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Municipal Bond Market in India: How To Make Them Work?


(This is the second of a two-part series on the need to recognize how Municipal Bonds in India can be used to drive its’s rapidly growing urbanization requirement. Municipal bonds can potentially serve multiple stakeholders by granting financial autonomy to Urban Local Bodies (ULBs) as well as becoming a highly effective and untapped investment opportunity.)

Municipal bonds are bonds issued by Urban Local Bodies (ULBs) – municipal bodies and municipal corporations to raise funds for financing specific projects in the urban landscape, particularly infrastructural projects.

Even as constitutional legitimacy has been provided to ULBs in terms of autonomy, they remain feeble on the financial side of things. Tapping into the municipal bond market can be a starting point towards rendering the ULBs financially autonomous.

Have Municipal Bonds Worked in India?

As per a report on Urban Infrastructure and Services, 2011, Indian ULB’s are among the world’s weakest in terms of financial autonomy and their capacity to raise external capital.

In India, only 1% of the total urban local bodies’ requirement is funded by municipal bonds, compared to around 10% in the United States. It is observed that no municipal bonds had been issued since 2007 until recently when Pune Municipal Corporation successfully raised INR 200 crore via issuing municipal bonds as the first tranche of INR2260 crore plan to be raised in a 5-year time frame.

According to the government sources, municipal bonds in India were able to garner only $275 mn (INR 1750 cr) in India as opposed to the US $304 billion in 1 year and South Africa’s $1.8 billion raised in a single quarter.

Both demand and supply issues have been the prime factors behind the poor performance shown by municipal bonds in India. On the demand side of things, lack of financial transparency and lower operational efficiency reduces the creditworthiness of municipalities and thereby attract unimpressive interest from the investors.

Nagpur Municipality planned to raise INR128 crore in 2007 but was able to procure only INR21 crore. Similarly, as noted by the Fourteenth Finance Commission, borrowing restrictions placed on the municipalities and incomplete devolution of powers, constraints the capacity of the municipalities to leverage the municipal bonds market. While bigger municipal bodies can go for bond issues easily as they are backed by state and federal governments assurance, the smaller municipalities often find it difficult to access the market due to lack of capacity and scale.

Therefore, the respective governments should guarantee such bonds issued by smaller yet progressively performing ULB’s and their projects. Further, the provision of tax exemption only for bonds earning interest >8% makes them unattractive, especially for retail investors. Also, as per the regulations, retail investors can only participate in secondary markets.

This has further marginalized the interest of retailers and muted retail investments, the secondary market of the muni bonds virtually don’t exist. The listing of the municipal bonds as exchange-traded bonds would increase the liquidity situation and ensure broader participation. The retail participation can be enhanced by extending appropriate tax concessions on returns and also by providing competitive return rates.

Also, the institutional investments would spike if securitization of these bonds gets the green signal so that these bonds could be used as a collateral asset as per the funding requirements. The inclusion of muni bonds under the priority sector lending obligations or counting them as a part of SLR holdings would boost the credibility but also the demand from large banks and financial institutions.

Further, high transactional costs, lack of operational autonomy for ULBs (only “revenue bonds” allowed to be publicly issued. “General obligation bonds” can only be issued via private placements) and low revenues for ULBs which weaken their financial profile have been some of the significant supply-side factors which restrain the scope of municipal bonds in India which attract immediate attention and resolution.

SEBI Guidelines

The Securities and Exchange Board of India (SEBI) has recently brought out regulations on the issue and listing of debt securities by municipalities. However, some restrictive measures such as Municipalities not being allowed to issue unsecured bonds or a ruling mandating them to contribute at least 20% of the project cost greatly restricts their autonomy.

Though the freshly issued guidelines are welcome to structure the municipal bond market, more concrete steps need to be taken to encourage these instruments for investment. Conclusively, it can be said that Municipal bonds hold a great promise for solving the urban infrastructural problems. While granting constitutionally legitimacy to municipal bonds empowers them to a great extent, such authority without real financial autonomy is futile. Steps must to taken to ensure that the ULBs are both constitutionally and financially independent.

(The article was originally published at Transfin.)

Muni Bonds: The Untapped Potential For Urban Infra Needs


(This is the first of a two-part series on the need to recognize how Municipal Bonds can be used to drive India’s rapidly growing urbanization requirement. Municipal bonds can potentially serve multiple stakeholders by granting financial autonomy to Urban Local Bodies (ULBs) as well as becoming a highly effective and untapped investment opportunity.)

Urban Local Bodies (ULBs) is a broader term used for government entities responsible for setting up, maintenance, and administration of public welfare, health, regulations, and infrastructure in urban areas. Comprising of Municipal Corporations, Municipalities and City Councils – subject to size of urban sprawl – they are constitutionally empowered, at least on paper, to function as self-governing entities.

Inception of Municipal Bonds in India

Under the 12th Schedule of the Constitution, 18 functional items have been placed under the purview of ULBs including urban planning, infrastructure, drinking water, public health, and urban amenities. The resource base of ULBs consists of their own tax and non-tax revenue, grants and subsidies from central and state governments, loans from state governments, banks and also market borrowings.

However, due to the ever-rising demand for basic urban services, ULBs have been facing the issue of lack of requisite funds, resulting in a delay in project implementation.  It was the Rakesh Mohan Committee on “Commercialization of Infrastructure Projects (1996)” which recommended the development of a municipal bond market in India. The Committee pushed for private sector participation and accessing capital markets through the issue of municipal bond.

Following the recommendations, it was the Bangalore Municipal Corporation in 1997 which for the first time issued state guaranteed municipal bonds in India worth INR125 crore. Following this, other municipal corporations like that of Ahmedabad, Mumbai, Nashik and Madurai also issued these bonds. However, due to lower interest rates, non-tradability in the secondary market and virtually no tax benefits, they attracted tepid response and largely mobilized capital through institutional or private placements.

What are Municipal Bonds?

Municipal bonds are debt obligations, which are issued by ULBs to finance local infrastructure and civic projects like construction of schools, local transport, health care centres etc. They are used to mobilize capital from the market in exchange for payment of regular interest and the principal at a pre-determined maturity date.

Municipal bonds in India can be broadly classified into two categories. One is the general obligation bonds which are issued against the financial credibility of the issuing municipality. In such cases, payment to the bondholders is done using the tax revenues generated by the ULB. The other category of municipal bonds are revenue bonds, the proceeds of which are used to finance a particular revenue-generating project. Repayment of principal and the interest, in this case, is done via the revenue generated from the earmarked project.

How Can Municipal Bonds Help?

Given the pace of reforms being witnessed in the country, with the additional objective of creating more smart cities, ULB’s have increasingly been facing the heat of fund crunch.

The need to bridge the existent infrastructure gap, upgrade and maintain the existing ones, and the wide-scale urban migration exerting pressure for the creation of newer and larger facilities considerably strain the balance sheets of corporations.

The primary sources of resource mobilization i.e tax and non-tax revenues and state grants remain grossly inadequate to meet the requirement. The erstwhile Planning Commission had estimated an INR35 lakh crore fund requirement to be able to meet the current urban infrastructural needs. Interestingly, McKinsey, a management consulting firm pegged the required amount at about INR53 lakh crore. The Smart City programme introduced by the Centre, alone has an envisaged infrastructure spending to the tune of INR7 lakh crore over the next 20 years (i.e. INR35,000 crore each year).

With the overleveraged balance sheets of state government and legal bindings placed by Fiscal Responsibility and Budget Management (FRBM) Act, 2002, not much should be expected from the state governments in terms of allocating funds via grants or even loans.

Municipal Bonds, therefore, come to enjoy a critical significance in meeting the immediate challenge of urban infrastructural needs. They also share the burden of excessive dependency on state or federal grants. The 12th Finance Commission Report reveals that over the years, their dependence on “other source of revenue”, which includes grants from central and state governments; transfers from state or central finance commissions, has been increasing. As per the 13th Finance Commission, 47.1% of total municipal revenue consisted of grants from the state and centre in 2007-08. Municipal bonds will offload that share and push for more localized investments and greater public participation. This would result in an efficient assessment of local needs and push for transparent funding and ensure accountability of corporations.

International Precedents

Most developed and developing nations are focused on building local credit markets. North America and Europe have a long history of utilizing household savings for infrastructure development. The former has heavily relied on municipal bonds, while the latter established development banks. Most developing nations have used either one of these methods or their hybrid, directly or via financial intermediaries to raise capital.

Recognizing the potential that municipal bonds hold in contributing towards the development of the urban space can prove to be of great assistance to ULBs. While granting constitutional legitimacy to municipal bonds will empower ULBs to a great extent, such authority without real financial independence is futile. Concrete steps must, therefore, be taken in the right direction to ensure that ULBs possess the requisite institutional and financial autonomy.

(The article was originally published on Transfin)

Indira Gandhi: The unforgettable persona of the Indian political history


Indira Gandhi is remembered as one of the most powerful Prime Minister of India. She has been controversial in her political tenure since her accession to Prime Minister-ship till her unfortunate murder. She was brave, bright and bold in her approach and decisions. All in time, she was very much clear about her vision and ideology and never hesitated to take policy decisions which faced opposition even within from her party. It is true that She was acceded to the throne with the intent of placing the puppet prime minister remotely controlled by the coterie of then Congress stalwarts but to the surprise and shock of everybody, she not only gradually consolidated and concentrated the power in her hand but also emerged the winner of every political battle.

This piece is the first part of a two-part series which sheds light on her political career which was full of interesting incidents, stories and controversies ranging from bank nationalization to declaration of emergency to her brutal and unfortunate murder.

Road to PM-ship

The mysterious death of then Prime Minister Lal Bahadur Shastri, during Tashkent Declaration (1966) brought the discussion on succession to the fore. Moraraji Desai was a senior and in a way rightful contender to the post. But a section of Congress (Syndicate) under the leadership of K Kamraj disliked him and therefore was in a search for a name who could challenge Desai but work under the Syndicate’s shadow. Indira Gandhi who was new and inexperienced but carried the legacy of Pandit Nehru was their obvious choice.

Desai due to his seniority and position in the party felt confident about his win in the contest. He termed Indira as “ye kal ki Chokri”! However, to everyone’s surprise, Indira Gandhi in a much famous contest defeated Morarji Desai by 355 votes to 169 and became the first and the only women Prime Minister of the country.

The 1967 Election Debacle

In the general elections of 1967, Congress suffered a major setback. Though it succeeded in retaining control of Loksabha by winning 284 out of 520 seats but the majority margin in the Upper House was drastically reduced. Further to the losses incurred, Congress also lost its majority in eight state assemblies which include Bihar, UP, Rajasthan, Punjab, Orissa, WB, Madras and Kerala. The major reasons for the defeat were raising factionalism and weak leadership in Congress after the death of Nehru (1964) and also united opposition which contested the elections. This was the election in which all opposition parties including Lohiya’s socialist party, communal Jan-Sangh, rightist Swatantra, CPM, Muslim League, Akalis all joined hands together and fought anti-congress elections.

Fault Lines in Congress

The outcome of 1967 elections drastically changed the balance of power inside the Congress. The position dominant Syndicate got weakened as many of the Syndicate loyalists including its president, Kamraj lost the Loksabha election or of state assemblies. Though Indira Gandhi had acquired a certain control over the government after the blow suffered by the Syndicate, she hardly had any organizational base in the party.

Moreover, Kamraj got re-elected to parliament by winning by-elections tried to be assertive in his position that it is the party (Syndicate) should form the policies and the government should be accountable to the party for its implementation.

However, Indira was not willing to cede control to the Syndicate. She emphasized on the fact that the government acquired its power and legitimacy from the parliament and the people himself, not from any party or organization.

This way two wings, which were ideologically different, developed and later got radicalized in Indira times. One was led by Indira herself propagating socialist agenda (Congress-Left) which included Ten Point Programme and advocating closer relations with communist countries. The other wing (Congress-right) was led by Syndicate under its new president Nijalingappa (after the retirement of Kamraj) which opposed the socialist policies and demanded greater private sector participation and use of foreign capital for economic development.

The Presidential War and Split of Congress:

Though Congress had always been ideologically heterogeneous party accommodating diverse ideological strands with overall nurturing of left of the center image, this time the two factions were much more radicalized on both political and economical fronts. The historically subdued Congress-right faction was much more assertive and was willing to openly oppose the left-wing policies.

For example the Ten-Point Programme adopted by the left wing faction led by Indira and which comprised of many socialistic agendas like social control on banks, nationalization of general insurance, ceiling on urban property and income, curb on business monopolies and concentration of economic power etc, was aggressively opposed by the right wing section under the leadership of Desai and Nijalingappa. Moreover, the syndicate even proposed an alternate set of far-right policies which consisted of ideas like liberalization, privatization, warm relations with the West and higher reliance on foreign capital.

This rift got further intensified over the period of time and reached its peak with the death of President Zakir Hussain in May 1969. It is to be noted that while the post of President as per the Indian constitution is of a ceremonial head but at the times of hung parliament, he enjoys certain discretion and therefore could play a politically decisive role. The Syndicate which was determined to have their own man on the top position, despite Indira Gandhi’s opposition, declared Sanjiva Reddy as a Congress candidate for the Presidentship.

This was the declaration of an open war against Indira. However, she accepted the challenge and decided to give it a strong fight with all of her strength. Though She was on back-foot due to a clear majority of the Syndicate on congress parliamentarian board. Within days of the declaration, she sacked Morarji Desai from the Finance Minister portfolio on the grounds of his conservative ideology incapable to implement her radical policies.  There were two other candidates for Presidentship, CD Deshmukh, a senior statesman was fielded by Swantantra and Jan Sangh while VV Giri, then Vice-President decided to stand as an independent candidate backed by communists and several regional parties.

Indira Gandhi wanted to support Giri but did not know how she could go against her party’s candidate whose nomination papers she has filed. At this stage, the syndicate made a major blunder. To ensure Sanjiva Reddy’s election, Nijalinagappa met the leaders of Jan Sangh and Swatantra and persuaded them to cast their second-preference votes, once the CD Deshmukh gets eliminated in the first round. ( Know more about the election of the President of India)

Indira immediately accused the Syndicate of having struck a secret deal with communal and reactionary forces in order to oust her from power. She now, more or less openly, supported Giri by refusing to issue a party whip in favour of Reddy and by asking Congress MPs and MLAs to vote freely as per their own “conscience”.  At the time of the election, nearly one-third of them defied the official nomination of Congress and voted for Giri who was declared elected by a narrow margin.

The countdown had begun with the election of VV Giri as the President of India. The defeated and humiliated Syndicate took disciplinary action against Indira Gandhi and expelled her from the party for having violated the party discipline. Indira responded by setting up a rival organization, which came to be known as Congress (R where R was for Requisitionists. The Syndicate dominated Congress came to be known as Congress (O) where O was for Organization.

Once again at the final showtime, Indira Gandhi emerged as a victor securing the support of 220’s of party’s Lok Sabha MPs while the Syndicate got the support of just 68 MPs. Moreover, she now became the unchallenged leader of both the government and the new party which was soon to become the real Congress.

(To be continued….)


Will automation make you jobless soon?


Automation, Artificial Intelligence (AI), Robotics and Technology are the buzzwords of the industries especially of manufacturing and IT services. Techno experts have been calling AI and Automation as the future of technology. Whereas the critics have been taking it as a threat of potential job displacement. As per the research report of PeopleStrong, a Human Resources Solution firm, India will make up around 23% of jobs to be lost to automation globally by 2021. However, one need to understand over the root cause of why India stands to lose a quarter of Jobs due to automation? Is it because of the process itself or due to lack of apt skills required to handle the challenge.

McKinsey Study

Another study compiled by McKinsey Global Institute says that advances in AI would have drastic consequences on the existing job markets. The Study estimates about 40-70 million job losses alone in the US market due to automation. However, the study also acknowledges the fact that new jobs would get created in the market which would require newer set of operational skills. So the constant updation of the skill set as per the technological developments becomes a crucial mandate to stay relevant in the job market. A historical perspective of the journey of innovation suggests that the fear of job losses looks misplaced. The report exemplifies the effect of invention of personal computers which were to consume jobs at unprecedented scale but in fact resulted in the creation of 18.5 million jobs after accommodating the possible job losses due to the innovation.

Automation at its face value may appear as a destructive force to the job prospects but a conscious analysis suggests that it would create new possibilities which would require advanced skill set and changed job roles. In line with the argument, Infosys, India’s leading IT firm, stated that automation allowed it to shift 9,000 workers from low-skill jobs to more advanced projects, like machine learning and artificial intelligence.

Experts’ Views

The Economic experts based on the basic principles of demand and supply have been suggesting the fact that the process of AI and Automation can result in higher income levels as it would enhance not only the competitiveness of the product and offer better quality but also cash in economies of scale as well as higher labour productivity. This would ultimately get reflected in lower prices of the product which would in turn create higher demands, higher productions and hence higher income levels.

Further, the establishment of automation industry itself would generate employment opportunities for production of spare parts and services. Therefore, the efficiency argument goes in favour of automation. However, other significant aspect of the AI revolution is the variability in the impact distribution based on region as well as job classes. The developing countries are expected to be more affected than the developed world. As per the World Bank data, 69% of today’s jobs in India are threatened by automation. And India isn’t alone: China’s figure was 77% and other developing countries also scored highly.

Mohandas Pai, former CFO of Infosys, have stated that very high skilled jobs and very low skilled jobs are going to be least affected due to automation. As high skilled jobs are yet irreplaceable because the technology is still in developing stage while the low skilled jobs would remain cost competitive. It is only those middle class jobs which involve repeated and rule based work could face the heat. As per the world development report,2016, of the world bank, as technology would streamline routine tasks, middle-skill jobs like clerical workers and machine operators may decline while both high-skill and low-skill ones would increase. It is the division of labour which will go to advanced stage not the elimination.

Further, automation technology promises huge possibilities from the perspective of art and craft sector. With the replacement of repetitive and loop based work with automated devices and process, it is the human intelligence and creativity space which will get strong push.

Misplaced Fear

Also one need to understand the fact that the process of automation is going to be introduced in a gradual manner and thereby is not expected to produce a knee-jerk reaction in the job market. If India grows at 8% a year, with a labour productivity increase of 1.5% a year, jobs should grow at a rate of 6.5% a year. With automation, jobs may grow within a band of 4-5% a year for the next 10 years. Also as the cost of initial automation and robotics is high, In a country where wages are much lower than such costs, impact will be felt at a slower pace. However, the major challenge to adopt the AI techniques is streamlining the education sector as per the future requirements. If the educational sector is overhauled and proper skilling is imparted, there would no exaggeration in saying that automation would promise immense possibilities to the global market.

Conclusively it can be said that historical experience adjoined with the facts like lower costs, better quality, mass production, higher income levels, greater competition indicate the positives of adoption of automation technology while the fear of job destruction stands misplaced.

Simultaneous Elections: A Masterstroke or A Futile exercise?


The issue of holding simultaneous elections to the Lok Sabha and all the State Assemblies has become hot again with the recent statement of the Election Commission of India stating that there is a practical possibility of implementing the idea once the necessary political convergence takes place.

In that context, Bureaucracy Today presents a fresh perspective along with a detailed analysis of the hot topic. In an exclusive interview to BT, Election Commissioner Om Prakash Rawat speaks in detail about the opportunities and the challenges associated with the Idea.

In order to provide a comprehensive character to the cover story, we have also tried to incorporate the views of diverse stakeholders, including leaders of various political parties and two former Chief Election Commissioners.

Prime Minister Narendra Modi has suggested that elections to the national and State legislatures, panchayats and local bodies should be held simultaneously. However, the idea is not new as it was first introduced by the Law Commission headed by Justice BP Jeevan Reddy in 1999.

Later on, in 2009, BJP leader LK Advani aired similar views. The Parliamentary Standing Committee on Personnel, Public Grievances and Law and Justice under the Chairmanship of EM Sudarshana Natchiappan (Congress), in its 79th Report in 2015 also concluded that simultaneous elections were required for long-term governance. In fact, the practice was already under effect, though unconsciously, from 1952 to 1967. However, it got disrupted in 1969 due to the premature dissolution of the Lok Sabha.

Election Commissioner O.P. Rawat while speaking at length to Bureaucracy Today provides useful insight on the envisaged benefits and challenges associated with the idea. “Under the current system of elections, India is in a constant phase of polling with this and that State going to the polls.

It hampers governance as political leaders find themselves busy in a consistent mode of political campaigns. For example, we have just witnessed the UP, Punjab, Uttarakhand and Goa Assembly elections and the election dates for Gujarat and Himachal Pradesh Assemblies have now been announced. It creates an unintentional environment of policy paralysis”, Rawat says when BT asks him about the fundamental reason behind the genesis of the idea.

The line of reasoning stands justified as every time a State heads for the polls, the Model Code of Conduct (MCC) gets enforced by the Election Commission. The enforcement of the MCC limits the powers of the Government as new projects, policies and major announcements can’t be made by it.

The MCC has critical importance in ensuring free and fair elections across the country which is a constitutional mandate imposed on the Election Commission of India. It prevents the ruling party from exerting undue influence on voters and thereby provides an unbiased playground to all the contestants and political parties.

THE Hobbling Experience

However, the MCC makes the Central Government walk with a limp for nearly 30 months out of its 60-month tenure. It puts the top line leadership to an endless political campaign mode, brings administrative machinery to the halt, results in utter wastage of human resources and involves huge economic cost to the national exchequer.

Confirming the views of O.P Rawat, former Chief Election Commissioner H.S Brahma states that “the whole exercise results in an unproductive expenditure to the tune of thousands of crores of rupees whose brunt is ultimately bearded by the ordinary taxpayer”.

All goes well with the theoretical disposition of the proposal of holding simultaneous elections but the real challenge is faced on the implementation ground. Synchronization of elections to the Lok Sabha and all the State Assemblies remains the foremost challenge.

For example, if the Modi Government wants to implement the idea from the 2019 general election, how would it ensure the concordance of State Assembly elections? Will the Punjab Assembly which recently secured a full five-year term surrender its remaining period? This remains a big question.

The Indian Constitution has provisions for the early dissolution of national and State legislatures as per the wishes of the Government concerned with the mandate of holding fresh elections within a period of six months. Further, Article 356 of the Constitution empowers the Centre to dissolve any State Government on various grounds as per the recommendation of the Governor of the State.

Observers say the Indian political system has witnessed instability and volatility of tenure with the emergence of coalition Governments at the national level as a single party majority has become the rarest of a rare case.

The scene gets more complicated at the State levels with the emergence of regional parties which mobilize votes on regional issues and aspirations. There are more and more cases of hung legislatures where no party gets a majority, withdrawal of support of coalition partners, large-scale horse trading and no-confidence motions making the completion of tenure unrealistic and unviable.

According to observers, these multiple scenarios which occur regularly in the political corridors of India raise numerous questions on the feasibility of holding simultaneous elections.

When asked about these cases, Rawat tells Bureaucracy Today: “The Election Commission of India has already submitted a detailed proposal explaining the practical modalities of holding simultaneous elections. The Commission has suggested appropriate amendments to the Constitution, including Articles 81, 82, 83, 85 and 356 to make the proposal practically feasible.

The Commission has also given the recommendation of introducing a confidence motion rather than a no-confidence motion or holding both the motions simultaneously in the case of early dissolution of a House.

Suppose a Government faces a no-confidence motion and loses the confidence of the House at a certain stage of its tenure, rather than calling for fresh elections, a confidence motion needs to be presented by the challenging political party. If it wins the confidence motion, it would immediately replace and succeed the present dispensation for the rest of its tenure. If it loses, then the present Government would be continuing to rule the State”.

A senior Government officer on condition of anonymity revealed to Bureaucracy Today that the Centre was exploring the possibility of holding simultaneous elections in a two-phase cycle to tackle the problem of convergence of various elections.

“Basically the idea is to hold two elections in a five-year period. At first, all the elections would be conducted simultaneously in a concordant manner, but then there would also be a provision of holding mid-term elections to re-synchronize the States, if any, which have fallen apart from the cycle for any of the stated reasons,” the officer says.

When BT tried to confirm whether the idea was presented by the Election Commission, Rawat denied. He states that the idea may be under the consideration of the Government but was not originally presented by the Commission.

Apart from large ground level difficulties, the proposal also faces an ideological battle from Opposition political parties with some alleging to the extent that the whole idea was a covert attempt to stall the parliamentary form of Government in the country and replace it with the Presidential order.

Various Takes

Manish Tiwari, former Union Minister and Congress spokesman, while speaking to Bureaucracy Today says that not only is the idea impractical but it is also against the spirit of federalism which is a basic feature of the Constitution. All these fervent propositions proposed by the Prime Minister find their genesis in the 2014 general election successfully fought riding on a single personality by the BJP. The idea of holding simultaneous elections is just another attempt to recreate an election wave and sweep national and State elections. It would ultimately translate into the destruction of democratic values and the spirit of co-operative federalism of India.

Sitaram Yechury, leader of the Communist Party of India (Marxist), while expressing his views to Bureaucracy Today categorically denies any possibility of holding simultaneous elections to the national and State Assemblies. He says, “Unless Article 356 gets deleted from the Indian Constitution, the holding of simultaneous elections will remain a bogus idea.”

The former Chief Election Commissioner, SY Quraishi, in a telephonic conversation with Bureaucracy Today expresses the similar thoughts raising various questions on the practical modalities. He says “The feasibility of the idea remains quite unclear. How you are going to ensure synchronism of the elections when the Constitution itself provides provisions of early dissolution or imposition of Presidents rule.

How are the aspirations of assertive regional parties going to find their legitimate expression? How can you muffle up a single set of election and create a single set of national priorities? How are you going to acknowledge the presence of regional diversity and differences? The Election Commission must first come clear on these questions, only then a meaningful deliberation on the issue is possible.”

Indian Voters’ Wisdom

However, when these questions are put to the Election Commissioner Rawat, he expresses his confidence in the institutional set-up of Indian democracy and the wisdom of Indian voters. “ You see, Indian democracy has matured and so Indian voters. While raising these questions you are undermining the wisdom of the voter. It is not so the case.

The Indian voter is very much informed now and can very well discriminate between different types of elections, political parties, candidates and national or regional aspirations. You must place your trust in the hands of our voters.

After all, this is all about democracy. Also, you should not forget that the ultimate focus should be on a better serving of the people of this country. Everything else should be subsumed to the best interest of the population.” Rawat tells Bureaucracy Today.

Sambit Patra, BJP spokesman in a conversation with Bureaucracy Today, however, says “The BJP welcomes the idea. We believe in a consensus-based approach keeping the spirit of co-operative federalism. I think the Prime Minister has made absolutely clear by stating that there will not be any imposition of the idea on other political parties.”

When asked about the infrastructural preparedness of the Election Commission in case the idea gets flagged off by the Government, Rawat quickly responds that “Infrastructure is not the issue. The commission has an adequate number of voting machines and required manpower.

Though we would need a capacity addition to conduct simultaneous elections,  the new Voter Verified Paper Audit Trail (VVPAT)Simultaneous Elections enabled voting method but that could be arranged easily. I do not see any challenge in it. The main challenge lies in evolving a broad-based political consensus as the implementation of the proposal would require a number of constitutional amendments.”

Way Ahead

The idea of holding simultaneous elections to the national and state legislatures has its own merits, still, it appears to be in a nascent stage. There is no doubt that the country needs to save itself from constant electoral campaigns, huge economic costs and poor political governance involved with the current system of elections but the various challenges associated with its implementation like ensuring constant synchronization, protecting the federal structure and giving space to various regional aspirations must first be acknowledged and then be discussed with all the political parties.

The detailed proposal of the Election Commission discussing practical modalities which include multiple constitutional amendments should come in the public domain so that other stakeholders like political parties, civil societies and experts can express their opinion on it. If all the challenges are handled with a consensus-based approach, there is the least doubt that the idea could turn as a masterstroke by Indian democracy.

(The article was originally published at Bureaucracy Today news magazine)




Recapitalization of Banks: The Unfinished Agenda


Modi government finally recognized the critical health of Public Sector Banks (PSBs) due to rising Non-Performing Assets (NPAs) and announced much-needed recapitalization amounting to INR2.1L cr.

Equity markets as expected showed their support by spiking the market capitalization of 22 listed PSBs by INR1.2 L cr the very next day. The announced package is structured in three tranches. INR18,000 cr will come directly from budgetary allocations. Another INR58,000 cr will be raised by PSBs themselves…presumably via the sale of non-core assets. It is to be noted that Indradhanush (an existing government program) already included these ideas but perhaps not at such a scale.

The new announcement, however, had a third element comprising INR1.35 L cr to be raised through recapitalization (recap) bonds. Implementation for the moment remains unclear. PSBs, flushed with liquidity post demonetization, is likely to buy these recap bonds, the proceeds of which would be re-injected into banks by the government as equity.

Hence PSBs in a way would finance their own bail-out. Cleaner balance sheets make banks more attractive for private investment, also enabling them to focus on fresh lending. The move will boost bank capital ratios, thereby giving them more leeway in expanding credit without worrying about regulatory pressures.

This is important as, under Basel III norms, the minimum level of tier 1 capital has been mandated at 10.5%. In fact, last year when RBI eased the classification norms of tier-1 capital and allowed banks to revalue their assets as per new guidelines, most including the largest lender SBI, could not secure the 10.5% mark.

Recapitalization is a quintessential move to restore the beleaguered sector – plagued by rising NPAs, deteriorating asset quality, and historically low credit growth.

Gross NPA in PSBs rose from 5.43% of advances in March 2015 to 13.69% as of June 2017. In 2015, banks needed recapitalization of INR2 L cr to handle the challenge. Since bad loans have sharply risen since then, the current allocation stands inadequate vis-à-vis the estimated INR3 L cr plus requirement as per Fitch.

It is to be noted that most part of the infused capital will be utilized for higher provisioning or debt write-offs, limiting the possibility of inorganic revival in credit. Also, propensity to lend (supply) need not straightaway translate into a propensity to borrow (demand). Given recap bonds would crowd out private investment and large-scale investors have a sluggish credit demand; targeted lending to MSMEs could revive the credit cycle.

One of the biggest challenges of the recapitalization plan is the possibility of a rise in debt to GDP ratio, which at 69% already indicates higher levels in comparison to other Emerging Market Economies.

Though the Economic Survey suggests bringing debt to GDP ratio to sub-60%, the current proposal makes its achievement difficult. It would be interesting to see how rating agencies respond to this probability.

Coming to the fiscal debate, Chief Economic Adviser Arvind Subramanian says that the true fiscal cost of issuing bonds worth INR1.35 L cr would range between INR8,000-9,000 cr in the form of interest cost.

Unlike the accounting norms of International Monetary Fund (IMF), Indian standards require the inclusion of interest payments on recap bonds in its fiscal expenditure. Restructuring accounting norms as per IMF will be a possible way to save oneself from breaching the budgeted fiscal deficit target of 3.2%.

The fiscal cost could go higher in case the bond market witnesses sustained yield spikes as was seen in 2009 due to oversupply. To illustrate, the 10-year Indian generic bond yield rate which was at 6.75% on October 24 has already touched the peak rate of 6.89%.

The idea of recap bonds has been executed in other economies such as USA, UK, and Indonesia in the past. In the 90s, India itself issued recap bonds to rescue the financially stressed oil marketing companies. Indonesia issued them after the ‘98 East Asian Crisis resulting in the collapse of its banking and financial sector.

Taking a cue from low international interest rates, Indonesia revised its strategy in 2004 by issuing Dollar dominated bonds in International markets. India could have considered this option as besides from facing a lower interest charge, our comfortable external debt position gives more room to increase leverage Internationally.

Also, the problem of crowding out of private investment would reduce. The government has the option to issue “Masala Bonds” (Rupee dominated bonds issued abroad) to hedge any exchange rate risks. Probably the expectation of a rate hike by US Fed in December made the government shy away from this strategy.

The whole exercise brings the problem of moral hazard to play as any write-offs give wrong incentives to defaulters. Case in point is Essar Steel, where promoters bid to buy back the company after receiving write-offs, ironically after filing for bankruptcy. Therefore, the banking management must be vigilant to write off only genuine cases instead of inadvertently assisting willful defaulters.

The success of recapitalization eventually depends on financial prudence shown by bankers while allocating proceeds for provisioning, write-offs or fresh credit disbursal. Transparent decision making accompanied by lower turnaround time would be key. Further, recapitalization must accompany a stream of other measures such as consolidation, governance changes and the eventual creation of a bad bank.

The market has wholeheartedly welcomed the move, but it would be interesting to see whether the Finance Minister would take the initiative to its logical conclusion i.e. a revived & healthy banking sector in India.

The article was originally published at Transfin.

One Year of Demonetization: The Pain is NOT Worth the Gain!


The date marks the first anniversary of the great Indian demonetization which was projected as the historic decision by the Modi government. In a single stroke, 86% of the currency in circulation was taken out of the system. The objectives stated by the Prime Ministers were to unearth the black money, choke terror funding, seize counterfeit currency and hit hard on corruption. But when the utopia could not be realized, the goalposts were shifted to formalization and digitalization drive. Even that could encase limited success. Amid much fanfare, More than hundred people have lost their lives directly or indirectly caused by the demonetization drive. One year since the whole exercise begun, available statistical data is confident enough to suggest that demonetization was not only badly planned and poorly executed but also a conceptually flawed decision. Former Prime Minister and the eminent economist Dr Manmohan Singh while terming demonetization a monumental mismanagement predicted a 1-2% hit on GDP due to it.  GDP for Q2 FY 18 aligning on the lines of his prediction has plunged to a three year low at 5.7%. The attorney general in the affidavit filed before the Supreme Court stated the government estimated Rs 10 lakh crore to come back as deposits expecting 3-4 lakh crore of black money to be flushed out of the system. The expectation of the windfall gains was wiped out with the report of RBI stating that 99% of the demonetized currency got deposited back to the system. The government making an overnight change of stance amusingly claimed the report to be a victory and stated that the dubious transactions were going to be thoroughly investigated.The truth is that the rich and powerful black money lobby was successful to park their ill-gotten wealth back to the system either through the nexus with banking officials or via rechanneling it through shell companies or Jan Dhan accounts. It was only the “Aam Admi” who supported the move at his best, suffered the worst. The government while unleashing tax terrorism and inspector raj is still churning on the data and yet to find the real black money hoarders.

Though any push to the formalization of the economy should be a welcome step, the applied “shock and awe therapy” has resulted in the total shutdown of selective informal sectors. Amid the fervent talks of unearthing the black money, the government has completely missed the point by assuming that “all cash is black and all black is cash.” It is to be noted that 92% of the employment comes from the informal sector which constitutes agriculture and Micro, Small and Medium Enterprises. It also contributes about 48% of GDP. The fact that the informal economy operates almost in cash only mode does not implicate it to be a black money hoarder. Streamlining the sector on the formal channels is a desirable goal but the applied method has called for a total shut down. In a way, the Indian economic structure explains that informality has been the strength of the sector. The forceful formalization would take away that advantage & make them prey for the large corporate houses which enjoy the economies of scale. As expected the principle of competition among the unequals has wiped out the employment boosters like the leather industry of Kanpur, power looms of Surat and garment hub of Tirupur resulting in a 1.5 million-plus job losses post demonetization. The Real Estate sector has come to a halt and so the construction jobs. The informal sector needed a gradual shift to formalization starting with tax incentives, better credit accessibility, market demand and other policy supports.

On the other hand, the government apparently made a naive assumption that the black money only exists in cash. The demonetization could just hit the stock of black money, particularly in cash. It was incapable to touch upon the black money stored in forms of real estate properties, gold etc. Further, it could also not address the flow of black money in the economy making regeneration a potential possibility.

On the similar lines a digital push to the economy was a welcome step but again the method adopted still remains questionable. After an initial surge in digital payments, largely attributed to a shortage of cash in the banking system, digital transactions have seen a dip, indicating a slow reversal in the usage of digital platforms. The digital transactions which sharply spiked to 149 lakh crore in March 2017, up from Rs 94 lakh crore in November 2016 have come down to Rs 99.28 lakh crore in October (till 29th). However, bankers and analysts said a complete switch back to pre-November 8 trends has not happened, holding out the possibility that there has been some behavioural change in transactions patterns.

Though the government has met some success on better tax compliance and digitalization of the economy, it has totally missed the stated larger goals. Even the limited success has come at the unwarranted cost to the national exchequer, shaken consumer confidence, and existential threat to MSME’s. The argument of increased tax compliance is morally challenged by the mega recapitalization plan of public sector banks which would ultimately incentivize the willful defaulters of the corporate world at the cost borne by the Indian taxpayer. Conclusively, demonetization can be termed a huge political success for the Modi government but least have been the benefits to the Indian Economy.

The long-term impact of the mammoth exercise is yet to come out as companies are still getting de-registered, the data is still getting mined and the debate is still on. But if we were to believe the great John Maynard Keynes, ” In the Long Run We Are All Dead!”


State of Mental Healthcare in India


Mental Healthcare as an issue holds a muted visibility in the realms of Indian policy-making. The Mental Healthcare Act (2017) was passed through Parliament only this April after a long wait of 3 years. With another World Mental Health Day passing by in October, it is only appropriate to take stock of the situation in India.

The World Health Organisation (WHO) in its latest report estimates that over 300 million people globally live under depression; the figure resulting from c.18% annual growth between 2005-2015. When it comes to the state of its mental healthcare, India stood a lowly 11th on a comparison of 15 countries from Asia-Pacific according to The Economist Intelligence Unit. Indian youth of ages 15-29 years have the highest suicide rate in the world at 35 deaths for every 100,000 people. 14% of Indians suffer from one form of mental disorder or the other with 11% requiring immediate attention as per the National Mental Health Survey. Moreover, the fear of social stigma ensures that nearly 80% of patients do not receive any treatment, even a year after exhibiting the initial symptoms.

The problem only gains intensity in urban areas thanks to long work hours, strained relationships, tiring commute, a consumerist culture, support system breakdown and rising economic instability. Substance abuse and social anxiety does not help.

Infrastructural bottlenecks

Access and affordability of treatment is the big challenge. There are only 43 government funded mental hospitals in the country serving an estimated 50 million plus patients. This translates into around 3 psychiatrists, even fewer psychologists, less than 2 specialist nurses, and 1 mental healthcare social worker for a million Indians. Government’s spend on mental health is just 0.06% of its total health budget vs.  a standard 5-7% contribution in developed nations. India’s health budget as a proportion of GDP is already one of the lowest in the world. It is no wonder insurance companies cherry-pick and refuse to protect mentally-ill patients, thereby making admission to a good hospital out of reach for most.

Mental Healthcare Act (2017)

The Mental Healthcare (MHC) Act (2017) repeals the previous legislation passed in 1987 to be in line with present needs and international norms. The Act seeks to ensure compliance with the UN Convention on the Rights of Persons with Disabilities (UNCRPD) to which India became a signatory in 2007 by formulating guidelines around treatment of mental illness.

The law now defines mental illness as a disorder of thinking which greatly impairs judgement, behaviour or the cognitive capacity of the person. It includes conditions associated with alcohol and drug abuse. This is in sharp contrast to the previous definition which simply sought to define a mentally ill person as someone needing treatment for a recognised mental disorder. Hence the subject is not looked at in a linear fashion as an ailment requiring treatment, but instead as a condition manifesting itself when the affected person interacts with family and society. For the first time, an Indian legislative framework upholds the right to confidentiality, right to free treatment for those below the poverty line, right to legal aid, right to live with dignity and the right to seek redressal in case of deficiency in treatment. The government is directed to set up Mental Health Authorities in all States and the Centre, with every mental healthcare institution and practitioner including clinical psychologists, specialist nurses, and psychiatric social workers requiring registration to plug-in any gaps in accountability.

Every insurer is obligated to provide appropriate cover for mental illness on the same basis as other “physical” illnesses. This will smoothen the road to accessibility and affordability for many. The Act stipulates provisions for “advance directives” by which the patient can choose/refuse the specific treatment they want to undergo. This comes as a significant departure from the earlier law of 1987 which did not recognize the decision-making capacity of a person suffering from mental illness. A Mental Health Review Board i.e. a quasi-judicial body will be constituted to protect the rights of persons with mental illness and manage the procedure of advance directives. However, the Board has been given discretionary power to dismiss a patient’s decision if these are made in a moment of incapacity which could be misused.

Suicide which was earlier a punishable offence under the Indian Penal Code has finally been decriminalised under the Act. This is a very positive development as it recognises the said action as symptomatic of an illness instead of choosing to incarcerate the patient. The Act seeks to impose a duty on the government to rehabilitate such people. The Act prohibits Electroconvulsive Therapy (ECT) without the use of muscle relaxants and anaesthesia. ECT will not be performed on minors except with the informed consent of the guardian or a competent institutional approval. Chaining of persons with psychological disabilities, subjecting him/her to seclusion or solitary confinement is forbidden. Physical restraints may only be used if necessary.

The provisions of the MHC Act (2017) makes for a progressive piece of legislation but as expected its success depends on implementation and empirical monitoring of ground realities. The biggest crippling factor of the MHC Act (2017) is that it creates obligations on the state for meeting various rights of patients without earmarking the resources required for meeting them. Lack of funding and unclear mapping of the allocation process is a critical deterrent in the successful implementation of this law.

Furthermore in 2005, the WHO published a Resource Book on mental health, human rights and legislation, including a checklist of 175 specific items that must be addressed in mental health legislation or policy. MHC Act (2017) is said to take heed of 96/175 (55.4%) of these standards. Including other domestic healthcare-related legislation, 118/175 (68.0%) of the standards are addressed in Indian law. Areas of low concordance includes rights of families and care-givers, principles of competence and guardianship, rights of non-protesting patients and application of involuntary community treatment. The poor state of basic infrastructure of course demands a substantial and more importantly a recurring financial support from the government.

National Health Policy 2017 envisages community-based mobilization to provide psychological support for strengthening mental health services in the country. Keeping a vigil watch on the ground, running awareness and sensitization campaigns and most importantly ensuring healthy and consistent financial flows to the system would be a right step in improving the state of mental health in India.

The article got originially published at Transfin.

Highest Ever Production by OVL

A photo taken on April 2, 2012 shows French energy giant Total's Elgin rig, 150 miles (240 kms) from Aberdeen in eastern Scotland, in the North Sea. Total plans to send a helicopter to inspect the platform in the next few days to ensure it is safe before beginning work to cap a well that has leaked explosive gas for more than a week, two industry sources close to the matter said on April 2. The French firm evacuated the Elgin rig off the Scottish coast on March 25 because of a gas leak which the company says is costing it 2.5 million USD (1.87 million euros) a day. AFP PHOTO / JONATHAN NACKSTRAND (Photo credit should read JONATHAN NACKSTRAND/AFP/Getty Images)
The ONGC Videsh Limited (OVL), the overseas arm of the Oil and Natural Gas Corporation Limited, with a global footprint in 17 countries is contributing significantly to India’s energy security needs.  The PSU has been facing a hit on its profitability due to a slump in crude oil prices and the challenging global scenario. However, despite all the challenges, the OVL under the visionary leadership of Petroleum and Natural Gas Minister Dharmendra Pradhan and the company Managing Director, NK Verma, recorded its highest ever production in 2016-17. In an exclusive interview to Bureaucracy Today, NK Verma while expressing full confidence in the operations and finances of the company, talks in detail about his vision, the challenges the OVL is facing and the transformative steps taken by the PSU under his leadership. The technocrat also throws light on the impact of the recent slump in the crude oil prices on the profitability of the OVL and what makes Russia so attractive for the PSU to do business.
Please tell us about the recent major achievements of ONGC Videsh Limited (OVL) under your leadership.
We (OVL) achieved an epochal milestone in the 2016-17 financial year. The OVL produced 12.803 MMT of Oil and Oil Equivalent Gas, the highest ever output achieved by ONGC Videsh in its history. This was achieved largely due to the seamless closure of the Vankorneft transaction, wherein we closed the additional 11% stake acquisition in October last year, This was after our initial 15% acquisition earlier in May. We strive to achieve even higher targets, and we are aiming to produce more than 14 MMTOE in the current fiscal.
Another event that ONGC Videsh can justifiably be proud of is the encouraging discovery made at Well Mariposa-1 in CPO-5 Block in Colombia. It is a significant exploratory success where every step of the way, in-house resources and team effort acted as the catalyst in the successful drilling and completion of this exploratory well.  It opens up new prospects in the region where we have other acreages within our ambit, and it also opens up new horizons for more such successes for the future. We are also currently drilling in the North Caspian in the quest to find hydrocarbons and hope to achieve success.
The international E&P environment is deeply stressed today since production cuts, bankruptcies, project deferrals, and investment uncertainty dog the industry. But we take quiet satisfaction in the fact that as far as ONGC Videsh is concerned, we did not lower our targets despite the plummeting oil prices. If anything, we have considered this to be an opportunity both to consolidate and grow inorganically as is evident from our recent Vankorneft acquisition, a deal that commenced and reached conclusion in a deeply volatile and uncertain industry environment.
What is your vision for the company?
ONGC Videsh has achieved phenomenal growth over this millennium, from 0.25 MMT in 2003 to 12.8 MMT last fiscal; and we are aiming at 14 MMTOE in the ongoing fiscal. From here, the story can only get better. The OVL has the asset base, It has the proven technical competence. It has the pan-global footprints, and the OVL has demonstrated the capabilities of an international company. Our focus now should be to leapfrog the growth chart and evolve the OVL into an international E&P major. ONGC Videsh will have a premier role in the growth of the ONGC Group in the coming years to boost oil and gas production, and for the nation it strives to achieve the Hon’ble Prime Minister’s vision of reducing oil imports by 10% by 2022. As the ONGC aspires to produce 130 MMT of oil by 2030, 60 MMTOE is projected to come from ONGC Videsh. Although steep growth is required to meet the target, we believe it is eminently achievable. But for this growth to be achieved, ONGC Videsh has to take a quantum leap in the scale of its operations, and evolve into a truly integrated oil and gas major. Internationally, we need to be present in all segments of the value chain. So this would be my vision for the company: To be an integrated energy company working ceaselessly for the energy security of the country.
What has been the impact of the recent slump in international crude oil prices on the profitability of the OVL?
The first point to understand here is that balance sheet erosion is an industry-wide phenomenon, and no company, whether an oil major, an oil-producing NOC , or a pure upstream E&P player, has escaped the same. The precipitous oil price decline started in June 2014 and deepened further in 2015, to finally culminate at its lowest point in more than a decade in January 2016. The decline has had the maximal impact on balance sheets. Despite the highly stressed and volatile environment, ONGC Videsh performed commendably by generating an operating profit in the 2015-16 fiscal. Our EBIDTA was about USD 1,074 Mn but as a responsible corporate entity, the OVL chose to write down the value in three of its assets post the oil price decline. We incurred a net loss which was a function of the impairments taken by us on these assets. However, excluding exceptional items pertaining to the impairment provision of around USD 720 million, the OVL earned a profit before exceptional items and a tax of USD 114 Mn in financial year 2015-16.. However, even in this highly stressed and volatile environment, ONGC Videsh performed commendably by moving back into the black in 2016-17. We can take justifiable pride in the fact that our concerted efforts led to company moving back into profit the last fiscal.
What are the challenges that the OVL is facing and what are the strategies to overcome them?
The challenges continue to be daunting.  The spectre of low oil prices continues to haunt the industry for three years since the decline registered on the radar of the commodities landscape. If anything, this has driven home the realization that we are living in increasingly tumultuous times, and the old paradigms of business no longer hold true in a rapidly evolving landscape. On the one hand the world is facing the startling reality of the increasing irrelevance of the OPEC in influencing oil prices and on the other trillions of dollars are being transferred from oil producing countries to oil consuming countries. The benefits for India in terms of foreign exchange reserves and the balance of payments position have been reiterated by experts in multiple fora and are well documented and understood. Clearly since the dawn of the oil age, the geo-economic balance of power has been shifting. Changes in automotive technology, the fight against climate change and the explosion in renewable alternatives are dampening the world’s appetite for crude. Speculation in the E&P industry has shifted from the so-called ‘peak oil’ to ‘peak demand’ when the reserves considered valuable assets today wind up being left in the ground. Riding on the more availability and global mobility of LNG, countries are moving towards the gas-based economy to harness the greening effect of gas usage.
The OVL is seized of these challenges, and it is taking a close look at its business seeking optimization at every stage. ONGC Videsh’s bouquet of assets is a prudent mix of operated, non-operated and jointly-managed assets. We have also achieved a judicious mix of exploratory, development and producing assets in our portfolio, spread across the gamut of offshore and onshore, deep-water, tight oil and conventional oil, etc. To that extent, our portfolio has the level of diversification that we strive for. Having said that, we also strive for an optimum level of geographical diversification. With that in mind, the focus areas of the OVL are Africa, Russia and Latin America. As an E&P company first and foremost, the OVL maintains its focus on E&P acquisitions, while keeping a close eye on the non-conventional sector. Fossil fuels, built on the platform of mobility, provide the requisite logistical fungibility that is essential for energy security from overseas operations. Non-conventional energy is the growth area for the future and the OVL is looking at options to diversify into it.
The OVL is often criticized for relying too much on Russia. In fact, in 2015-16, around 30 percent of the OVL’s production came from that country. So what makes Russia so attractive for the OVL?
Since the sixties, Russia has always been close to the ONGC’s heart with its active support in the evolution of India’s E&P industry, which was reinforced with the ONGC Videsh’s entry into Sakhalin-I. At the turn of the millennium, ONGC Videsh made its first major foray into the world-class E&P project field with its acquisition of 20% stake in the Sakhalin-1 project. A deal was valued at $1.2 billion  and the total cost of its acquisition crossed  $2 billion by all accounts. In 2001, it was the first major overseas venture of this magnitude  by an Indian company not only for the Indian oil & gas industry, but for entire corporate India. Our strategic relationship with Russia, and its national oil company, Rosneft, has only strengthened over the years, and finally culminated in our acquisition of a 15% stake, followed by an additional 11% stake, in Vankorneft, the licence holder of the prestigious Vankor field in Western Siberia. The Vankor is the Rosneft’s (and Russia’s) second largest field in terms of production and accounts for 4% of Russian crude oil output.
The present transaction only strengthens ONGC Videsh’s stated strategic objective of adding high quality international assets to its existing E&P portfolio. This acquisition also has significant strategic importance to India, both in terms of augmentation of its energy security and adding a new dimension to the relationship between the Rosneft and ONGC Videsh besides further strengthening the cooperation between the two countries.
As far as the exposure to Russia is concerned, let us examine what the options are for a resource-seeking NOC such as ours. The whole world comprises opportunities and risks. In some countries there is a very low geological risk, but a very high surface risk, while in some other countries the situation is stable, but they have a high geological risk. Then some countries are balanced. It is a mixture that is very difficult to fully optimize.
For example, North America provides a very stable fiscal and legal regime, but now with the advent of shale oil and the dynamics of costs and operational efficiency and all attendant operational challenges, companies are having problems. The geological risk is not high, but the operation cost is very high. In Mozambique, on the other hand, we are sitting on humongous reserves in placid offshore waters, but the surface challenges on infrastructure, plus the evolving regulatory and legal regimes, provide their own set of dynamics that require a calibrated approach. Much of Africa has these challenges of virgin and evolving regulatory regimes, which can actually translate into high-risk barrels.  The third set of reserves lie within the CIS, of which Russia is the largest. The acquisition cost per barrel here is still among the lowest in the world, and we have an additional advantage of excellent G2G relations as also our strategic relationship with the Rosneft. And it is our considered opinion that the Russian regulatory regime provides much more stability and continuity than other countries which have such humongous reserves.
The OVL has set a production target of 60 million tonnes of oil and gas by 2030. How confident are you about achieving this goal? What is your strategy to meet the challenge?

The immediate target of the OVL has been growth and more growth. It is to achieve the target of doubling the OVL production of 8.92 MMT, achieved in the 2016 fiscal, by 2018-2020. Our recent acquisition of a 26% stake in the Vankor was geared towards achieving that target and we managed to reach 12.8 MMT in the 2017 fiscal as a result of this acquisition. We are hoping to cross 14 MMTOE in the ongoing fiscal, making about a 70% jump in the last four years which, however, still leaves a gap of around four MMT. This only goes to show that the challenges are huge. The OVL actively scouting for opportunities for inorganic growth, while striving to put our development asset into production.  Primary among these are our projects in Mozambique, Venezuela and Iran. It would be worthwhile to mention here that 2P reserves presently stand at 704 MMTOE, while till date our company has produced a little over 100 MTOE, which led our phenomenal growth from 0.25 MMT in 2003 to 12.8 MMT presently. These massive reserves provide us with the benchmarks for production, and we are confident of putting them into production as planned. Our investment and capex allocations will be driven primarily on these opportunities, apart from the ongoing capex and opex commitments in our existing projects. It’s worthwhile to mention that we did not lower or rationalize our targets despite the plummeting oil prices. The OVL advantage in comparison to other upstream players is that we are very lean and we have strong backing from our parent company, ONGC. Additionally, we have a strong government mandate for oil and gas acquisitions and we are a partner of choice for host governments and NOCs.

What is the global scenario as far as acquisitions are concerned?
The industry is witnessing the early greenshoots of revival.  This year has witnessed a marked uptick in M&A activity compared to the dismal scenario since the past couple of years. Woodmac expects global upstream investment to touch US$410 billion this year, up 3% on 2016.  That percentage growth is not much, and it is still 40% below the 2014 high but at least investment spending is turning the corner and is headed in the right direction. Another heartening development is that FIDs have jumped sharply in 2017. The low point of the cycle was 2015 when operators took FIDs on just eight projects with reserves over 50 mmboe, down from the typical 40 or so project sanctions in the prior few years. Nine months into 2017, the figure by industry trackers is 18 FIDs and counting, well up on the 12 in 2016. The forecast is 20-25 projects for the year, holding a total of 10 bnboe of reserves. Prices have also moved decisively towards the seminal figure of $60, and all indications are that this is a fundamental demand-supply predicated movement which portends a decisive turnaround from the preceding years. In such a positive environment, we can assume global M&A activity to pick up substantially, while eschewing euphoria in valuations of the earlier years and being based more on fundamental assessments. Along with the global trends, perhaps it’s time to look beyond oil and gas to forge ONGC Videsh into an international energy company rather than just an E&P operator or producer. We are in the process of stakeholder consultations and keeping our options open to look forward to new forays into the evolving energy space of renewables to augment our contribution towards the energy security of India in the coming years.

The article was originally published at Bureaucracy Today news magazine.

Mahindra & Mahindra: The shining EV star of India!


Mahindra & Mahindra (M&M) has emerged as one of the leading market players in the Electric-Vehicle (EV) field. E-Vehicle has become the buzzing word in the auto industry following the statement of Union Transport Minister Nitin Gadkari that India plans to switch “one hundred percent” to Electric-Vehicles by 2030.

Ambitious targets

The Mahindra group entered the Indian electric vehicle market only in 2001 with the launch of its Reva model which was revamped and rebranded in 2013 as e2o. Since then, the company has made remarkable progress in the electric-vehicle segment with the back to back launches of new models like e-Verito and e-alpha. M&M was successful in sharing the order of 500 E-Vehicles with Tata Motors which was placed by Energy Efficiency Services Limited (EESL) by slashing the prices of its model e-Verito to make it competitive to Tata’s e-Tigor.

Pawan Goenka, the Managing Director of Mahindra & Mahindra, tagged the target as “aspirational”. He added that such clarity of objective and a set time-frame demonstrates the government’s resolve on deliverance. Further, the company has announced that it will invest between Rs 3,500 crore and Rs 4,000 crore in the next five years to ramp up its electric vehicles division, which is nearly eight times as much as it has put into this business so far.

Towards the goals

Recently, the group has launched an e-rickshaw, the E-Alpha, which is powered by a 120 Ah battery and can travel up to 85 km on a single charge with a top speed of 25 Kmph. The e-alpha mini model, which is a five-seater, has been priced at Rs 1.12 lakh ex-showroom Delhi. Mahindra is currently offering a two years vehicle warranty, low down payment, and attractive EMI, along with one free battery replacement offer on the model, which is soon going to be launched in other metro cities of India.

e-Verito, a four-wheeler model of Mahindra in the electric sedan segment, is powered by a 3-phase 72V induction motor, and a 200Ah Li-ion battery. The model is priced at Rs. 9.5-11 with a top speed of 86 Kmph claimed by Mahindra. The Mahindra Electric Verito is a 100 percent zero emission, green vehicle, and can travel for 110 km on a single charge that takes around one hour and 45 minutes. Also, the model offers clutch-free driving with a running cost of just Rs. 1.15 per km, which makes it an attractive choice to the consumer.

Teaming up for better results

In a major development, Mahindra and Mahindra Ltd have recently announced a partnership with Ford Motor Co. to cooperate in areas, including driverless and electric cars. Anand Mahindra, the group chairman, has termed the EV sector as the single largest opportunity to the auto industry for the next couple of decades. The Mahindra Group has recently announced plans to enter the Indian cab aggregator market against competitors like Uber and Ola. The fact that electric vehicles will reduce the cost of travel, especially for taxis, would work as an added advantage in favour of Mahindra, as it plans to enter into the burgeoning ride-hailing space with its fleet of electric vehicle cars. Notably, Mahindra Electric, a subsidiary of Mahindra & Mahindra Ltd. has already announced that it will begin sales of electric buses in 2018. It has also struck up a partnership with Ola to provide it with 100 of their e2o hatchbacks.

A clearer policy thrust of the government, supportive tax policies, thriving domestic and global markets for EVs, developing electric-infrastructure, and addressing serious environmental concerns, all these factors justify the aggressive stand taken by the Mahindra group in the E-vehicle space. It places its future on one of the brightest spots of the rapidly growing global EV industry.

The article was originally published at Qrius.

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