Risks or opportunities4 min read . Updated: 25 May 2010, 09:30 PM IST
Risks or opportunities
Risks or opportunities
With Friday’s Reliance gas verdict, the Supreme Court has now held that all the natural resources belong to the people and that the government holds them in trust on behalf of the people. The production-sharing contracts signed with private developers would therefore not dilute the government’s right to allocate resources according to its priorities, and also to determine the prices at which these resources would be sold. This is an important judgement, not just with relevance to the particular case, but about development of natural resources in general.
At the first level, it is likely to determine the future of Nelp, or new exploration licensing policy, blocks that the ministry of petroleum and natural gas hopes to put out for international competitive bidding in the future. With a pricing formula that could yield them less than adequate returns on the investment involved, international investors are likely to factor in this risk to their returns. This is no mean thing: The global oil and gas industry is one with a limited number of players, and they are now likely to factor in the results of this judgement while choosing countries.
At a larger level, the judgement enunciates a fundamental principle about the ownership and use of natural resources. The apex court’s judgement does not single out oil and gas, but is generic about natural resources. Therefore, it could apply equally to the mining of iron ore, bauxite, all minerals and, indeed, licences even for the use and utilization of water. In short, the government now has the right to determine the price at which iron ore and coal would be sold, and to whom. At the extreme, it can regulate the prices and use of bottled water. This reinforces the state’s right to determine the course and manner of development of economic resources, and, as such, is a clear negation of the “market knows best" principle of development.
Two consequences are likely to follow—opposing ones, perhaps. First is the nature of state management of resources. Until the 1990s, the allocation of all minerals was with the state—oil and gas was a closed preserve for state exploitation. This judgement takes us back to that position. Clearly, this is a step back from the measures of economic reform, and a return to the era of state control. It is also evident that local industry as well as the government in power is not at all unhappy about this dispensation—it is, in fact, the same dispensation that has worked to the interests of both groups for at least 50 years since Independence. The aberrations of free-market competition and level playing fields can now be forgotten for the advantages of access and allocations.
The backward steps in the reforms agenda have been visible for some time now: Consider the slow pace of reforms in the financial sector and the lack of new initiatives to take open market measures forward. Let us take another example. The government is now agreeing to the enumeration of a caste-based census, at a time when increasing urbanization and changing educational, work and living patterns are just starting to make a dent in centuries-old societal rigidities. This indicates that those in power see a need to perpetuate caste-based distinctions, rather than to attempt to erase them. One has only to compare with China’s efforts in the last 30 years to integrate different ethnic groups with our efforts to perpetuate divisions. That means the Indian state is likely to re-emerge as a strong arbiter of what is good for the people.
The second, more positive, consequence is a possible change in the orientation of development. Finance minister Pranab Mukherjee clearly enunciated in his February budget speech that the state would increasingly provide an active role in social welfare. One recalls that the alignment of the original gas pipelines from the Bombay High fields in the 1980s was decided by the then prime minister on the basis of the need for regional development in backward areas in Uttar Pradesh. The government will now be able to take development initiatives that can help backward regions, use cross-pricing mechanisms to benefit poorer areas—all this at a time when it can take advantage of the skills and resources of the private sector.
That translates into more opportunities for public-private partnerships. Private players with their capital, banks with their debt provisions, and financial markets with their equity support can now work along with the government in putting together a new model of development that is not merely market-friendly and profit maximizing, but a more equitable one. The caveat is that this would require balanced and transparent governance, and a watchful media and citizenry.
International investors would need to factor in these changes, depending on whether they see them as country risks or additional opportunities.
S. Narayan, a senior research fellow at the Institute of South Asian Studies, Singapore, is a former finance secretary. We welcome your comments at firstname.lastname@example.org