FEBRUARY 27, 2015

By Naresh Minocha, Our Consulting Editor

TRUTH is stranger than fiction. This cliché has got a fresh lease of life with Finance Minister Arun Jaitley claiming that NDA Government is being criticized for being “too fast.”

Mr. Jaitley's observation should be viewed as Government's response to growing chorus of disparagement from the left, the right and other quarters. The news stories have linked FM's comment to HDFC Chairman Deepak Parekh's observation that the businessmen are getting impatient as nothing has changed on the ground in the first nine months of Modi Government.

While Mr. Jaitley's comment sounds more of an exercise in make-believe, the Power Minister Piyush Goel's rebuttal to HDFC Chairman smacks of aversion for healthy criticism. Mr. Goel reportedly stated: “The shares of Deepak Parekh's companies HDFC and HDFC Bank have been doing well. If he is unhappy about some personal matter, then he should speak about it.”

Unlike Mr. Parekh, CPI (M) stalwart Sitaram Yechury has mocked at Modi Sarkar. In an interview with daily, Mr. Yechury dubbed the new Government as UPA III as it taking UPA II policies to logical culmination.

There are different set of facts available in public domain to corroborate respective views of Mr. Jaitley, Mr. Parekh and Mr. Yechury. The truth about Government's performance would thus lie not in black and white but in different shades of grey. And the grade of the shade depends on how and with which yardstick one compares Modi Government's performance with UPA's.

As the Government of the day is always subject to 24x7 scrutiny by TV channels and the social media, the ministers should exhibit the statesmanship to turn criticism into an opportunity to speed up good governance and growth. They must show the political will to clear mountain of pending reforms, both mundane and complex ones. Let their concrete actions silence the critics, if not convert them into admirers.

The need for pursuing such an approach gains urgency if we factor in the feedback from within BJP, NDA partners and the BJP's humiliating defeat at Delhi State Assembly polls.

Answering a question in a free-wheeling discussion organized by a daily in December 2014, former NDA Minister Arun Shourie stated: “I don't want to use harsh words but the consensus seems to be that when all is said and done, more is said than done. I am sure sincere efforts are being made and they may yield results, but as Akbar Allahabadi said, ‘ Plateon ke aane ki awaaz toh aa rahi hai, khaana nahin aa raha' (The plates' sound can be heard but the food is not coming)”.

This column builds on Mr. Shourie's pithy observation by citing just five facts. These would prove that Mr. Jaitley's claim of Government acting too fast is nothing but a witty remark. The list of such facts is too long to befuddle any reader.

First consider the much-trumpeted ‘Make in India' initiative. It should be preceded by ‘Save Indian Manufacturing' campaign, if the plight of several industries characterized by plant closures, liquidity crisis, inverted duty structure, regulatory hassles, unfair competition from imports, bad governance-led raw material constraints including power shortages is any indication.

The botched policies-led closure of plants is best illustrated by the urea industry, whose stunted growth and forced production cuts is increasing the country's dependence on imports. The Government imported 7.08 million tonnes of urea valued at USD 1.97 billion during 2013-14. The import volume for 2014-15 is expected to be higher during the current year.

NDA has failed to end UPA's policy paralysis in this area. And it hardly has demonstrated the political will to clean the fertilizers stables. The observations about fertilizer subsidy made by the 14th Finance Commission in its report released on 24th February 2015 are pertinent.

The Report says: “The (Finance) Ministry's memorandum has projected subsidy expenditure on fertilisers to increase, given its linkage to farmers' incomes and food security and said that any rationalisation would be contingent on reforms.”

NDA is behaving like ostrich to harsh ground realities in this core sector area. It is thus hardly surprising to find that the Department of Industrial Policy and Promotion (DIPP) has banished fertilizer sector from its publication captioned ‘Investment Opportunities in India' released earlier this month.

This shows continuation of perverted approach towards fertilizer manufacture that successive governments have displayed over the last 25 years.

NDA's reluctance to resolve urea conundrum has created a wacky situation where the Government lets one public sector plant close its urea plant due to policy hurdle and lets another to import urea for churning out complex fertilizers!

On 16th February, MFL, a naphtha-based urea producer, invited tenders for import of 15,000 tonnes of urea for delivery at Chennai port.

Only 12 days prior to that, National Fertilizers Limited (NFL) had shut down its Nangal plant in Punjab due to Government's failure to encourage surplus production by urea units that revamped/expanded under the new investment policy-2008 (NIP-2008).

The company stated: “Nangal plant of the Company has completed its 100% urea production as permissible under the Pricing Policy. The plant shall remain under shutdown up to 31 March, 2015.”

It added: “We have to further inform you that in the event of any revision in the Pricing Policy, the Plant may be restarted based on cost economic, which shall be intimated to you.”

Chambal Fertilisers and Chemicals Limited (CFCL) has gone the NFL way by shutting one of its urea plants.

In a communication to two premier stock exchanges, CFCL said: “one of the Company's urea plants at Gadepan, District Kota, Rajasthan has been shut down from February 08, 2015. The shutdown of the plant is necessitated due to unfavorable policy of the Government of India for production beyond 100% capacity of the plant for the financial year 2014-15.”

It pointed out that the production loss due to shut-down of the plant up to 31st March 2015 will be approximately 150,000 tonnes of urea. As put by CFCL, as per the prevailing policy of the Government of India, the company would have incurred loss by running the plant during the aforesaid period.”

The policy paralysis had forced Indian Farmers Fertiliser Cooperative Limited (IFFCO) to shut one of its plants in Uttar Pradesh for over two months. It has re-started this plant now due to compulsions of ‘take or pay' clause of the gas supply contract. IFFCO has, however, now shut another plant in UP due to Government's failure to amend NIP-2008 that provides for use of imported gas for urea capacity additions.

As in the preceding year under UPA, the country is thus heading too fast to suffer colossal production loss in 2014-15. This is in addition to urea output loss due to closure of three naphtha-based plants for a few months and their impending, indefinite closure after expiry of 100-day reprieve in April 2015. Add to this production loss of another 700,000 tonnes of urea due to partial operation of Nagarjuna Fertilizers and Chemicals Limited (NFCL) another plant due to inadequate supply of gas.

Answering a question in Rajya Sabha on 16th December 2014, the Minister of State Chemicals and Fertilisers Hansraj Gangaram Ahir stated: “The Government has drawn action plan for incentivizing the additional production of urea beyond reassessed capacity by existing indigenous urea units by amending the existing provisions of New Investment Policy – 2008 and Modified New Pricing Scheme-III.”

Mr. Jaitley, please tell the country whether the action plan has been delayed in the wake of so-called criticism that the Government is acting too fast? How Modi Government got time to amend NIP-2012 but not the NIP-2008 one? Why has it not yet cleared a single project out of the 13 pending proposals under NIP-2012?

Put simply, the crux of the matter is that the Government does not want to buy imported gas-based indigenous urea at the farm-gate delivered cost of imported urea. Nor does it want to account for the rise in the cost of imported gas by revising the formula for computing import parity price of indigenous urea. Nor does the Government want to spur domestic production of gas by decontrolling its price.

Another feature of the piquant situation is that the imported gas-based urea plants cannot avail of the current drop in spot prices of liquefied natural gas (LNG) that have direct correlation with notable decline in crude oil prices. This is because they are bound by regasified LNG (RLNG) supply contracts that provide for penalties for declining the gas under the ‘take or pay' clause of contract agreements.

The NIP-2008 policy explicitly provides for review of floor and ceiling prices of urea after five years keeping in view the prevailing gas prices and investment costs.

Over the last two years, price of RLNG increased whereas the import parity price of urea decreased due to subdued prices in the global markets. This rendered additional production of urea above the cut-off capacity of 100% unviable under NIP 2008.

Under the administered price mechanism, the annual capacity of a urea plant is reckoned as daily nameplate capacity multiplied by 330 days. The balance 35 days in a year is provided for upkeep and unforeseen situations necessitating shut-down.

As well-maintained plants can operate uninterruptedly throughout the year, there is always plenty of scope for additional production under the complex pricing mechanism.

Urea production woes aside, NDA has also not reversed the UPA's decision to stop supply of gas to Deepak Fertilisers and Petrochemicals Corporation Limited's (DFPCL's) fertilizer-cum-chemicals complex at Taloja in Maharashtra.

In its results for third quarter of 2014-15, DFPCL says: “effective from 15th May, 2014, the domestic gas supply to the Company has been stopped, pursuant to an Order passed by the Ministry of Petroleum and Natural Gas. As a consequence, the Company's nitro phosphate plant has been under shut down. The Company is of the view that this abrupt decision to stop the gas supply is arbitrary and discriminatory. The Company has moved the Delhi High Court against the said Order. The Company had simultaneously approached the Department of Fertilisers to reconsider its decision of gas cut. The Government of India has, since, constituted an inter-Ministerial Committee to review its decision. "

The Committee was actually constituted sometime in second quarter of current financial year. The delay in resolving the production problem of one unit shows how fast NDA is working!

If there were no fertilizers price controls and rationing of price-controlled domestic gas, the fertilizer companies would have got production freedom. They would have also got an opportunity to transform them into fertilizer-cum-chemical complexes to improve their viability.

The ‘Make in India' Initiative has no provision for such innovations and operational freedom for the fertilizers, pharmaceuticals and other sectors subject to pricing and non-pricing regulatory controls.

A fundamental flaw of the National Manufacturing Policy (NMP), unveiled by UPA in 2012, is that it has overlooked the need for aligning sectoral policies and framing new ones for each sector. NDA has not recast NMP to remove such policy deficits.

An instance of such deficit lies in the pharmaceuticals sector. The Government has not unveiled National Pharmaceuticals Policy (NPP), whose draft was released way back in 2006. It is, however, religiously implementing the National Pharmaceuticals Pricing Policy (NPPP) that was unveiled on 7 December 2012.

What is the hitch that NDA is facing in formulating an integrated, all-inclusive pharmaceuticals policy?

The Modi Government has now declared the Year 2015 as ‘Year of Active Pharmaceutical Ingredients' without indicating when it would unveil NPP. It has also not implemented the long-pending proposal to merge Central Drugs Standard Control Organisation (CDSCO) and Drugs Controller General of India with National Pharmaceutical Pricing Authority (NPPA) to create a unified regulator named National Authority on Drugs and Therapeutics (NADT).

The failure to crack the knotty policy woes of pharmaceuticals sector is thus the second fact that dispels the illusion that Modi Government is acting too fast on the reforms turf.

It is ironical that the Government has launched ‘Make in India' campaign without fully implementing NMP and without fine-tuning the policy. The Government, for instance, has not notified the guidelines for implementation of NMP's provision relating to jobs loss insurance and sinking fund.

NMP says: “NMCC (National Manufacturing Competitiveness Council) will be authorized to examine and make recommendations on duty structures and other measures to the extent that they impact the manufacturing sector in order to ensure that changes therein do not adversely affect the manufacturing sector.”

NMCC has not been reconstituted by Modi Government till today, leave aside pursuing valuable nuggets embedded in its documents prepared over the years. Deficiencies in the implementation of NMP thus constitute the third fact that should correct erroneous impression that the Government is acting too fast.

Take now the fourth fact that corrects the image about NDA Government working too fast. This relates to ailing public sector undertakings (PSUs). Their restructuring has suffered a setback under Modi Government partly due to its failure to reconstituted Board for Reconstruction of Public Sector Enterprises (BRPSE).

This advisory body, which recommends bail-out package for sick PSUs, has not met since 30th April 2014. An official said that the Government might wind up BRPSE.

The inordinate delay in finalization of draft rehabilitation scheme (DRS) by BRPS/Government can be assessed by considering the instance of Madras Fertilizers Limited (MFL).

The Board for Industrial and Financial Reconstruction (BIFR) at its meeting held on 18th September 2013 directed MFL and the Government to expedite decision of revival package within three months. BIFR has postponed the hearing on MFL four times.

In the last BIFR hearing held on 14 th August 2014, MFL stated: “BRPSE meeting has not yet taken place and a result, Department of Fertilizers is not a position to formulate fully tied-up DRS.”

The fifth fact should help the public judge rationally the pace at which NDA is working falls in domain of cooperative federalism .

The Prime Minister Narendra Modi's instant letter to Chief Ministers, informing them of the Government's decision to wholeheartedly accept the recommendations of the 14th Finance Commission is welcome.

It should, however, not be counted as instance of Government going too fast. The Centre has no option but to accept the binding recommendations of Finance Commission, which is a constitutional body.

Mr. Modi would have earned appreciation from both from his fans and critics had he convened a meeting of Inter-State Council (ISC), which is also a constitutional body, to take a joint call with Chief Ministers on 273 recommendations of Commission on Centre-State Relations (CCSR) that submitted its report in April 2010.

The recommendations, if accepted by PM-Chaired ISC, can herald a paradigm shift in the Centre-State relations as well as give a new impetus to socio-economic development.

Unfortunately, Mr. Modi has not yet reconstituted ISC, which is required to meet at least thrice a year. It last met in December 2006.

These facts should silence the criticism about Modi Government governing too fast and spur Modi Cabinet to bite the real reforms bullet.