The State-owned oil giant Indian Oil Corporation (IOC) — India’s first Fortune 500 company — has sought permission from its shareholders to mortgage its assets, if necessary, to raise loans to remain afloat. In another related development, the State-owned banking giant, the State Bank of India (SBI), decided to freeze loans for buying tractor equipment but had to backtrack following government pressure. Both these instances exemplify the truth of the aphorism: there is nothing called a free lunch. With international oil prices surging to record levels of $135 a barrel, the government’s decision to insulate the urban middle-class from inflation has a price. And that is being borne by the likes of the IOC that are taking a big hit and are awash in red.
In an election season, the UPA government is dilly-dallying in effecting a hike in petro-products like petrol, diesel, kerosene and LPG to better reflect global oil prices. Under these circumstances, the financial hemorrhage of oil majors arising from the insulation of domestic retail prices from international prices continues unabated. The IOC is losing Rs 2.7 billion a day due to under-recoveries from motor and kitchen fuel sales. The government provides bonds to oil marketing companies that cover only half these losses. Is it then terribly surprising that they decided to stop giving new cooking gas connection to cut their losses? Is it really surprising that the IOC now contemplates an asset mortgage to raise loans to keep it going?
The SBI’s decision to halt tractor loans to check overdues also falls in the same league as the IOC’s. This bank is the leading financier of farm machinery business, accounting for 25 per cent of all tractors sold in the country with an exposure of Rs 7,000 crore. The SBI took this bold decision as its non-performing assets (NPAs) had shot up in the March quarter as people simply stopped paying farm loans after the UPA government’s Rs 60,000 crore loan waiver scheme announced in the Union Budget for 2008-09. These were basically the compulsions behind its decision to stop fresh credit in the farm machinery business just before the kharif or summer season is about to kick in. But thanks to politics in command, it has had to back down from its resolve.
Just to reiterate: free lunches don’t exist. While the government has its political-economy compulsions to insulate the urban middle class from inflation and adopt pro-farmer stances in an election season, the brunt of adjustment is being borne by State-owned companies like the IOC and the SBI. Fostering such State-owned entities forms part of the UPA government’s commitment under the National Common Minimum Programme. While the Left exerts tremendous pressure on the government to safeguard these entities, there is nary a thought on how the political fixation of oil prices can financially ruin them. Or that electoral populism can strain the finances of its leading bank.
{{/usCountry}}Just to reiterate: free lunches don’t exist. While the government has its political-economy compulsions to insulate the urban middle class from inflation and adopt pro-farmer stances in an election season, the brunt of adjustment is being borne by State-owned companies like the IOC and the SBI. Fostering such State-owned entities forms part of the UPA government’s commitment under the National Common Minimum Programme. While the Left exerts tremendous pressure on the government to safeguard these entities, there is nary a thought on how the political fixation of oil prices can financially ruin them. Or that electoral populism can strain the finances of its leading bank.
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