Taxes account for over 84% of the combined revenue of the Union and State governments. How does India compare with other countries as far as tax revenues are concerned? What is the tax base of direct taxes? What percentage of their profits do companies actually pay in taxes? These questions are examined in the context of the anticipated large fiscal deficit by the Union government in 2011-12 and the plans to cut down on food, fuel and fertilizer subsidies in this InfoChange India piece.
Thursday, January 19, 2012
Sunday, December 4, 2011
Unraveling India's oil subsidies
The government periodically puts out data on the quantum of
‘under-recoveries’ by the public sector refiners and distributors of petroleum
products – Indian Oil (IOCL), Bharat Petroleum (BPCL) and Hindustan Petroleum
(HPCL) – on the sale of diesel, kerosene, and LPG. The exercise is calculated
to prepare public opinion to accept higher prices. Mainstream media often
uncritically reports the ‘under-recoveries’ as the 'loss' (see
this ET report, for example) suffered by these oil marketing companies
(OMC) or as the ‘subsidy’ that must be provided by the government to make up
the loss. Such an interpretation, though natural, turns out to be quite off the
mark.
'Under-recovery' is not the loss
The government measures ‘under-recovery’ as the loss an OMC would make if it imported a petroleum product, say diesel, from the international market and after paying ocean freight, import charges and customs duty and incurring inland transport and marketing costs, sold the product to a dealer at the government specified price. (Government note explaining under-recovery calculation)
The government measures ‘under-recovery’ as the loss an OMC would make if it imported a petroleum product, say diesel, from the international market and after paying ocean freight, import charges and customs duty and incurring inland transport and marketing costs, sold the product to a dealer at the government specified price. (Government note explaining under-recovery calculation)
It is a notional loss, for it is unrelated to the actual process
by which oil companies make diesel available in the Indian market - by refining
imported and domestic crude in Indian refineries. It is also an exaggerated
loss.( The use of the 'under-recovery' concept to determine petroleum prices
has been challenged recently
in the Kerala High Court)
Price differentials in the international market between a refined
product and crude oil reflect the product specific demand-supply equation
rather than the inherent cost of producing the product. Shortage of refining
capacity for a particular product – real or artificially created – pushes the
differential up.
International
price differentials over crude ($/bbl)
|
||
2010-11
|
2009-10
|
|
Petrol
|
7-8
|
7-9
|
Diesel
|
14-15
|
7-9
|
Jet-kero
|
14-15
|
8-9
|
The table above (compiled by taking Singapore & Europe prices as listed in Page 21 of the
Reliance annual report for 2010-11) shows the price differentials
for petroleum products between 2009-10 and 2010-11. In 2009-10, petrol, diesel,
and jet-kero (used to benchmark kerosene in India
[This differential has gone up
even further this year. For the 2nd fortnight of Nov 2011, the average price of
India
If ‘under-recovery’ is not the loss of the OMC’s, how much are
they actually loosing and what is the extent of the ‘subsidy’ that the
government has to extend to them? A look at last years (2010-11) consolidated
results of the three companies provides some surprises. All three showed
profits, paid income tax, and declared dividends. Government provided support
to these companies under two heads – a fixed amount for each liter of Kerosene
and cylinder of LPG sold, and a discretionary grant announced quarterly. The
aggregate amount is presented in the table (Data is from the published financial results of the companies) as subsidy.
Excise
and Subsidy 2010-11 (Rs crores)
|
||||
IOC
|
BPCL
|
HPCL
|
Total
|
|
Excise
|
30861
|
12394
|
9743
|
52998
|
Subsidy
|
24282
|
10048
|
9727
|
44056
|
Each of the three oil companies paid more excise to the government
than it received as subsidy. In effect, the government returned a portion of
the taxes it collected on petroleum products from the OMC’s. ‘Subsidy’
considered in this light, appears to be a tax concession by another name, not
very different from the ‘fiscal stimulus’ the government extends to an
industrial sector when it is in trouble.
The OMC’s showed a large loss in the first half of 2011-12 and
this tells its own story. We will return to this a little later.
Who benefits from Indian crude?
Leaving refining costs and taxes aside, the price of petroleum
products is determined by the price of crude oil. Government’s economists would
have us believe that this is completely outside its control.
The fact is that a significant quantity of crude oil is produced
in India India
Private oil producers get rights to oil fields after signing
production-sharing contracts with the government. These contracts mandate
selling oil to Indian refiners at no less than the prevailing international
prices. The contracts are structured such that government’s share of production
will increase if the producers get a higher price for the oil. While providing
the government with another source of revenue, these contracts, by locking
Indian oil produce to international prices, ensure that the Indian public does
not enjoy the benefits of local production.
The government treats the public sector oil producers somewhat
differently, based on historical imperatives. They must sell their oil at a
‘discount’ to international prices to the public sector refiners. The
‘discount’, however, is not tied to the rise in international prices or the
windfall profits made when this happens; it is fixed every quarter, at the
government’s discretion.
The 2011-12 first half results of the OMC’s provide insights into
how the government uses its discretion on ‘subsidies’ and ‘discounts’.
The oil companies together showed second quarter (Q2) losses of
about 14000 crores, on the backs of first quarter (Q1) losses of about 9000
crores (Data from the quarterly published results). The government delayed announcing the Q2 ‘subsidy’, which, had it been
timely, would have allowed the OMC’s to show a small profit for the quarter
instead of a large loss. The Q1 ‘subsidy’ announcement was not followed up with
cash, forcing the OMC’s to borrow from banks and pay high interest to
finance crude oil imports. The public sector oil producers provided sharply
lower ‘discounts’ to the OMC’s on crude oil price in Q2 compared to Q1 and
showed sharply higher profits. One is left with the strong suspicion that
these moves were orchestrated to make a strong case for increasing retail
petroleum prices as well as to make government’s planned disinvestment in ONGC
and OIL more attractive.
Taxing the aam
admi
The central government has several revenue streams from petroleum
products collected at different stages of processing. At the crude oil
stage, it collects royalty, a share of the production (from private producers),
and excise on oil produced and customs duty on the oil imported. At the
refining stage, it collects excise on the refined products such as diesel and
petrol. Oil producers, refiners and marketers also contribute to the central
exchequer by way of taxes on their profits, dividends and tax on the dividends.
State governments collect royalty on crude oil and sales tax on petroleum
products. Sales tax rates range from 18% - 25% on diesel and 19% - 33% on
petrol with a few exceptions.
Last year, the central government’s income from the public sector
oil and gas producers, refiners and marketers alone was in excess of Rs
100,000 crores, eclipsing the ‘subsidy’ it provided. State governments were not
far behind, collecting over Rs 80,000 crores. (Estimates are based on figures for ONGC, MRPL, OIL, IOC, HPCL, NRL, and BPCL obtained from their annual reports)
Taxes on petroleum products add to the cost of all goods and services and reflect in their prices. Far from subsidizing the public, governments raised a substantial part of their revenue from the aam admi by taxing petroleum.
Taxes on petroleum products add to the cost of all goods and services and reflect in their prices. Far from subsidizing the public, governments raised a substantial part of their revenue from the aam admi by taxing petroleum.
Tuesday, October 11, 2011
Thermal power clusters in the making
The geographic distribution of the new thermal power generation capacity under development is highly uneven showing clustering in certain districts and regions of the coal producing heartland. The governments at the center and in the states have forsaken the local communities - who will bear the adverse consequences of the large concentration of thermal plants - to favor the power producers. The thermal power clusters are detailed in the EPW piece "New thermal power clusters" that appeared in the October 1-7, 2011 issue. The article has been reproduced below.
Economic Times in a recent review of the progress of power plants in Chattisgarh has quoted from this article.
Economic Times in a recent review of the progress of power plants in Chattisgarh has quoted from this article.
Thermal power – currently accounting for 65% of overall installed capacity[1] in
The prevailing
policy environment has led to an explosion of interest in thermal power
generation in recent years. Evidence of this is available in the number of Memoranda
of Understanding (MOU) that state governments have signed with private
companies and in the number of new applications the Ministry of Environment and
Forests (MoEF) gets every month for environmental clearance.
The list of
companies planning or building thermal power plants is not limited to those
belonging to large business houses such as Tata, Reliance, Vedanta and Adani.
It also includes a number of unknown entrepreneurs with no experience of any
large industrial enterprise, let alone power generation. Private investors
clearly sense a great opportunity here.
How much
thermal capacity is actually under development? In the past, the CEA, as the
body responsible for planning and monitoring power generation in the country,
would have provided the figures. With the private sector playing an increasing
role in new generation capacity, the CEA has become cagey about figures. It is however
possible to obtain estimates from a different source, the MoEF.
Estimating
the thermal capacity under development
Setting up a
thermal power plant based on the common fuels - coal, lignite and gas – with
capacity equal to or greater than 500 Mega Watt (MW) requires a clearance from
the MoEF. The clearance is broadly a two-stage process[2] and the ministry maintains a public
record of projects clearing each stage.
Project
promoters approach the ministry after reaching an understanding with the
government of the state where they intend to set up a plant. On the successful
conclusion of the first stage of scrutiny, they are provided the Terms of
Reference (TOR), a list of environmental issues that have to be evaluated for
the Environmental Impact Assessment (EIA) of the project.
During the
second stage, the EIA is carried out and a “public consultation” held with the
people affected by the project. Environmental clearance is subsequently granted
after a detailed scrutiny of the EIA and other project documents. Environmental
Clearance represents a significant milestone for a thermal project, for, at
this stage the project site has been identified, agreements exist with the
state government for provision of land and water, the formal consent of the
people of the area has been obtained for the project and most importantly, the
linkages for fuel are in place. Specifically, if the project intends to use
domestic coal, it has either been allotted captive coalfields or been provided
linkage with a coalmine. Construction activity can begin as soon as the land
acquisition is complete.
Counting only
projects that have a capacity of 500 MW or above, data from the MoEF[3] indicates that since 2006, environmental
clearance has been given to nearly 200 projects for generating close to 220,000
MW of power. Thermal plants take a minimum of five years from the start of
construction to get their first unit operational and two-three more years to
get the additional units on stream. In the normal course, this capacity should
become available for electricity generation between 2011 and 2019. To put this
number in perspective, the total electricity generation capacity in the country
– from thermal, nuclear, hydro, and other sources – is just over 176,990 MW at
the end of June 2011 (CEA 2011). The thermal generation capacity expansion
underway works out to 1.3 times the total generation capacity in the country.
How much
additional electrical generation capacity does India
Of course,
not all of this capacity may materialize in this timeframe. There could be problems
with land acquisition, financing, or project management delays. Promoters may even
decide to go slow for other reasons. Nevertheless, the fact remains that the
development activity has been unleashed for these projects.
Thermal
power hubs
The thermal
capacity addition underway across India West Bengal , Madhya Pradesh, and Andhra Pradesh
– account for close to half of the capacity addition. Tamil Nadu, Maharashtra and Gujarat account for a third. The remaining
is spread across UP, Bihar ,
Haryana, Rajasthan, Karnataka, Punjab , Delhi
Table 1 (From EPW) shows the total power generation capacity currently available from all sources
and the thermal capacity addition in various stages in the top coal mining
states. The projects labelled ‘under development’ are those for which the MOEF
has given environmental clearance while the projects labelled ‘in the pipeline’
only have the TOR for the EIA. The project statistics spans the different types
of projects – public sector and government (state and central) promoted, private
sector based on competitive bidding and the projects of Independent Power Producers
(IPP’s) – and include both new and expansion projects. The ratio of the thermal
generation capacity under development to the generation capacity from all
sources currently available to the state is presented in the column headed ‘B/A’.
The coal
rich states – with the exception of West Bengal - are adding between 2.2 and 4.7
times their existing generation capacity in thermal capacity alone, against the
all India
Chhattisgarh
for instance has a long stated policy of becoming a “power hub”, using its
large coal deposits to competitive advantage. In line with this policy, the
state government has signed MOU’s with 61 would-be IPP’s, to generate more than
50,000 MW of power. Most of the other coal rich states have also signed
numerous MOU’s.
A typical MOU[4] promises an IPP help in acquiring
land, meeting water requirements, conducting the public hearing mandated under
the Environmental Protection Act, facilitating clearances from state and local
bodies and pushing the case of the company with the central authorities for
coal linkages and other central clearances. The companies with projects ‘in the
pipeline’ have the backing of state governments (except in West Bengal & AP) through MOU’s.
The thermal
capacity addition from the projects ‘in the pipeline’ at over 200,000 MW is humungous.
However, the question arises if one should attach much significance to these
projects. To get environmental clearance, these projects will need fuel
linkages and that can be a major problem today.
With the
exception of the coastal regions of AP (where imported coal and piped gas are
options), the viability of projects in these states depends on the availability
of the relatively inexpensive local coal for which they have to approach the
central government. Given that the increase in coal production is not keeping
pace with the increase in coal based thermal generation capacity, the Ministry
of Power has sought to prioritize the allocation of coal linkages. For IPP’s
seeking coal linkage, progress in acquisition of land for the plant will count
towards higher priority[5]. Government policy is driving
independent power producers to acquire land even before obtaining environment
clearance.
The
projects in the pipeline, backed as they are by the state governments, therefore
need to be taken seriously for the immediate footprint they will leave on the
ground even if plant construction is some years away.
Thermal
Clusters
Thermal projects
in the coal mining states are concentrated in certain districts. Table 2 (From EPW) shows the
generation capacity of thermal plants that are in operation, the capacity under
development and capacity expansion and new projects that are in the pipeline
for certain districts. Past record
suggests that expansion projects in the pipeline will get environmental
clearance – so these have been clubbed with the projects under development.
The effects
of such a deadly concentration of coal based thermal power plants are likely to
prove devastating to the communities in the midst of whom they are coming up.
The loss of
farming land and commons will be felt first. The CEA estimates land
requirements for pithead thermal plants to range from 0.6 to 1.1 acre per MW. Taking
Janjgir-Champa as an example, and assuming 1 acre/MW, the land requirement for
all the plants planned works out to 2.5% of the area of the district! Twenty-one
of the 26 plants planned in the district do not have environmental clearance
yet. However, land acquisition is already underway[6], with government policy linking
progress in land acquisition with allotment of coal linkage.
Once the plants
become operational, the surrounding communities will face threats to their
health and, where they are agricultural, to their livelihood. Thermal power
plants using coal are extremely polluting with environmental damage arising
from the transport of coal to the plants, the emissions from the smoke stack,
the storage and disposal of the ash from the burning of coal, the continuous
withdrawal of a large quantity of water for cooling and the disposal of
wastewater and effluents. Indian coal has high ash content and a practical
solution is yet to be found for its safe disposal.[7]
Returning
to the subject of clusters, if the preferred location for a thermal power plant
is mainly to do with geography and connectivity, one should see clustering
across district boundaries. Table 3 (From EPW) shows certain regions spanning districts
and even state boundaries, which have a large concentration of thermal plants.
The
Singrauli region centred on the reservoir of the Rihand dam and composed of
parts of Singrauli district of MP and Sonebhadra district of UP will be the
largest thermal cluster in India
The
geography of the regions with large thermal plant concentration provides
pointers into potential large-scale environmental effects. The plants in
Raigarh and Janjgir-Champa districts of Chhattisgarh are located along the Mahanadi . The Chhattisgarh government has
announced plans to construct a chain of seven barrages on the river upstream of
Hirakud dam to ensure supply to these plants. Several thermal projects in
Jharsuguda district of Orissa are also slated to withdraw water from the
Hirakud reservoir. Studies are yet to be carried out on the sustainability of
using Mahanadi waters for so many power plants and
the effects it may have on other water users downstream.
Conclusion
The current
electricity policy has turned thermal power generation into a lucrative
proposition. The generation capacity is coming up in dense clusters in the main
coal mining states in locations chosen to minimize running costs. While many of
these planned plants may not deliver on the promise of power because of
non-availability of domestic coal, they are already leaving their imprint on
the ground. Given the drastic negative fallout from coal based thermal power
plants for the health and livelihood of communities where the plants will be
located, one would expect government to intervene on behalf of the communities.
These
clusters are however coming up with the full support of the state governments.
The central government’s efforts to regulate the location of power plants are
limited to ensuring that the rules and procedures laid down for obtaining
environmental clearance are followed. It has refrained from taking any decisive
action to stop clustering of thermal plants. One can only conclude that the
government – both in the states and at the centre – has forsaken the
communities who will bear the brunt of these thermal clusters in favour of
power producers.
References
Sharma, S (2011): Chhattisgarh Minister's son buys farmland for Videocon, Times of India 5
Sept 2011
Notes
[1] Inferred from CEA (2011)
[2] The environmental clearance process is described in the
Environmental Impact Assessment Notification, 2006 available at the MoEF
website
[3] These numbers have been arrived at by aggregating data from
the MoEF Environmental Clearance Database which can be accessed from (http://moef.nic.in/modules/project-clearances/environment-clearances/)
[4] The model for the MOU that Chhattisgarh signs with
companies is available at (http://cg.gov.in/departments/sipb/Model%20Mou.pdf),
last accessed on 5 Sept 2011
[5] The coal linkage policy for 12th plan projects is laid out
in a 2009 office memorandum of the Ministry of Power. IPP’s wanting coal
linkage are assigned priority based on the points they score on several
criteria. Progress with land acquisition is the most important criteria with
50% weight. (http://www.powermin.nic.in/whats_new/pdf/Coal_linkage_policy_for_12th_plan_projects.pdf),
last accessed on 4 Sept 2011
[6] See Sharma (2011) for a report on land acquisition for a
thermal project that has not yet got environmental clearance.
[7] See Sethi (2011) for the problems faced by India’s largest
power producer, NTPC, in handling fly ash.
Tuesday, August 9, 2011
National Manufacturing Policy
A Hundred Million More Jobs in Manufacturing by 2025 is the clever advertisement for the government's soon to be unveiled National Manufacturing Policy. The jobs are to be created by rapidly growing the share of manufacturing in the GDP from the current 16 per cent to 25 per cent by 2025. The government's seriousness in pushing the new policy is evident from its involvement of senior executives of Tata Steel, Vedanta Aluminum, Maruti Suzuki and other major maufacturers in putting together the plans to implement it.
The situation on the ground, however, is quite in contrast to the ambitious plans. The share of manufacturing in GDP has remained almost flat over the last decade, sharply differing with the historical pattern seen in countries transitioning from being agrarian to industrial societies. The total employment in manufacturing, inferred from the results of the National Sample Survey 66th round (NSS-66) conducted in 2009-2010, is just short of 53 million. Eighty percent of this employment is in 'unorganised' manufacturing (units using electricity that employ less than 10 workers, as well as units not using electricity that employ less than 20 workers). Organised manufacture employs fewer than 11 million workers.
On top of these poor numbers, the employment in India India
Sunday, June 26, 2011
Thermal Electricity: Power hubs and hot spots
Several states – Chattisgarh, Orissa and Andhra Pradesh among them - are building thermal power capacity far in excess of their foreseeable needs. Chattisgarh, for instance, is developing 21000 MW of thermal power, more than four times the generation capacity that it uses today.
This is however not the complete picture. Chattisgarh has signed dozens of memoranda of understanding (MOU) with companies to generate more than 50,000 MW of power. Most of these companies have joined the pipeline of projects working towards getting environmental clearance from the MoEF. The states profligacy in signing MOU’s is in line with its long stated policy of becoming a “power hub”, of using its large coal deposits to competitive advantage and “exporting” power to other states. Orissa, with similar ambitions, has signed MOU’s with 30 private companies for generating 38000 MW of power, over and above the power generated in state and public sector plants. Some of these projects are in the construction phase, the rest in the pipeline. Andhra Pradesh, too, wants to be a “power hub”, using imported coal at coastal power plants.
In these “power hubs” of the future, the projects (under construction and in the pipeline) are concentrated within a few compact geographical regions. The table below shows some of these ‘thermal hot spots’.
Thermal Hot Spots
|
District, State
|
Thermal Power Generation Capacity (MW)
|
Number of new plants
| ||
In Operation
|
Being built
|
In the pipeline
| |||
Coast around Krishnapatnam port
|
0
|
12260
|
8460
|
10
| |
Samal reservoir and downstream on Brahmani river
|
4420
|
2250
|
11710
|
15
| |
0
|
5420
|
4820
| |||
Hirakud reservoir and upstream on
|
1620
|
4400
|
2660
|
42
| |
Raigarh, CG
|
1300
|
6360
|
13040
| ||
Janjgir-Champa, CG
|
0
|
8400
|
22460
| ||
Private producers, given the freedom, will invariably pick the locations for thermal plants suited to produce electricity at the lowest cost. The stretch of the Brahmani river in Orissa near Talcher and the stretch of the Mahanadi river just upstream of the Hirakud reservoir are extremely popular and the reasons are not too far to seek. Coalfields are located nearby, the water from the rivers and reservoirs can be accessed for meeting the large cooling water requirements of the thermal plants, and the areas are well connected by National Highways and railways.
The complete piece may be accessed at India Together
Monday, April 25, 2011
The demographic masculinization of India
Census 2011 - the bad news
Census 2011 finds that for every 1000 males, there are only 940 females in India. India compares unfavorably in the sex ratio even with its neighbors – Bangladesh (978), Pakistan (943) and Sri Lanka (1034). China with 926 women for every 1000 men is the major exception being worse off than India.
This is however not the worst of the news in the census. The child sex ratio – the number of females to every 1000 males in the age group 0-6 years - at 914, is sharply lower than the sex ratio in the overall population. What is most shocking is that the child sex ratio continues to follow the decreasing trend established over four decades ago.
At normal biological levels, the sex ratio at birth should be close to 952 and this is seen to be the case even in many Asian countries - Japan, Thailand, Indonesia and Sri Lanka for instance. The normal child sex ratio should be equal to or higher than the sex ratio at birth. The extent to which the child sex ratio in India falls below the figure of 952 represents the numbers of the ‘missing’ girl children.
In Haryana, male children exceeded female children by over 22% in 2001 (this has decreased marginally to 20% in 2011); and in certain districts like Kurukshetra and Ambala, it was closer to 30%. Read the complete India Together piece here.
An excellent discussions of the problem may be found in this reference: ‘The Sex Transition Ratio inAsia ’, Christophe Z. Guilmoto - available online here
Census 2011 finds that for every 1000 males, there are only 940 females in India. India compares unfavorably in the sex ratio even with its neighbors – Bangladesh (978), Pakistan (943) and Sri Lanka (1034). China with 926 women for every 1000 men is the major exception being worse off than India.
This is however not the worst of the news in the census. The child sex ratio – the number of females to every 1000 males in the age group 0-6 years - at 914, is sharply lower than the sex ratio in the overall population. What is most shocking is that the child sex ratio continues to follow the decreasing trend established over four decades ago.
At normal biological levels, the sex ratio at birth should be close to 952 and this is seen to be the case even in many Asian countries - Japan, Thailand, Indonesia and Sri Lanka for instance. The normal child sex ratio should be equal to or higher than the sex ratio at birth. The extent to which the child sex ratio in India falls below the figure of 952 represents the numbers of the ‘missing’ girl children.
The worst offenders
The tribal belt states, and the eastern, north-eastern and southern states have far better sex ratios than the states of the north, west & central India Punjab and the National Capital Region.
Region | States | Child Sex Ratio |
North-East | Arunachal, Nagaland, Manipur, Mizoram, Tripura, | 934-971 |
South | Kerala, Tamil Nadu, Andhra Pradesh, Karnataka | 943-959 |
Tribal Belt & East | Chattisgarh, Orissa, Jharkhand, | 933-964 |
North & Central | 830-866 | |
Uttar Pradesh, Madhya Pradesh | 899-912 | |
West | Rajasthan, | 883-886 |
An excellent discussions of the problem may be found in this reference: ‘The Sex Transition Ratio in
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