Bankrupting the navaratnas

India’s state run oil marketing companies, navaratnas all of them, are on the verge of bankruptcy. The situation is not serious. It is critical. The three giants – Indian Oil Corporation, Bharat Petroleum and Hindustan Petroleum – are expected to suffer under recoveries (euphemism for losses) to the tune of US $ 50 billion. And the Indian government is doing nothing. I think it believes that the problem will disappear if it shuts its eyes and prays to God. Three weeks back, I wrote about how Reliance Industries had shut down its petrol pumps because it couldn’t compete with the subsidized fuel being sold by government companies. Now Ambani might just have the last laugh because his competitors have been shooting themselves in the foot all this time, and their end seems near.

2009 is an election year. And India is a country where high prices of onions can bring down governments. So, I have no doubt that the UPA is in panic mode. Regardless of the fact that they forced Chidambaram to write off US $15 billion in farm loans, money which they didn’t have, the common man is not pleased. Inflation is taking its toll. And the sustained increase in oil prices is only making matters worse. Then there is the small matter of the Sixth Pay Commission that is going to blow a elephant-sized hole in the government’s finances – with the retrospective award and all.

There is nothing the government can do to fix the situation. Except rethink the entire pigheaded idea of the Administered Pricing Mechanism. The only way forward is to let the market determine gas prices, and reduce the obscene amount of taxes the government levies on oil. India will be spending US$ 100 billion this year on importing oil. But with no money to pay for the imports, will the creditors play ball? The government is relying on the fact that the companies being public sectors ones, there is an implicit assumption that their liabilities are guaranteed by the Government of India. In effect, their going bankrupt means that the Indian government is bankrupt, something similar to 1991. But the UPA is more concerned with the elections, and as it has shown in the past, it is incapable of taking tough (rational) decisions. And hence, the APM will stay.

In my opinion, a rescue package will be arranged with everyone from insurance giant LIC to the SBI playing their part, and instead of isolating the impact, the government would have allowed the contagion to spread to other institutions. And only time will tell what monster will emerge from this mess.

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  • lightonsun  On May 23, 2008 at 1:06 pm

    The payback period for many of the short term loans that India Inc. took starts from 2008.So it uses the accumulated dollars from the forex reserves causing rupee depreciating against dollar.Now you have all the external factors like global credit crunch,forced and unforced supply constraints on oil coupled with depreciating rupee making imports cost as well as inflation shoot up.
    Does it happen like it did with steel? lets see

    ……….Chaos chaos

  • aristotlethegeek  On May 23, 2008 at 11:12 pm

    It would be fun to watch the entire subsidy based edifice crumble under the weight of its own stupidity. Bankruptcy or reason? That is the question the government has to answer. But it won’t. Not when the communists are waiting with a stick in their hands. As it is, Karat has spoken about not committing electoral ‘suicide’.

    We can therefore look forward to stuff like rationing (for the greater good), imposition of emergency taxes on corporates (for the greater good, again), crackdown on black marketeers and hoarders…have to stop, I am getting paranoid…

    Chaos, you say. Chaos it shall be.

  • lightonsun  On May 25, 2008 at 4:54 pm

    compare this with a system built on the opposite philosophy…..which after mistaking consumerism for capitalism has wiped enough trillions of liquidity out of the market triggering “run for the cover” mechanisms in the countries which were as old as it and in those like ours…..

    read an article after Fed bailing out BearSterns… said finally its the state that has to intervene in the free market to save it from crumbling down…..smells bad???

    hmmm…demand and supply….respect the equation…..otherwise vacuum out the dent it causes

    now in our case……I cant help but repeat what you said……Chaos it shall be!!!

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