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Collapse of Modi’s third path

By Rajiv Shah
There was a time when Gujarat government would take pride in initiating ways to get out of economic activity. I distinctly remember how former state finance secretary KV Bhanujan, at the turn of the last century, would prolifically tell me how it was important for the state to shrink its role in running the economy and why it should concentrate increasingly on social sector, which had long been forgotten, becoming the chief reason for the state’s poor human development index (HDI). Word would ring very strong in the corridors of power that it wasn’t the role of the state to run enterprises, and they should be either disinvested or sold to the private sector. To prove, officials would quote Nobel laureate Amartya Sen, and say market economy, strong social sector and strong democracy were complimentary, not contradictory.
Though the idea of getting out of economic activity wasn’t new for Gujarat, soon after assuming power, in October 2001, chief minister Narendra Modi announced it would be one of his major planks. It wasn’t without reason that Bhanujan, who retired in 2000, and had a strong grip over the state economy, was appointed an expert member in the high-profile disinvestment committee. It was formed under the chairmanship of former technocrat Hasmukh Shah. The other expert on it was a faculty of the Indian Institute of Management, Ahmedabad, Prof Ravindra Dholakia, an economist with strong views on market economy and reform. It seemed, to many then, that Gujarat, in the midst of a raging controversy around 2002 riots, was finding some economic logic.
Not that Modi was doing anything new. Gujarat was always in the front rank of Indian states to implement the new economic policy, initiated in 1991. Disinvestment process in Gujarat took off in 1994 when a senior Congress leader Sanat Mehta came up with a report on the need to restructure state-owned enterprises, leading to the closure of six during 1996-2000. Those that were closed were Gujarat State Textile Corporation, Gujarat State Construction Corporation, Gujarat Fisheries Development Corporation, Gujarat Small Industries Corporation, Gujarat Dairy Development Corporation and Gujarat Communications and Electronics Ltd. Two more were privatised – Gujarat Tractors and Gujarat Exports Corporation.
The disinvestment committee, formed in 2003, held a series of meetings on how to "restructure, disinvest or close down" 35 state public sector undertakings (PSUs). It prepared reports on disinvesting major state enterprises like Gujarat Narmada Valley Fertilisers Company, Gujarat State Fertilisers and Chemicals, and Gujarat Alkalies and Chemicals Ltd. The disinvestment reports brushed aside the suggestion that these enterprises had turned around, one reason why it wasn’t necessary for the state to relinquish ownership. They asked the government to make "systemic changes" and distance itself from their managements, allowing “private players to occupy space vacated by it.” The argument ran that state babus weren’t capable of running enterprises professionally and these were “vulnerable to external shock”.
Despite the great talk of disinvestment, government officials who were part of the committee sounded skeptical. GP Joshi, a government official on the panel and who resigned from the IAS three years ago, told me that that the process would “never be implemented”, and despite Modi’s hype, the requisite political will was lacking. Others agreed. The whole idea was for the “benefit of powerful interests”. A sharp rise in the PSUs’ share prices had taken place due to the big talk of disinvestment. The ruling politicians, with access to inside information, had bought shares at a very low price before the disinvestment talk. I didn’t believe them then, but now I think there is reason to believe what they told me had some logic.
By 2006, Modi suddenly brushed aside the suggestion of disinvestment. Finding that some PSUs were profiting, he called for “third path.” It meant that one need not disinvest but restructure, but under strict state control. Gujarat State Petroleum Corporation (GSPC) began being projected as an example, amidst GSPC (and Modi) claims in 2005 that it had found a whopping 20 trillion cubic feet (tcf) of gas from a block in KG Basin off the Andhra coast, valuing 50 billion dollars. Modi said it was the “biggest ever” reserve found anywhere by any Indian oil-and-gas company. Modi’s minister of state for energy Saurabh Patel didn’t mince words in declaring that GSPC’s success was the success of the “PSU model” developed by Modi, suggesting it had created wonders which the private sector cannot only be envious of.
The “model” was sought to be expanded outside India. GSPC took blocks in four countries, in Egypt, Australia, Yemen and Indonesia. It even sought to spread out its wings in Russia, in the tiny province called Astrakhan, signing up MoUs. It began being suggested that the GSPC had become the first state-owned PSU which had turned a multinational company (MNC). Expansion continued without looking into GSPC’s funds position. It borrowed and borrowed, with no returns in sight, despite the expert view that oil-and-gas explorations nowhere in the world was done on funds borrowed from banks, and that it should be done only by raising funds from the market by going public. But as the 50 billion dollar (or 20 tcf) buildup had no basis, going public was a risky proposition. Currently, the situation is such that the PSU is in deep trouble, with Rs 8,000 crore debt and no returns. Worse, if it wants to continue to explore outside India, it must borrow another Rs 5,000 crore, or pay up millions for failing to abide by agreements.
Meanwhile, officials have told Modi, for the first time in black and white, that it was a “monumental mistake” to have declared GSPC had found 20 tcf. The actual find was “not more than 2 tcf”, or one-tenth of what was actually declared, out of which “we still do not know how much is recoverable”. Worse, the KG basin exploration was carried out in "high pressure, high temperature and low permeable situation", which was an "an extremely expensive affair." “Even if the gas was finally procured after employing foreign technical know-how, which itself was extremely scarce, it may not be cost effective or commercially viable to produce gas at all”, a senior official tells me. But who cares?
There is, therefore, reason to ask: Who pays for GSPC in case it goes defunct? Should the tax player’s hard-earned money be used for bailing out GSPC, which may have become a “former bluechip company”? Already, GSPC is considering options to sell out one-third of its stakes – in the same way as Reliance did for its KG basin basin venture – to a foreign private player, who may have the technical capacity to suck out the small 2 tcf. If it happens, what will happen to Modi’s third path? In fact, the third path has found an alibi – it has turned into further state control on economic activity. Despite opposition from shareholders, several PSUs are forced to set aside funds for corporate social responsibility. The funds are directed to the Gujarat government, which in turn uses them the way it likes.
More, the state control over the economy has diversified into several fresh colours. Top tycoons are called to participate in Vibrant Gujarat investors’ summits and declare, from the rostrum, the amount they would spend. Worse, some of them are made to declare Modi as the next Prime Ministerial candidate. Though privately many of them detest the idea, they are made to accompany Modi to every foreign visit in a private plane – the latest being to China. The tycoons have their own reasons to do what they do. An official says, “Gujarat has the longest sea coast – 20 per cent of the country. Traditionally investor-friendly, it is the best choice for those wanting to trade through Gujarat with the outside world – if there is necessary infrastructure.”



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