its not going to help the climate cause.

Obama on Climate change

US President Barack Obama said during the Summit that the world had made "important strides" towards arresting climate change by agreeing to limit warming, but UN chief Ban Ki-moon said it was simply not enough. Obama said that he understood China and India’s apprehensions in cutting their carbon footprint but also said that without measures taken by them the world climate target cannot be met.

Discussions on boosting food supplies

The G8 leaders have agreed to build new efforts to boost food supplies and have reportedly pledged $15 bn over three years for helping poor nations to develop their own agriculture. Out of this US will reportedly contribute $3.5 bn. However, various aid organizations have criticized the developed nations as they have not fulfilled their target of providing $25bn to Sub Saharan Africa by 2010.

Union Budget 2009-10 – Key Highlights – Infrastructure, Housing

Key figures

• Growth rate in 2008-09 dipped to 6.7 per cent from average 9 per cent growth in previous three fiscal years.
• Fiscal deficit grew from 2.7 per cent to 6.8 per cent of GDP.

(Fiscal Deficit indicates the difference between the government’s revenue and expenditure. A positive fiscal deficit indicates that government’s expenditure is more than its revenue.)

• Budget expenditure crosses Rs 10 LAKH crore for the first time.

Infrastructure Allocations

• Allocation for National Highway project is up 23%.

(This should benefit the road construction and raw material industries like cement.)

• Indian Infrastructure Financial Corporation Limited (IIFCL) to evolve financing mechanism for giving increased support to infrastructure projects. It will will re-finance commercial bank loans upto 60 per cent in critical projects through public private partnership to the tune of Rs 1,00,000 crore to raise investment in the sector.
• Gram Sadak Yojana allocation has been hiked up 59% to Rs 12000 crore

Housing Schemes

• Housing allocation hiked under Rajiv Awaas Yojana. Allocation for urban poor for provision for housing and basic amenities to be raised to Rs 3,973 crore in the current year.
• Allocation for Jawaharlal Nehru Urban Renewal Mission increased by 87 per cent to Rs 12,887 crore.
• Rs 2,000 crore for rural housing fund under National Housing Bank.

(This shall also benefit the housing construction and raw material industries)

Union Budget 2009-10 – Key Highlights – Poor, Rural, farmers, Women

Farmers

• Additional budget allocation for farmers. Target for agriculture loans raised to Rs 3,25,000 crore in 2009-10 from Rs 287,000 crore.
• Additional allocation of Rs 1,000 crore for accelerated irrigation project.
• Announced loans at a subsidized interest rate of 6% for farmers who pay their dues in time, which is one per cent less than what others would get.
• The debt waiver scheme, announced during 2008-09 Budget, would be extended till December 31 this year, in view of delay in monsoon.

Women

• Fifty per cent of all rural women to be brought into self-help group programmes.
• National Mission for Female Literacy with emphasis on minorities, Scheduled Castes and Scheduled Tribes to be launched.
• Rashtriya Mahila Kosh corpus to be raised from Rs 100 crore to Rs 500 crore.

Rural and Pro poor

• For Indira Awas Yojana, allocation to be increased by 63 per cent in 2009-10 to touch Rs 8,800 crore.
• Allocation for flagship Bharat Nirman progamme is being raised by 45 per cent.
• An allocation of Rs 39,100 crore to be made for NREGA in 2009-10, an increase of 144 per cent.
• Rs 7,000 crore to rural electrification scheme
• Allocation for National Rural Health Mission to be raised by Rs 257 crore over and above the outlay in the interim budget.

Union Budget 2009-10 – Key Highlights – Taxes

Tax Reforms

• Saral Form II to be reintroduced.
• In 4 years, filing tax returns online to be made easier.

Personal Tax

• Personal income tax exemption limit raised by Rs 10,000.
• 10 per cent surcharge on personal income tax removed. This was charged for individuals whose income in more than Rs. 10 lakhs. (This would help them save Rs 1,000 on every Rs 1 lakh additional income )
• Income Tax rates exemption limit to be raised from Rs 180,000 to 190,000 for women and from Rs. 2, 25,000 to 2, 40,000 for senior citizens.
• Threshold limit for wealth tax has been increased from Rs 15,00,000 to Rs 30,00,000.

Companies Tax

• Fringe benefit tax is abolished. It was introduced in 2005.
  

(This means that the perks that were earlier taxed in the employer hands will now be taxed in the employee's hands. So its not good news for the employees. )

• Commodities Transaction Tax abolished!
• Securities transaction tax is cut
• MAT (minimum alternative tax) rate to be increased to 15% versus 10% of book profit
• Small businesses up to Rs 40 lakh (Rs 4 million0 turnover exempted from filing advance tax returns.

Other Taxes

• Service tax exempted for exporters on select services.
• Service Tax to be extended to lawyers on technical advice.

Duties

• Customs duty on LCD panels halved from 10% to 5%.
• Customs duty of 5 per cent being levied on import of set-top boxes used under Conditional Access System (CAS).
• Customs Duty to be reduced on drugs for heart treatment.
• Excise duty on fibre for cheaper cloth reduced.
• Excise duty on petrol-driven small trucks reduced to 10 per cent.
• Full exemption from excise duty on branded jewellery.

(Makes LCD TV, heart disease related drugs, SUVs, trucks, branded jewellery cheaper.)

Indian Budget 2009-10 – Budget and the Sensex

Soon after the Indian Budget for 2009-10 was announced by our Finance Minister, Pranab Mukherjee, the Sensex started its downfall. Nothing surprising as the market has ended in red three times out of five during the UPA term, each time the budget was announced. The market generally rises before the budget in the expectations build up and then falls. The markets have 60% probability of falling on the day of the budget.

Soon there will be a lot of theories on why the markets fell and what has the budget done to depress the industry. For starters, UPA being a government with a pro social reform and pro poor agenda was not expected to cheer up the markets. Because what may be good for the poor may not necessarily be good for the industry. The UPA has come out with a slew of social sector reforms for farmers, urban poor, people living below poverty lines, education sector, infrastructural building but not much has been done for the industry. Though the cumbersome fringe benefit tax has been removed, the Corporate tax has been left untouched. Also, there were no announcements on foreign direct investment or disinvestment, which are key market drivers.

The UPA was likely to announce disinvestment plans for sick public sector companies but nothing was said about it other than the dampener, that Banks and Insurance sector will be left out of disinvestment. The banking stocks, especially the public sector banking stocks are expected to be negatively impacted by this but hopefully, the infrastructure companies will gain following key infrastructural announcements like, the 31% increase in allocation for National Highway, evolving financing mechanism through Indian Infrastructure Financial Corporation Limited (IIFCL), for giving increased support to infrastructure projects or the Gram Sadak Yojana whose allocation has been hiked up 59% to Rs 12000 crore.

Also, the Growth rate which dipped to 6.7 per cent in 2008-09 from average 9 per cent growth in previous three fiscal years and the big Fiscal deficit ( revenue – expenditure of the government) that grew from 2.7 per cent to 6.8 per cent of GDP, did not help the sensex downfall either. Yet one should not look at the sensex reaction as an economy indicator. As Keynesian economics says that, during recession the country may have to take a fiscal deficit on its balance sheet as it has to provide a stimulus to the economy by increasing its own expenditure. The budget has definitely increased its expenditure items but it’s for the reform of the not-so-rich. As C.K. Prahalad has mentioned in his award winning book, Bottom of the Pyramid, that a whole big sector which forms the bottom of the social ladder remains to be exploited in India Such reforms will definitely help the industry in reaching this new market segment.

Indian Budget 2009-10 – What do our taxes say?

When I was in school and much after that, Budgets were supposed to be bad days as the TV would be hijacked by my father to view the Budget coverage. But all that changed six years ago, when I first followed the budget as a MBA student. I remember the entire college was glued to the auditorium where the Budget was being featured live on a news channel. Business and economics was new to me and I was intrigued by the way, this one day impacts the entire year of our nation’s economy and to an extent ourselves.

Most of us are not much interested in the budget until we come to the Income Tax section. During my first year of work, I was totally into calculations, that how much tax I am going to save when the exemption limit was raised. What are the various sections under which I can get tax deductions and rebate. And even though I may not be working right now, this section still holds maximum interest for me. I am really happy the cumbersome tax filing process is set for a change. The Finance Minister, in his Budget 2009-10 has announced that filing tax returns online is to be made easier in 4 years and a new Saral form 2 will be reintroduced. I remember the Saral form being the cause of various headaches when changes were done to it, supposedly to make it easier to fill. Keeping the trend of raising tax exemption limits, the personal income tax exemption limit raised by Rs 10,000. Income Tax rates exemption limit is raised from Rs 180,000 to 190,000 for women and from Rs.2,25,000 to 2,40,000 for senior citizens. The 10% surcharge on personal income tax has also been removed.

The Corporate taxes have however being left unchanged. But the industry has a reason to cheer about as the intricate and dampening fringe benefit tax has also been abolished. The FBT had caused quite an uproar when it was first announced and the industry will be happy to do without it. Another non favourite tax for most of us who invest in stock market is the security transaction tax. STT was introduced in Budget 2004-05, and is levied every time you buy or sell a security like shares. STT has also been cut.

These are the important taxes impacted by the Indian Budget 2009-10 that I can think of, which may impact the common salaried urban ‘junta’ like us.

Rail Budget 2009-10 – A comparison with Rail Budget 2008-09

( Have tried to do a small comparison between this year's and the last year's Rail budget )

The Railway Budget 2009-10 presented by India’s Railway Minister, Mamata Banerjee, has a lot to offer for the common man. Right from a no increase in passenger and freight tariff, to new trains, proposals for world class stations, improvements in ticketing system, it looks like a popular budget made to please the masses. Nothing wrong with it except one small glitch, it is all on paper. How much will it take for the paper to turn into something concrete, is a question that somehow gets lost in the Budget euphoria.

I had some of my notes on the Budget 2008-09 presented by the then Railway Minister Laloo Prasad Yadav and I was not surprised to find that on paper, the two budgets look almost the same. The reservation card for minorities, women etc was played even then. The proposal of world class stations was proposed even a year ago and is again being proposed now. But the proposals have sadly not turned into global stations but have just resulted in more proposals for the same thing. I don’t think the people of Bihar should feel left out because their stations were not included in Mamata’s list of world class stations, it was listed in Laloo’s list of world class stations and nothing seems to have become remotely world class about Patna.

Ticket confirmation via mobiles, sms updates, plans for increase in automated vending machines etc were also a part of proposals last year. So on paper, the current rail budget is mot much different for me than the one presented last year. What shall make a difference is the implementation of these grand schemes. That the Railways have made astronomical profits in Laloo’s regime is well established, documented and audited. But I read an interesting take on Railways from the ex-railway Minister Ram Naik, who has been the Rail Minister in the NDA regime, who says that the Railways are not supposed to be a profit making organization.

I agree with him partly, because Railways as a social vehicle cannot be treated like a profit making corporate driven by maximizing dividends to its shareholders. The Railways should operate efficiently to make good profits but those profits need to be ploughed back to build the railway infrastructure. Just generating profit and publishing it on your balance sheet is not enough, if the stations continue to be filthy, trains lack proper sanitation, railways remain overburdened by the population or the station security continues to be lax. Hence, profit making may be the first step in the right direction but is lost if not followed by actions of improving the rail infrastructure. Let’s give three cheers to the current rail budget hoping that the proposals and schemes will result in actions and not in proposals for next year’s Budget.

Railway Budget 2009-10 or a Boxing match

( The post is my take on the fight between Mamata Banerjee and Laloo Prasad Yadav )

If you have never seen a boxing ring match between a former champion and a challenger, you can view the recent video of the Railway Budget 2009-10 of India being presented in the Parliament. The former champion was our ever entertaining Lalu Prasad Yadav, erstwhile Railway Minister, and the challenger, our ‘didi’, Mamata Banerjee, the current Railway Minister. I can’t tell you who won which round and the whole match, as I don’t think we have seen the end of it. The match will definitely go on.

Laloo was roaring like the lion who has enjoyed an excellent regime but now has to accept defeat and give way to the new king ( or shall I say Queen) of the jungle. Not to be outdone, the lioness roared back with an equally big roar. At the onset, the Queen challenged her predecessor’s claims of enormous profits and revenues, by stating that she has to reduce the estimated revenues for current fiscal at Rs 8,121.48 crore from Rs 10,876.48 crore as presented in the interim budget, as the Railways had failed to meet the target in 2008-09. She has also stated that ministry would come out with a white paper on the organizational, operational and financial status based on the last five years’ performance. This is seen as a direct challenge to Laloo’s claims of running a good ministry in the past 5 years as Mamata is now trying to verify his claims.

Now if you think that by the above actions or by announcing a popular budget, Round one is won by Mamata, then our Laloo is not far behind. How can you expect him to not provide fodder for entertainment? He has gone on the record of alleging that his successor in the Rail Bhawan was a “complex-ridden” person who was trying to prepare her “Vision 2020’’ for the ministry on the basis of his “achievements.’’ He has also accused her of purposefully ignoring Bihar, as Patna is not on the list of the to-be world class stations, only 4 news trains have been proposed in Bihar and it has been ignored in the non-stop point-to-point Turant list of trains.

I can imagine people of Bihar feeling left out, as they are used to being pampered by the Railway ministers who have been from their state since the past few governments. Also feeling left out are states like Tripura, Karnataka, Chattisgarh, Orissa whose MPs and Chief Ministers have shown their disapproval for the budget as they say that their respective states have been left out. I guess it pays to have the Railway Minister from your state and irrespective of which minister won the round one, the people of West Bengal surely look like the current winners.

Railway Budget for the fiscal year 2009-10

Mamata Banerjee, the railway minister presented the rail budget on July 3, 2009. The interim Railway Budget for the fiscal year 2009-10 was presented on Feb 13th, 2009, in the Parliament by Lalu Prasad Yadav. Because a new government has come in at the centre, a new budget needs to be presented for the fiscal year 2009-10. Some of the high points of the Rail Budget are as follows –

Revenue, Targets and Fares

• The targets for revenues for 2009-10 were lowered than what was set by her predecessor Lalu Prasad Yadav. She claimed that they were too high considering that Railways failed to meet its target in 2008-09.
• The net revenue of Indian Railways has been pegged at Rs 8,121.48 crore down from Rs 10,876.48 crore as presented in the interim budget in February this year by Lalu Prasad.
• No increase in passenger fares and freight hikes
• She has proposed making 'Tatkal' scheme more user-friendly by reducing the advance booking period from five days to two days and minimum charge from Rs 150 to Rs 100.

New Trains and improvement of stations

• To cut whopping losses of about Rs 40,000 crore every year because of fruit and vegetables getting wasted, she has proposed introducing special trains to reduce the damage.
• She has also said that the Railways would facilitate movements of village handicrafts, and cottage industry and textile products from production clusters like Tirupur, Dhanekhali, and Shantipur to consumption centres to promote small-scale industries by providing them access to new markets.
• Proposal for a 57 new trains, increasing frequency for few trains, for new lines, for gauge conversions
• Has proposed to develop 50 stations like CST Mumbai, Pune, Jaipur etc with public private partnership.
• Twelve non-stop point-to-point Turant trains between select cities to be introduced such as Howrah-Mumbai, Delhi-Lucknow etc.
• One doctor to be posted on long distance trains.
• An Integrated Security System is being developed for 130 vulnerable stations to provide security to passengers.
• Announcement regarding introduction of air conditioned double-decker services, ladies specials, Yuva Express.

Improvements in ticketing System

• Unreserved ticketing terminals to be expanded from 5000 to 8000.
• Automatic ticket vending machines to be increased.
• Passengers can now buy reserved tickets from 5,000 post office.
• The Minister announced the introduction of mobile ticketing vans 'Mushkil Aasaan' for issuing reserved and unreserved tickets in both urban and rural areas.

Schemes for Minorities

• It has been proposed to devise a scheme that will provide for separate recruitment drives for minorities like SC, ST, women and economically backward class.
• She announced concessions for unorganised sector by proposing monthly season ticket of Rs 25 for people with monthly income of up to Rs 1,500 for travel up to 100 km calling it the ‘izzat’ scheme.

Stock Market Reaction

Stock Market rose by +250 points following the Rail budget announcement. The stocks impacted directly by rail infrastructure announcement expectations like Integra Hindustan Control and Stone India soared close to 5% each in morning trades on July 3.

Economic Survey 0809 - Decontrol petrol, diesel prices and reforms in energy sector

The Economic Survey was tabled in the Indian Parliament and is a pre cursor to the Budget. The Finance Ministry presents the Economic Survey in the parliament every year, just before the Union Budget. It is the ministry's view on the annual economic development of the country. We will list out the important measures that have been recommended in the survey in a series of posts. The information consists of both facts announced in the Survey and their analysis picked up from a range of sources. The first Economic Survey – Part1 discusses the survey’s recommendation of deregulating the oil prices in India.

Petrol Prices

Even while the opposition protests against the recent price hike by the government of Rs.4 per litre in petrol and Rs.2 per litre in diesel, the economic survey says the opposite. It says that the entire hike in the global oil price should be passed on to the consumers for petrol. For diesel, the survey recommends that until the crude oil price reaches $80, it should not be regulated and state oil retailers should have the freedom to fix the prices.

Currently government of India controls the petrol price in India. So whatever is the global oil price, it is government’s decision if that want to change the petrol price in India.

Why should the government decontrol the prices?

The Economic Survey says that if there the government does not increase the petrol price even though the price is global market has increased, then, the demand will continue to grow causing the global price to increase even more because as the economic principle goes, an increase in demand will increase the price. This results in wasteful expenditure subsidized by the government and big losses for the oil companies which are again bailed out by government with public money.

Where as in a free market, if the global prices are high, the demand should fall and bring the price down again.

Diesel is commonly used by the farmers in agriculture (used for pumps and irrigation) and trucks and hence impacts the poor. So it is prudent to control it after a threshold level to protect the poor. Diesel is also used by rich who own cars and a subsidy in diesel end up subsidizing the rich.

The survey thinks that this is the right time to take a decision as the global prices are moderate and the domestic inflation is also low.

Other reforms in energy sector

• Limit subsidised cooking gas to domestic consumers to 6 to 8 cylinders.
• Phase out Kerosene supply-subsidy by ensuring that every rural household (without electricity and LPG connection) has a solar cooker and solar lantern.
• Survey also suggested the sale of old oil fields to private sector for application of improved oil recovery techniques.

What's happening at Air India?

Current Market Share of Air India

Air India holds 17.4% of the domestic market and 23.5% of the market for flights coming in and going out of India.

Losses incurred by Air India

AI is making a loss of Rs 15 crore per day, up from the earlier Rs 11 crore. AI has no money at all to pay salaries.

What AI wants from the government?

AI has sought a Rs 10,000-crore bailout from the Union government. AI has tried to defer the salary payments of staffers by 15 days and suggested that senior staffers skip the salary for June.

What is government’s reaction to AI’s demand?

Government has agreed to help Air India but has mentioned that AI will have to tighten its belt and draft a plan for airline’s revival. Government is wary of setting up a precedent for other public sector companies. Also, the government is itself strapped for funds and cannot be seen squandering public money on inefficiently run failing public enterprises. Recently, Prime Minister has agreed to bail out AI but has outlined that AI will have to prove its efficiency if it wants the bailout. The bailout sum is not clear yet but is supposed to be atleast half of AI’s demand.

Why did Air India fail?

The airline is still run on decades old business guidelines and failed to modernize itself to keep up with the agile private airlines launched in India after the economy opened up in 1991. Here are a few instances that demonstrate the fact -
(source http://news.bbc.co.uk/2/hi/south_asia/8125719.stm)

• Cabin crew recruited before 2004 work on average between 50 and 55 hours per week, though the international norm is 70 hours weekly.
• Pilots flying on the international sector are paid around Rs 7 lakh per month and stay in five-star hotels when on duty. They get an incentive allowance that is not linked to the national carrier's productivity. Compare this with Singapore Airlines, where pilots have agreed to take pay cuts and non-paid leaves, just because the net profits are down by half (it is still making profits).
• Engineers in Air India with 15 years of experience make more than Rs 2 lakh per month, though their productivity is estimated to be 40 per cent of the international norms.
• Air India has 210 employees per aircraft - that is nearly double the global norm.

Apart from these factors, the hold that the government and bureaucrats have on the national carrier further limits its operational efficiency. Due to political considerations, they force the airlines to take routes that do not give good traffic.

AI has also asked for fleet expansion at a time when the overall world air industry is cutting down operations. BJP has recently confronted Congress about the purchase decision of 111 aircrafts at the time of downturn. Th deal was worth Rs 55,000-crore.

Below is an Anecdote about Air India’s ways of operation that I read in the newspapers a few days ago.

Captain N K Beri, refused to pilot flight AI-822 to Delhi after taking off from Riyadh because of faulty landing gear. His decision to turn back may seem prudent to you and me but not to the Air India officials. They have not only grounded the pilot, but also, stopped his salary because of the monetary losses that AI had to incur.

Current State of World Airline Industry

The world airline industry is not doing so well either. The world’s airlines lost more than $3 billion in the first quarter of 2009, the International Air Transport Association (IATA) declared on 30th June 2009 and has maintained its estimate for full-year losses of $9 billion. The major reasons cited were that of weak travel demand and lower freight volumes in the global recession.

Also, they have mentioned that the decline was before the global oil prices rose and now with oil prices surging again, the condition will detiorate more. Both oil and jet fuel prices have risen almost $20 a barrel in the past two months, and are now 75% higher than their low point at the end of 2008.