📰 Supreme Court strikes down Tamil Nadu’s 10.5% Vanniyar quota
‘Reservation was based on antiquated data’
•The Supreme Court on Thursday confirmed that the grant of 10.5% internal reservation to Vanniyakula Kshatriya community violates the fundamental rights of equality, non-discrimination and equal opportunity of 115 other most backward communities (MBCs) and de-notified communities (DNCs) in Tamil Nadu.
•A Bench of Justices L. Nageswara Rao and B.R. Gavai held that the allotment of 10.5% reservation to a single community from within the total MBC quota of 20% in the State, leaving only 9.5% to 115 other communities in the MBC category, was without "substantial basis".
•Reservation in Tamil Nadu comprises 69% under a 1994 Act protected under the Ninth Schedule of the Constitution. Of the 69%, backward classes, including Christians and Muslims, get 30%; MBCs get 20%; Scheduled Castes 18%; and Scheduled Tribes 1%.
•The Special Reservation Act of 2021, which was enacted by the AIADMK government in consultation with Tamil Nadu Backward Classes Commission Chairperson Justice (retired) M. Thanikachalam, scooped 10.5% of the total 20% MBC quota for Vanniyakula Kshatriyas alone, citing their "extreme backwardness".
‘Antiquated data’
•On Thursday, the Supreme Court upheld the Madras High Court's conclusion that the reservation afforded to the community under the 2021 Act was based on "antiquated data". The verdict winches to fore the push for conducting a caste survey to get the latest figures in backwardness in the State.
•The court said there was no assessment or analysis done prior to the 2021 Act to back the claim that the Vanniyakula Kshatriyas were relatively more backward than the other MBCs and DNCs.
•The court underscored that "while caste can be the starting point for internal reservation, it is incumbent on the State government to justify the reasonableness of the decision [to provide quota to a particular community] and demonstrate that caste is not the sole basis".
•“Equal laws would have to be applied to all in the same situation, and there should be no discrimination between one person and another ....The classification should never be arbitrary, artificial or evasive,” the court held.
•Justice Rao, who wrote the verdict, observed that the entire basis for the 2021 Act was a letter from Justice Thanikachalam recommending the certain percentage of internal reservation for the Vanniyakula Kshatriya community.
•The court said the State government had erred by ignoring the apprehensions of other members of the Commission about the "absence of updated caste-based data". They had warned that internal reservations could not be "fruitfully made" without the latest caste-based statistics.
•"The letter from Justice Thanikachalam does not refer to any analysis or assessment on the relative backwardness or representation of the communities within the MBCs and DNCs," the court noted.
•It said "population was made the sole basis for recommending internal reservation for Vanniyakula Kshatriya, which is directly in violation with the law laid down by this court".
•The Supreme Court held the 2021 Act was "ultra vires" the Constitution. It however refrained from making any comments on the merits of the 1994 Act, which provides 69% reservation in the State even as the ceiling limit on quota is 50%.
•Though the court held the 2021 Act and its percentages of reservation unconstitutional, it upheld the legislative competence of the State to enact a law sub-classifying and apportioning percentages within identified backward classes.
•"There is no bar to the sub-classification among backward classes," Justice Rao observed.
Ancillary legislation
•The court further found that the 2021 Act was only an ancillary legislation to the 1994 Act and was not in conflict with the latter.
•"Detailing the extent of reservation for communities already identified as MBCs/DNCs, which is the thrust of the 2021 Act, cannot be said to be in conflict with the 1994 Act," Justice Rao reasoned.
•Placing of the 1994 Act in the Ninth Schedule cannot also operate as a "hurdle" for the State legislature to enact a legislation on matters ancillary to the 1994 Act, the Supreme Court held.
The agreement to resolve six disputed points along the Assam-Meghalaya border is a model for others
•Tuesday’s agreement between Assam and Meghalaya to end their boundary dispute in six of the 12 areas, where discord persisted, is a welcome first step. The agreement signed by Assam Chief Minister Himanta Biswa Sarma and his Meghalaya counterpart Conrad Sangma, in the presence of Home Minister Amit Shah, also sets the stage to resolve differences in the remaining six areas. Based on a draft resolution of January 29 between the two States, the agreement covers Tarabari, Gizang, Hahim, Boklapara, Khanapara-Pillangkata and Ratacherra under the Kamrup, Kamrup (Metro) and Cachar districts of Assam and the West Khasi Hills, Ri-Bhoi and East Jaintia Hills districts of Meghalaya. By adopting a give-and-take approach, the two States have demonstrated that knotty boundary issues can be resolved — in this case, partially to begin with — if there is a will to arrive at an agreement. Of the disputed territory — a little over 36 square kilometres — the two States will get a near equal share, enshrining the sharing principle that might serve as a template to resolve other boundary disputes in the northeast. Assam, the mother State from which other States were carved out in the northeast, currently has boundary disputes with Arunachal Pradesh, Mizoram and Nagaland. As the Home Minister underscored in Delhi, the spirit shown by Mr. Sarma and Mr. Sangma should be used in other disputes as well. People living in the six disputed areas should be allowed to choose where they want to live. While Mr. Sarma has blamed the Congress for allowing the dispute between Assam and Meghalaya to fester, Nandita Das, Congress MLA from the Boko seat, alleged that in three of the six “resolved sectors”, there was no give and take. The agreement requires delineation and demarcation by the Survey of India as well as parliamentary approval.
•One can only hope that the right lessons will be drawn by Assam, Arunachal Pradesh, Mizoram and Nagaland from Tuesday’s accord to understand the other’s point of view and come to agreements. In July 2021, five policemen and a civilian from Assam were shot dead in violent clashes with their Mizo counterparts at a disputed point between Assam and Mizoram. The clash came right after a meeting that Mr. Shah had had with the Chief Ministers of northeast States to resolve boundary disputes. It is imperative that Assam and the other States locked in dispute use goodwill and the good offices of the Centre. Rather than entrusting security to paramilitary forces, one confidence-building measure could be to deploy State police without arms wherever possible. It would be a signal that all States are committed to resolving their disputes peacefully. For the moment, Tuesday’s agreement is a moment to savour.
📰 Cohesion and co-operation: On power imbalances in BIMSTEC
India must assuage any apprehensions of power imbalances among members of BIMSTEC
•The adoption of the Charter at the Fifth Bay of Bengal Initiative for Multi-Sectoral Technical and Economic Cooperation (BIMSTEC) summit promises to re-energise the 25-year-old grouping at a time of growing global uncertainties. The Charter is expected to help impart a more connected vision to the seven-member organisation. The Charter, and India’s decision to lead the ‘security pillar’ out of the seven designated pillars of the revived BIMSTEC, has given India’s regional aspirations a new orientation, away from the stalemated SAARC that has been unable to meet since November 2014. The new opportunity is also accompanied by its own set of problems. These inherent challenges were reflected in the time taken to finalise the Charter — one of the key factors was the Rohingya crisis that has weakened bilateral Bangladesh-Myanmar ties, with Dhaka seeking full repatriation of the refugees and Naypyidaw disinclined to respond positively to international pleas. Unlike SAARC, which is burdened by India-Pakistan hostilities, BIMSTEC is relatively free of sharp bilateral disagreements and promises to provide India with a co-operative sphere of its own. Given the complexity of domestic and geopolitical factors, this sphere will require sustained bilateral and group-level discussions to prevent problems such as the Rohingya crisis from becoming impediments to the smooth delivery of economic and security outcomes. India too will have to ensure equally sustained political engagement with partners such as Nepal, Sri Lanka and Bangladesh to prevent any domestic political spillover from affecting bilateral and group-level working relationships.
•With his call for a BIMSTEC Free Trade Agreement, Prime Minister Narendra Modi has outlined India’s vision to bolster trade connectivity in the grouping. An FTA spanning the maritime resource-rich members such as Myanmar and Sri Lanka could bring dramatic gains for all members. A ‘coastal shipping ecosystem’ and an interconnected electricity grid, in addition to the adopted Master Plan for Transport Connectivity, have the potential to boost intraregional trade and economic ties. Having walked away from mega trade blocs such as the China-led RCEP, New Delhi’s willingness to explore an FTA within the framework of a near-home regional grouping may provide greater accommodation for multi-party interests. The security- and trade-related lessons from the troubled SAARC and SAFTA experiences also ought to serve BIMSTEC well in the long run. Ultimately though, for the revived grouping to realise its trade and economic potential, India will have to take a leadership role in assuaging any apprehensions among the smaller members of intragroup power imbalances and strive to facilitate greater cross-border connectivity and flow of investments by lowering barriers to the movement of people and goods.
📰 This is a criminal attack on privacy
The Criminal Procedure (Identification) Bill 2022 erodes the privacy of those convicted of crime and the ordinary citizen
•Springing a surprise, the Union Minister of State for Home Affairs, Ajay Mishra Teni, on Monday introduced the Criminal Procedure (Identification) Bill 2022. The Bill was neither put up for pre-legislative consultation nor indicated in the session’s legislative agenda in Parliament. Seemingly technical, it is a legislative proposal that undermines the privacy of not only persons convicted of crime but also every ordinary Indian citizen as it proposes replacing a law that is over a 100 years old.
What needs scrutiny
•Let us first understand why it is being introduced, and what it intends to achieve. The Bill aims to replace the Identification of Prisoners Act 1920 that has been in need of amendment for several decades. Back in the 1980s, the Law Commission of India (in its 87th Report) and the Supreme Court of India in a judgment titled State of U.P. vs Ram Babu Misra had nearly simultaneously suggested the need to amend the statute. The criticism and the need for amendment was predominantly in respect of the limited definition of ‘measurements’ as under that Act. It seems that this is one of the primary issues that the proposed legislation is designed to resolve.
•In this regard, it might be unexceptional, being an expression of long-held views within the legal establishment. However, the devil is in the details, with three expansions in the power of state surveillance (in the name of criminal reforms) that merit further scrutiny.
•First, the definition of measurements is not restricted to taking measurements, but also their “analysis”, when the definition now states “iris and retina scan, physical, biological samples and their analysis, behavio[u]ral attributes including signatures….” This definition is nebulous and vague. It goes beyond the scope of a law which is only designed for taking measurements and could result in indirectly conferring legislative backing for techniques which may involve the collection of data from other sources. For instance, using facial recognition technology where measurements of persons as under this law are compared with samples taken from the general public.
•At present there are extensive facial recognition technology programmes for “smart policing” that are deployed all across the country. For instance, the Delhi police use facial recognition technology originally acquired for identification of missing children in 2018 to also screen for “habitual offenders”. Similarly, the Tamil Nadu police deploy facial recognition systems which are integrated with State- and national-level databases including CCTV footage. Such experimental technologies cause mass surveillance and are prone to bias, impacting the fundamental rights of the most vulnerable in India.
Data capture and ‘choice’
•The second area of the expansion of surveillance concerns from whom such “measurements” can be gathered. The existing law permits data capture by police and prison officers either from persons convicted or persons arrested for commission of offences punishable with a minimum of one year’s imprisonment. Parallel powers are granted to judges, who can order any person to give measurements where it is in aid of investigation. While the judicial power is left undisturbed, it is the powers of the police and prison officials that are being widened. The law removes the existing — albeit minimal — limitation on persons whose measurements could be taken. It is poised to be expanded to all persons who are placed under arrest in a case. This is a truly breathtaking spectrum, including petty crime such as violating a prohibitory order for not wearing a mask, jaywalking or a traffic violation.
•Here, the proposed Bill also contains muddied language stating that a person, “may not be obliged to allow taking of his biological samples”. This, on its surface, offers a choice to a person to refuse. However the words “may not be obliged” may also be read to offer discretion onto a police officer to confer such a choice. In any instance the exercise of such “choice” is presumed in law, it may not be truly voluntary, given the absence of wider accountability reforms in which existing policing practices are coercive.
•Even if these objections are disregarded, the “choice”, if any, is limited only to, “biological samples” from the wider data points captured within what constitutes, “measurements”. For instance, “iris and retina scan” is mentioned separately to, “biological samples”, and hence a person arrested under any crime or preventive detention law if desired by the police will be required to scan their eyes.
Storage of data
•The third area of concern is the database of the “measurements” which are gathered. The National Crime Records Bureau (NCRB) shall for a period of 75 years from the date of collection maintain a digital record, “in the interest of prevention, detection, investigation and prosecution of any offense”. As pointed out by Prof. Aparna Chandra (an associate professor of law) on Twitter, “How will these records be used for preventing crime except through surveillance?” This becomes clear when the provision permits the NCRB to, “share and disseminate such records with any law enforcement agency, in such manner as may be prescribed”.
•It is important to consider that the NCRB already operates a centralised database, namely the Crime and Criminal Tracking Network & Systems (CCTNS), without any clear legislative framework. The interaction between the proposed law and CCTNS is not clearly defined though likely, given the powers conferred under for digital records go to the same government department.
•The existence of such legislative power with a technical framework may permit multiple mirror copies and parallel databases of the “measurements” being stored with law enforcement, beyond a State Police department which will be prosecuting the crime and the NCRB which will store all records centrally. For instance, in response to a Standing Committee of Parliament on police modernisation, Rajasthan has stated that it maintains a ‘RajCop Application’ that integrates with “analytics capabilities in real-time with multiple data sources (inter-department and intra-department)”. Similarly, Punjab has said that the “PAIS (Punjab Artificial Intelligence System) App uses machine learning, deep learning, visual search, and face recognition for the identification of criminals to assist police personnel. This app helps in storing and carrying information about criminals”. Hence, multiple copies of “measurements” will be used by State government policing departments for various purposes and with experimental technologies. This also takes away the illusionary benefit of deletion which occurs on acquittal and will suffer from weak enforcement due to the absence of a data protection law.
•In sum, once a person enters their “measurements” within the system, they stay there for life given the average life expectancy in India which hovers around 70 years is less than the retention period. The end result is a sprawling database in which innocent persons are treated as persons of interest for most of their natural lives.
•While the impact on persons with privilege may be minimal, the masses — many of whom lack social and economic power in Indian society — may face harsher law enforcement. This becomes clear from the primary research-based article, “Settled Habits, New Tricks”, by Ameya Bokil, Nikita Sonavane and Srujana Bej from the Criminal Justice and Police Accountability Project (the other writers include Avaneendra Khare and Vaishali Janarthanan). They pointed to the caste bias against the Pardhi Adivasi community which was at one time designated as a criminal tribe. In this context they state, “In reality since these databases are fed by the police’s centuries-long caste-based system of preventive surveillance and predictive policing (which has already determined who is a criminal and what crimes habitual criminals commit repeatedly), there is no possibility of objectivity or lack of caste bias. The CCTNS only adds a technological veneer to a caste-based policing model....” It is foreseeable that if the proposed ambit of “measurements” is expanded and then put in a database, it will likely also target the Pardhis.
Onus is on government
•Injuries to privacy are not mere academic debates and cause real, physical and mental consequences for people. To protect individual autonomy and fulfil our constitutional promises, the Supreme Court of India pronounced the Justice K.S. Puttaswamy judgment, reaffirming its status as a fundamental right. The responsibility to protect it falls to each organ of the government, including the legislature and the union executive. For India to fulfil its claims of being a constitutional democracy, rather than a mere electoral democracy, it will have to be better rather than regressing even from the Identification of Prisoners Act passed by a colonial regime.
📰 An opportunity to repolish India-Nepal ties
Prime Minister Sher Bahadur Deuba’s India visit should be used as a chance to recast power and trade links
•The visit of Nepal’s Prime Minister Sher Bahadur Deuba to India, beginning April 1 — four years after a Nepali leader visited New Delhi — is significant. It is the first bilateral visit abroad for Mr. Deuba who leads an election government; local elections are to take place on May 13 and federal elections are slated later in the year. In April 2018, Nepal Prime Minister K.P. Sharma Oli had a lacklustre-feel good visit to India, with little achievement worth talking about.
•Mr. Deuba assumed office in July 2021, his fifth time as Prime Minister, leading a fragile coalition that has not been able to make Parliament function. The Nepal Parliament has been dysfunctional since July 2020 after cracks within the former Communist alliance developed in December 2019. The novel coronavirus pandemic has been a face-saving event for political forces.
•Nepal’s relations with India, that plummeted to a historic low after the Indian blockade in September 2015, have yet to recover as Nepalis do not see relations with India improving any time soon. India’s refusal to accept demonetised bills with the Nepal Rastra Bank worth just INR₹7 crore and the unknown fate of the report submitted by the Eminent Persons Group (EPG) have not helped in securing it a better image in Nepal. The fact that passengers boarding flights from Nepal to India are still subjected to a pre-boarding security check even over 20 years after the hijack of an Indian Airlines aircraft, determines the perception of trust of India in Nepal. This is despite thousands of Nepalis serving in the Indian Army and Nepali villages expressing grief whenever violence escalates in India as many lose their lives defending a country that is not their own.
Complicated geopolitics
•Geopolitics is a complicated challenge for Nepal, whose geography requires it to make best use of its position between China and India. The last couple of months are an example of how complicated it can get. When the Nepalese Parliament ratified a U.S.$500 million grant assistance-Millennium Challenge Corporation (MCC) pact, there were street protests and big-time social media campaigns supported by China. However, India’s silence and the offer of other routes for power transmission as an alternative to the MCC confused everyone: was India for or against the MCC grant to Nepal? With relations between India and the United States further complicated by the China factor and India abstaining on the Russia vote in the United Nations even as Nepal voted in favour of it, the problems have continued to mount.
•The recent visit by the Chinese Foreign Minister, Wang Yi, to Nepal has resulted in a situation that everyone in Nepal is trying to decipher. Analysts also suggest that Mr. Wang did assure his Indian counterpart that Nepal should work out its internal equations with India and that China would stay out. But in reality, the Chinese engagement has been very deep as seen in the anti-MCC campaign. U.S. grant and investment activities are seeing a revival post the MCC ratification and India does not want to see other powers active in Nepal.
•With Mr. Deuba leading a fragile coalition, there are not many issues he may want to accomplish, but he should be able to push some of the key pending ones.
The main priorities
•First, the power trade agreement needs to be such that India can build trust in Nepal. Despite more renewable energy projects (solar) coming up in India, hydropower is the only source that can manage peak demand in India. For India, buying power from Nepal would mean managing peak demand and also saving the billions of dollars of investments which would have to be invested in building new power plants, many of which would cause pollution.
•Second, while trade and transit arrangements go through the usual extensions, it is time to undertake a complete rethink as the sales of goods and payments moves through electronic platforms — this can provide many new opportunities for businesses on both sides of the border.
•Third, the Bilateral Investment Promotion and Protection Agreement (BIPPA) signed between India and Nepal needs more attention from the Nepali side. A commitment from Mr. Deuba on implementing this would attract more foreign investments from Indian investors. The private sector in Nepal, especially the cartels in the garb of trade associations, are fighting tooth and nail against foreign investments. So, it will be important for Mr. Deuba to deliver a message that Nepal welcomes Indian investments and that he is willing to fight the domestic cartels knowing well that it may dent a bit of funding for his party for elections.
A new Nepal now
•Finally, it is for Mr. Deuba to provide the confidence that Nepal is keen to work with India while at the same time making it clear that it cannot take on India’s pressure to ignore China or the U.S. In the context of Nepalis currently living in 180 countries, India must note that it is a new Nepal it has to deal with from now.
•Perhaps there is hope that the situation can improve — in the appointment of Dr. Shankar Sharma, a seasoned economist, who was also Nepal’s Ambassador to the U.S., as Nepal’s Ambassador to India. He was responsible for recalibrating Nepal’s relations with the U.S. Perhaps we can hope that India will engage with him more deeply without the usual condescending attitude. Perhaps, an open moment has arrived.
📰 Is the fuel pricing policy problematic?
•After a long pause, retail fuel prices have been inching up over the past week and have crossed the ₹100-litre mark again in several parts of the country, while LPG cylinder prices have been hiked by ₹50. India officially has a deregulated pricing regime, but in recent years, this practice has been put on hold during election campaigns. Is the fuel pricing policy problematic? D.K. Srivastava and S.C. Sharma discuss the question in a conversation moderated by Vikas Dhoot:
How has India’s fuel pricing regime evolved in recent years, culminating in the so-called deregulated pricing regime?
•S.C. Sharma: The story of dismantling oil prices starts from 1997. In 1995-96, India had an import dependency of about 65%-70%, so the government thought of moving from an administered price mechanism on a cost-plus basis to market-determined consumer prices for petrol, diesel and other fuels. The Nirmal Singh Committee made recommendations in late 1996 and it was decided that the oil pricing mechanism would be dismantled gradually from 1997 till 2002, from 75% in the first year to 100% by April 2002. Ram Naik, the Petroleum Minister in 2002, announced full dismantling as oil prices were comfortable.
•From 2004, oil prices started moving up, and the United Progressive Alliance government restored the cost-plus pricing system to protect consumers. From an average price close to $48 a barrel in 2006, prices moved up each year and peaked at $143 a barrel in 2008. The average price was $69 then. In 2009, prices moved up to $89, and stayed between $100 and $120 till 2014. The government did not pass on the entire price burden to consumers, and subsidised prices for transport fuels, LPG and kerosene through a mechanism to provide for oil marketing companies’ under-recoveries. Till 2009-10, the government had issued ₹1,42,203 crore in oil bonds, but it started providing cash subsidies thereafter till 2014-15. Oil prices came down to about $50 per barrel in 2015, which was a happy situation for the National Democratic Alliance government, which again started implementing the market price mechanism. The prices remained at a low average level of $50-$60 per barrel, so the market price mechanism could be implemented easily without giving much discomfort to the consumers.
•The current high prices are largely due to two factors. The higher level of excise on transport fuels has led to higher VAT levies in States, which have in turn increased the prices. The Rupee has depreciated and the share of energy imports has gone from 70% to 86%-87%. The OPEC countries not releasing production quotas since COVID-19, and the Ukraine-Russia crisis, are also key factors for the high prices.
There is a stop-and-start approach to price changes despite a free pricing regime. As soon as elections in critical States are announced, fuel prices are frozen irrespective of global price trends. How does this affect the economy?
•D.K. Srivastava: The broader lesson is that the government has not been able to stick to either the earlier regime or the current regime whenever global price pressures have gone above a certain threshold. When the variations are within a certain range, the mechanism has worked, but the moment there is added pressure on global crude prices, there are political economy reasons as well as sound economic reasons for the government to deviate from the stated policy either temporarily or in a more regular way. Even as a de-administered pricing regime was introduced, it was partial to begin with, and there were repeated deviations as soon as global prices rose. So, when prices cross a threshold, we give up. Right now, we say ‘temporarily’, but we have to really revisit this issue because the Indian economy has become vulnerable to global crude price pressures. In fact, if those prices are passed on fully to consumers and industrial users, they will generate major economic effects. High retail inflation now will lead to an adverse income effect, which will lead to a subdued consumption expenditure recovery. After COVID-19, the economy has not been able to recover fully and investment has not taken off because private final consumption expenditure has not fully recovered and there is a very strong adverse income effect. This is having an adverse impact on inflation and growth and the government is now faced with a very serious problem. If it allows this effect to be passed on fully, then post-COVID-19 economic recovery will take more time, because it has to allow consumption expenditure to recover to pre-COVID-19 levels. And if it does not do so, then there are obviously serious fiscal costs. So, who is going to bear the burden of these costs: the Central government or State governments? This is a critical and a long-term issue, because we are not able to manage a meaningful de-administered price over a long period of time and we make short-term compromises again and again.
In the short term, the only quick solution could be a reduction in excise duties or taxes, which will have a fiscal cost. But the government has had fairly healthy tax revenues this year…
•D.K. Srivastava: Yes, in the short run, the tax buoyancy and the prospects for 2022-23 provide certain fiscal legroom to absorb a reduction in excise duty on petroleum products. This kind of buoyancy is also there for States through the VAT on petroleum products, so if the Central and States can come together, coordinate and balance the burden of adjustment among themselves, then there is room to absorb some of the costs. But this is only for the current period. The corporate income tax reforms, the expected reform on personal income tax and the GST reforms all proved to have a revenue-adverse impact, so, the capacity of the Central government to absorb increases in global crude prices became limited even before we hit the COVID-19 threshold. GST is still not revenue-neutral, corporate income tax has still not fully recovered, and if investment does not take place, the expected buoyancy won’t occur. Let us take recourse to the fiscal space available in the short run, but we have to recognise that the tax-to-GDP ratio, particularly of the Central government, has not touched the old peak levels after these reforms. So we continue to live with major constraints.
•S.C. Sharma: The government has to choose between healthy revenue generation and giving a fillip to the economy through lower prices. The contribution of the petroleum sector to the exchequer in 2014-15 was ₹ 1,72,065 crore, which went up to ₹4,53,820 crore largely due to enhanced and excessive excise duties. The excise today on petrol is around ₹29 and for diesel, it is ₹23-24. The States have also benefitted with VAT collections having risen. So, it’s a dual effect for consumers. Over the last 25-30 years, one should have diversified revenue generation from different sectors, but if you depend only on the oil sector, it makes a difference to growth and inflation because everyone depends on oil.
The government has been critical of oil bonds that were issued earlier. Is a direct transfer from the fiscal pool a cleaner way to pay oil marketing companies for losses due to price freezes?
•D.K. Srivastava: Obviously, oil bonds are a very inefficient intervention as they only tend to postpone the problem. Oil bonds are inconsistent with meaningful fiscal reforms. Right now, the options of the government are limited because of the lack of a macro vision for fiscal reforms. For example, corporate income tax used to contribute 34.5% of the Centre’s gross taxes in 2014-15. This came down to 22.6% in 2020-21 and is at 25.2% even in 2021-22, which indicates that the government even in this better year does not have the necessary fiscal capacity to absorb the burden of sudden and sharp rises in global crude prices. This is because the timing of fiscal reforms, the rate reduction that led to this massive erosion of growth of corporate income tax, has really tied the hands of the Central government. It is clear that from 2002 onwards, our strategy for dealing with the vulnerability of the Indian economy to global crude price rises on a trend basis has not been developed. So, we actually have a myopic view — when it is a sudden and sharp rise above trend, we develop some short-term measures like these oil bonds. But knowing fully well that the dependence of the Indian economy on imported crude oil has been rising and is now around 85%, and global crude prices are also rising, there has not been any long-term strategy to deal with this. So, all the time, we have short-term measures and our reforms are also not well-coordinated. This is why we keep landing ourselves in such macro situations that are adverse for growth and inflation. We have calculated that if the average oil price in 2022-23 settles at $100 per barrel, the growth rate would fall by 70 basis points, inflation would increase by 100 basis points, Ceteris Paribus. These are major adverse macroeconomic effects soon after the deleterious impact of COVID-19. We have failed to develop the necessary capacity and policy to cope with this well-known trend of increasing dependence and rising global prices on a trend basis. We get lost in the short-term volatility.
How does this stop-and-start pricing approach for fuels affect interest from global investors in the oil and gas sector or bidders for BPCL?
•D.K. Srivastava: It is definitely a red flag because investors study closely governments’ behaviourial responses to various kinds of shocks that emanate from the world economy. Everybody understands that this policy may not be resorted to for some time, because there are no elections around the corner. Investors also look at the prospects of the Indian economy and capacity utilisation. Unless the capacity utilisation ratio increases to something like 75 or 80, new investment decisions will be postponed, and the cycle can only be turned by reviving consumption expenditure. Passing through higher oil prices will dent investments as well as consumption through cost escalation and income shocks. So, we have a vicious circle for policymakers right now.
•S.C. Sharma: Oil and energy are essential commodities and the government doesn’t want to completely let the sector out of its hands because any supply disruption impacts the country’s mobility and the economy’s health. Over the last six-seven years, the stop-and-start pricing policy and reforms towards a market price mechanism, if the government control on pricing was 90% in the previous 20 years, has become 10% to 15% now.
Should the Model Code of Conduct include the deferral of routine administrative decisions such as revision of oil prices or small savings rates?
•D.K. Srivastava: This is desirable, but it cannot happen unless the decision of determining the price goes to some independent body. I do’'t think any government would be willing to give up whatever little legroom it has. We need to develop a proper medium-term growth strategy with taxation of petroleum products as a critical ingredient. Petroleum products are highly polluting, so we have a long-term trend of increasing tax burden on their users. But that long-term path should be determined. As long as we are seeing this prospect of continued high dependence as well as continued high prices, despite the move towards non-conventional energy sources, we have to really increase our tax-to-GDP ratio from other sources. Unless that is done, we will be dealing with various versions of stop-and-go pricing.
