Challenging Capitalism at Wall Street

By C P Chandrasekhar

A display of anger at the unjust American economic system, which began mid-September in Zuccotti Park, in New York, has turned into an international protest movement. The protest has named itself “Occupy Wall Street”, which speaks of what it plans to do and not what it represents. Though termed a movement by many, the protest is amorphous in nature, with no well-defined objections, no formal membership, and no leadership. In sum, it is a spontaneous display of anger for diverse economic reasons reflected in its slogans—“banker” fraud that blights economies, immoral bailouts that restore Wall Street to profit but show no concern for Main Street, foreclosures that render many homeless, persisting unemployment and gross inequality, to name a few.

Beneath these slogans lies the implicit rejection of a system and a development trajectory that are proving to be the means for a massive state-sponsored redistribution of income and wealth in the favour of the few that represent the Capital of capitalism today. But the protest as yet offers no clear-cut programme of what needs to be done or where we need to go. That and its unorganised nature is its weakness. But its strength lies in the fact that it has moved far beyond Wall Street and the US, increasingly taking the shape of a movement.

The protest was possibly triggered by an online call posted by the anti-consumerist group Adbusters. When It began, the “Occupy Wall Street” movement was seen as the activity of a small minority of the “disgruntled”, inspired, perhaps, by the “Arab spring”, that would soon dissipate and disappear. The media largely chose to ignore it. It was noticed, if at all, for its nuisance value. But over time the movement not only gathered substantial support in its initial location, but has spread to a number of other cities in the US and abroad—Toronto, Frankfurt, Rome, Hong Kong, Sydney, Tokyo and elsewhere. Moreover, while attracting initially sections like the unemployed burdened with educational loans, the protest is now finding support among the middle class, the workers’ unions and intellectuals. This spread and the movement’s persistence, despite its spontaneity, is its strength. Not surprisingly then, the world has been forced to sit up and take notice, including corporate capital and the media it controls, sections of which are subjecting the protestors to the worst forms of verbal aggression and abuse. But even when it is forced to take note, the media chooses to focus on the stray violent incidents in what has been a more-than-a-month long, widespread and largely peaceful protest. As has been noted by many sympathetic analysts, the corporate media’s focus on violence is an attempt to discredit the movement, which seems to be garnering far more support than expected.

POSITIVE

FEATURES

What is disconcerting to the ruling elite is the movement’s slogans: they question the legitimacy of finance capital and the unjustifiably huge compensation its functionaries command for activities that fatten the rich and impoverish the rest; they recognise and condemn the gross inequality that has to come to characterise capitalism, with increases in social income being diverted to the top one per cent with much accruing to the top 0.1 per cent; they rail against the huge post-crisis bail outs that have been offered to financial firms and “the bankers” while those trapped in mortgage defaults and rendered unemployed have received no support; they declare unacceptable the bizarre policy of granting huge tax concessions to the financial oligarchs, the rentiers and corporate capital even when public health interventions and pensions are curtailed, subsidies are withdrawn and basic social services are privatised on the grounds of budgetary constraints; and they question the acceptance of unemployment on the grounds that it is the unavoidable plight of an “inadequate few”.

There are a number of positive features of these slogans that need noting. They express deep resentment over the “outcomes” of the capitalist dynamic, unwilling to accept these as being the inevitable consequence of the functioning of the only available economic and social order for modern day societies. They dismiss the legitimisation of inequality and the “winner-takes-all” syndrome characteristic of current day capitalism with the argument that in an “efficient” economic order the successful acquisition of wealth justifies itself, independent of how that wealth is acquired. And they object not to the presence and activity of the State (as the Tea Party movement does) but to its capture by the corporations and the “super-rich”, that transformed the welfare State that characterised the “Golden Age” of post-Second World War capitalism into a “corporate welfare state” as Nobel Prize winner Joseph Stiglitz has described it.

These features notwithstanding, there are some who have expressed disappointment over what are seen as the limitations of an “uprising” rather than a movement. These limitations are many. To start with, the anger and opposition of this rebellion is not against capitalism as a system, characterised by anarchy and crises, but against its outcomes that in a situation of a prolonged crisis has come to be felt by the populace in a way that has not happened in a long time. That anger, as of now, reflects despair more than hope.

Note that the movement arose not when or just after the crisis occurred. There was enough evidence then, often supported with fact and opinion from the establishment, that the system was rotten to the core. Yet, the protest occurred close to four years after the crises, by which time those who were being railed against and were being threatened with action by the State for their acts of commission and omission had captured the official apparatus. Using the argument that if they were not saved the system would disintegrate, they have managed to benefit from an unprecedented bail-out of the culpable few at the expense of the still-distressed majority. It was when the full import of this gigantic confidence trick was recognised that the “Occupy” movement began.

DEEPER

INADEQUACY

A second cause for disappointment among some and satisfaction among many is that there is no theoretical questioning of capitalism as a system based on private property. The attack on property is physical, sporadic and symbolic. Any notion that the “anarchy” that characterises capitalism, leading to periodic crises and persisting unemployment, arises because it is a system based on private property and driven by atomistic decision making is missing. As critical analysts of a socialist persuasion have noted, it is because individual capitalists take investment decisions with no knowledge of the unfolding future and only vague guesses of the decisions that would be taken by other capitalists, that crises of the kind that capitalism experienced recently and in the 1930s occur. Recognising this would require transcending capitalism in some form in order to resolve the problems that afflict it.

This leads to a deeper inadequacy that afflicts not just this movement but a range of protests, including those subsumed under the broad label of the “Arab Spring”. With no express desire to transcend the system, there is no attempt by their constituents to define the contours of the alternative society that would be needed to overcome both the crisis-ridden nature and the outcomes characteristic of capitalism. If this does not change, the ongoing mobilisation may temporarily delegitimise finance and ensure a modicum of justice in the way the State intervenes in society, but it would not ensure the return to an era when capitalism itself was under challenge. 

These grounds for scepticism from a radical perspective notwithstanding, the political advance implicit in the Occupy Wall Street movement and its offshoots needs recognition. Note that these movements, even if inspired by the Arab Spring, occur not in the less developed or the underdeveloped countries of the world but in the developed. And within the developed, even if the first signs of the rebellion were seen in countries like Spain, what is remarkable is that in this phase the protest is centred more on the advanced metropolitan centres of capitalism particularly the centres of global finance, New York and London.

Advanced capitalism has seen a substantial weakening of mass protest, partly because the workers’ unions that launched or strengthened such protests have been substantially weakened. The productive sector that assembled a collective of workers has shrunk and insecure employment and substantial unemployment has reduced the proportion of organised and unionised workers in the labour force. While this was occurring as a result of the internal restructuring of capitalism, there were two important developments that contributed to the erosion of the base for protest.

The first was the launch, in response to the crisis of the 1960s, of a conscious project to consolidate capitalist control, represented by the Reagan-Thatcher onslaught on the working class. The defeat of the coalminers striking against closures and job losses inEngland under Margaret Thatcher epitomised this new phase of class consolidation. This “political” tendency was facilitated by the ideological shift to neoliberalism that allowed the economic borders of less developed countries with substantial surplus labour, such as China and India, to be opened up. The resulting access that imperialist capital had to the world’s combined and cheap, reserve army of labour to an extent “sealed the fate” of the working class in the developed countries. With capital choosing to relocate production of goods and even services to these less developed locations, the near full employment that gave developed country workers their strength was substantially undermined.

A second ideological blow was struck with the collapse of actually existing socialism in the Soviet Union and Eastern Europe and the transition to a “socialist market economy” in China, with features typical of the more “anarchic” capitalist societies. With the actually existing versions of economies attempting a transition to a more egalitarian and humane alternative to capitalism having disappeared or lost their legitimacy, the argument that there was no alternative gained ground. Apologists even declared the “end of history”.

This, after the interlude of protest in the mid- to late-1960s, led some analysts to believe that the focus of anti-capitalist protest had shifted decisively to the “Third World”. Given that background any sign of a return to mass protest in developed capitalist societies is indeed a whiff of socialist air. What is particularly encouraging in the Occupy Wall Street version is the fact that the movement’s protest is directed at capital in general and finance capital in particular. This compares with a substantial section of “civil society” protest, which is direct at the State and not at capital. The State too is being questioned now, but more because of the support it lends to capital, rather than for just being there, as is true of the right-wing Tea Party movement.

This “anti-capitalist” flavour arises because of the circumstances that have given rise to this movement. Capitalism is indeed facing one of its worst crises over the last century, barring of course the Great Depression. But as noted these protests did not arise when the crisis broke. Rather they come four years after the onset of the recent crisis, when the optimism that the State’s massive bail-out and stimulus effort would stall and reverse the economic decline is disappearing. Rather the expectation is that the crisis is likely to intensify. Thus, the protest has occurred when it appears that capitalism is losing its ability to restructure and reconstitute itself. It is the resulting loss of economic legitimacy that gives the protest an anti-capitalist character.

Needless to say, this alone is not enough. If this occurrence and spread of a primarily anti-capitalist protest is to acquire strength to confront the might of finance capital and the State it controls, if it is actually to undermine the power of the Wall Street-Treasury nexus it must find greater cohesion, with an organisational structure and a programme that goes beyond anger against the unjust system that prevails and the condition to which it has reduced the majority. Or it must galvanise sections within the prevailing left-of-centre formations strengthening their hands and serving as a check against the return to a degenerate form of social democracy. If that does not happen the movement may dissipate and even be exploited by those whose interests lie elsewhere. The developments in Egypt where fundamentalism and a sinister section of the military are attempting to pick up where the uprising left off is an indicator of the dangers ahead. But just as the Occupy Wall Street protest has surprised the world by its growing size and spread, it may also spring a surprise by evolving in directions that mount a challenge to the system.  

CPI(M) to field a young blood, SFI leader against Bakshi

The CPI(M) on Thursday decided to field its student wing general secretary Ritabrata Banerjee against Trinamool's Subrata Bakshi in the Kolkata South Lok Sabha bypolls to be held on November 30. Mamata Banerjee had only a day before announced Bakshi's nomination from the seat which she held earlier.

The seat had fallen vacant after Mamata resigned from Lok Sabha after winning the Bhowanipore assmebly bypolls on September 28.

Thirty one-year-old Ritabrata, a post graduate in English, became a party wholetimer in 2005. He was drawn to the Leftist ideology as a schoolgoer in South Point school. In an interaction with the media, Ritabrata said, "This is a battle of ideology. There is nothing like weak and strong in politics. People are supreme and they alone will decide who will win or loose." He said he would draw people's attention to the spiralling price rise and hike in petrol products while the UPA-II's most important ally - Trinamool Congress - chose to remain mum. "But they indeed can influence the Centre as is evident from the scrapping of the Teesta water treaty and land bill," he said.

DELHI CM MUST GO

THE Delhi State Committee of the CPI(M), in a press statement on August 6 demanded the immediate resignation of Delhi chief minister Sheila Dikshit over the revelations made by the audit report on the Commonwealth games by the CAG, submitted to the parliament yesterday.

The CAG report made a scathing indictment of the PMO, the CWG OC and the Delhi government, particularly the CM, by confirming what was known already that the “Modus operandi observed over the entire gamut of activities leading to the conduct of the games was: inexplicable delays, artificial or consciously created sense of urgency, contracting procedures became a very obvious casualty, eliminating competition led to huge avoidable extra burden on the exchequer.”

The irregularities found by the CAG pertaining to the Delhi government involve upgradation of street lighting, streetscaping and beautification of roads, road signage, two bridges (one of which collapsed), restoration of Connaught Place, communication services, bus parking opposite the Millennium Park, and improper awards of contracts at the behest of CM. Extra expenditure or escalation of costs involve over Rs 900 crores.

The CAG report confirmed what was earlier revealed by the Shunglu Committee report which was shamelessly trashed by the Delhi government. The Delhi CM had also tried to deflect probe into the Delhi government by saying the evidence pointed to corruption only by the OC of the CWG and tried to stonewall the CBI investigation into the activities of the PWD minister.

Following the submission of the CAG report to parliament, the Delhi CM has no moral right to remain in office. Her continuance in office will only inhibit a proper investigation and booking of the culprits. The CPI(M) demands the immediate resignation of the Delhi CM and the filing of FIRs against all those who are responsible for the enormous loot of public funds and losses to the exchequer. 

‘Peasants’ Movement Will Be Stepped Up in West Bengal’

LEFT peasants’ organisations in West Bengal will launch a statewide movement to defend the rights and livelihood of the peasants. They will build up the movement with the support of the trade unions, students, youth and women organisations.

West Bengal Provincial Kisan Sabha (Harekrishna Konar Memorial Bhavan), Agragami Kisan Sabha, Sanjukta Kisan Sabha and West Bengal Provincial Kisan Sabha( BB Ganguly Street) have decided to launch a powerful joint movement. Two conventions will be held on September 11 and 14 respectively in Kolkata and Siliguri to highlight the plight of the peasants in the state.

Briefing about the outline of the movement, Madan Ghosh, president of West Bengal Provincial Kisan Sabha (Harekrishna Konar Memorial Bhavan), said the peasants were very seriously affected by neo-liberal policies of centre. The cost of agricultural inputs have increased manifold. The decontrol policy pursued by the centre has resulted in increased price of fertilizer, seeds, pesticides. The diesel, needed for irrigation, has become too costly. In such a situation the peasants are not getting remunerative prices for their produces. For example, the jute producers are not getting enough price to meet their costs. There is a threat of decreasing price for paddy too.

The condition of peasants in West Bengal has turned worse with Trinamool- Congress alliance coming to power in the state. One of the major crisis that has developed is the decreasing number of workdays for agricultural workers. The rural employment programmes, including MNREGA, have been halted in large areas.

Madan Ghosh also described the attacks on legal rights of the peasants, unleashed in the last three months. The gains of the land reforms are now being snatched away. Thirty activists of the Left parties have been murdered, most of them peasants. More than 14,000 rural people have been forced to leave their villages. In a horrible operation of collecting so-called ‘fines’ (which actually is extortion), thousands of villagers are being forced to pay huge sums to Trinamool gangs. An amount of more than Rs 2 crore has been collected till date and many such incidents are as yet unreported. More than one thousand acres of tenancy land has been forcefully grabbed and 4700 title holders have been evicted from 2700 acres of land. More than 14,000 peasants have been evicted from legal operational control of 3490 acres of land and 3710 share croppers have been driven out from 1587 acres.

Another new feature of the political attack is destabilising the elected panchayat system in the state. Kishan Sabha leaders alleged that elected panchayat members were not being allowed to function in many places. In some districts, almost entire panchayat functioning has been either stopped or forcefully usurped by unelected Trinamool leaders. They were forcing the local administration to follow their dictates. This is a full-fledged attack on decentralisation of power in West Bengal, so fondly nurtured by the rural people.

The peasants will not tolerate such attacks on their rights and livelihood silently, asserted  Kisan Sabha leaders. The movement will be stepped up phase by phase.

'Corruption: PM Should Own Up Responsibility'

CPI(M) CENTRAL COMMITTEE MEETING

THE CPI(M) has demanded that prime minister Manmohan Singh must own up responsibility for the unprecedented scams taking place in the UPA-2 government.  It questioned the prime minister for not acting on any written documents submitted, warning about the scams (from 2G to KG) to prevent the scams.

Addressing a press conference in Kolkata on August 7, 2011 after the conclusion of the two day Central Committee meeting, CPI(M) general secretary Prakash Karat made this demand. Asked by reporters whether it meant the CPI(M) was demanding the resignation of the prime minister, Karat said “As he is an honourable man, we hope he will come to the conclusion that he is presiding over the most corrupt government in independent India and consequently own up responsibility”.

There was corruption in the earlier governments; the NDA government was also most corrupt. But this UPA-2 government has beaten all records as far as corruption was concerned, felt Karat. The CAG was indicting the government at various levels in various scams. He said prime minister's personal integrity was not the issue but the fact that he is presiding over the most corrupt government is the main issue. Karat felt that normally with the indictment by CAG, it was expected that the Delhi chief minister would resign. But that has not happened.

Regarding the resignation of BJP chief minister in Karnataka, B S Yedyurappa, Karat said it was not sufficient and all those involved in the loot of mineral resources in the state must be prosecuted.

PRICE RISE:

Karat criticised the government's response to the raging inflation in the country, particularly the finance minister's expression of helplessness in the debate on the issue in parliament. He explained why the Left did not agree to the resolution on price rise in parliament that had both the government and the main opposition party agreeing on the same content. He said the resolution avoided indicting the government as also not fixing the responsibility for the price rise. Therefore the Left voted against the resolution in the parliament.

BENGAL VIOLENCE:

Post assembly elections, 30 CPI(M) activists have been killed, hundreds of Party offices captured while thousands have been forced to flee from their homes. Karat said now the attempt seems to be to target panchayats. Many elected panchayat functionaries are not being allowed to attend to duties. Despite drawing attention of the chief minister to these happenings, the state government is ignoring it. “These attacks constitute a deliberate attempt to suppress the rights and functioning of the opposition in the state, particularly the CPI(M). This is a threat to democracy in general in the country. We have campaigned against these attacks all over the country. But since the attacks continue to happen, the CC has decided to continue our nationwide solidarity campaign”, said Karat.

As part of this campaign, on August 25, there would be demonstrations in all state capitals protesting the attacks and expressing solidarity. The central leaders will participate in the dharna in New Delhi on that day. There would be a central demonstration in Kolkata also on August 12.

PARTY CONGRESS:

The CC has finalised the dates of the 20^th Party Congress to be held in Kozhikode from April 4-9, 2012. It has also decided on the number of delegates to the Congress. The political resolution of the congress would be released by January of next year, he said.

Global Financial Turbulence: India Must Draw Proper Lessons

THE turbulence that has gripped the world’s financial markets has, once again, sharply illustrated the fact that global capitalism, a system based on the exploitation of man by man and nation by nation, can never be crisis free.  However, as repeatedly underlined in these columns, irrespective of the intensity of the crisis, capitalism never collapses on its own.  It needs to be overthrown. This requires the strength of the working class leading all exploiting classes through the sharpening of class struggle to lead the revolutionary transformation to overthrow capitalism. In the meanwhile, capitalism emerges from its self-created crisis by further intensifying exploitation. This is precisely what is happening today.

Following the unprecedented downgrading of US sovereign long term credit rating by Standard & Poor from AAA level, the world stock exchanges went into a tailspin.  In the US, the Dow Jones industrial average fell by 634 points or 5.6 per cent.  The Nikkei inTokyo was down 3.7 per cent while the Kospi in Seoul fell 6.2 per cent.  Australia saw a fall of 2.9 per cent.  The German index, the Dax, dropped 5 per cent and has lost 21 per cent of its value since May this year.  Reflecting this, major banks saw the biggest declines in their stocks.  Bank of America fell by 20 per cent, Citi Group fell by 16 per cent, Morgan Stanley dropped by 14 per cent, J P Morgan fell by 9 per cent and Goldman Sachs fell by 6 per cent. The Standard & Poor’s 500 stock index has lost 16.8 per cent in the last three weeks.  Some stock exchanges, including our sensex, have, since, shown some improvement. This, however, may only be transitory and, in any case, such fluctuations are the reflection of the current turbulence.

These developments have virtually generated panic with the London Economist predicting a double-dip global recession led by theUSA.  Last week alone saw $ 2.5 trillion wiped off from investor’s wealth.  The sensex in India lost over Rs 4 lakh crores in the last four trading sessions. The simultaneous sovereign credit crisis in the Eurozone has seen the virtual insolvency of Greece, Ireland andPortugal, who had to be bailed out by huge packages. The crisis is now threatening Spain and Italy and is unlikely to stop there. 

However, it will be wrong to characterise these developments as a new phase of the global economic crisis. In a sense this is a continuation of the financial crisis that began in 2007 leading up to a recession. This was only to be expected given the manner in which global capitalism sought to overcome the crisis that began in 2007. 

By undertaking huge and unprecedented bailout packages for those very corporates who, in the first place, caused the financial meltdown, developed countries incurred huge amounts of debts surpassing their GDPs.  Global capitalism sought to overcome the crisis by converting corporate insolvencies into sovereign insolvencies.  This, in turn, has intensified the crisis today plunging the world economy into a state of uncertainty. 

The Special Inspector General for the US government’s financial bailout programmes, created to serve as an auditor of the federal bailout, in a prepared testimony delivered to the US Congress House oversight committee says, “Since the onset of the financial crisis in 2007, the federal government, through many agencies, has implemented dozens of programmes that are broadly designed to support the economy and the financial system.  The total potential federal government support could reach upto $ 23.7 trillion.” Compare this with USA’s GDP which is just over $ 14 trillion.  The US treasury spokesman, however, denies the veracity of this figure.

The truth, however, is that as of May 16 this year, the total US debt was pegged at $ 14.3 trillion.  Now (as noted in Prabhat Patnaik’s article last week) the USA has an anachronistic law, adopted in 1917 that puts a ceiling on the magnitude of debt in absolute terms.  This is unlike in Europe or in India where the size of the fiscal deficit (different from debt) is fixed as a percentage of the GDP. This ceiling, however, was routinely revised upwards in US history.  Given the current debt crisis, it was presumed that the tradition of this routine will continue.  However, this was not to be. 

The Republicans whose concurrence was essential to raise the ceiling demanded their pound of flesh. While insisting that the tax benefits for the rich that began during the George Bush era be continued, the Republicans put a condition for agreeing to increase the debt ceiling only if severe cuts were effected in expenditures that were essentially aimed at benefiting the poor and the needy such as Medicare.

Similar is the logic of the sovereign bailout packages offered by the IMF and the EU in the Eurozone.  Countries like Greece had to undertake  massive `austerity measures’  to cut expenditures. This has imposed an unprecedented burden on the working people, whose remunerations, amongst others, have been drastically cut. During the last two years, the popular protests in Greece have seen 17 general strikes nationwide.  Germany, widely seen as the economic powerhouse of the European Union and expected to pull other Eurozone countries out of crisis is itself showing signs of an economic slowdown. Its index of manufacturing activity dropped to 52 in July, the lowest level since October 2009. This is the third consecutive month of decline.  Analysts have said that the main source of worry for Germany is that the “sources of domestic demand are not manifesting itself”.

In other words, what is happening is the following: The capitalist State mobilises resources for huge bailout packages. In the process, it accumulates massive sovereign debt. The burden of this debt is transferred on to the shoulders of the working people through massive cuts in welfare and social security expenditures. This is the logic of capitalism, pure and simple: maximize profits by intensifying exploitation.

In the USA, data from 2009 corporate tax returns shows that the estimates of corporate profits grew from 8.3 per cent to 10.8 per cent in 2010.  Corporate profits accounted for 14 per cent of the total national income in 2010, the highest ever recorded.  Corporate profits have been expanding for the last ten consecutive quarters. In the process, all corporates have accumulated mind boggling cash reserves.  Apple alone has cash reserves of $ 72 billion, more than the GDP of half the countries in world.  Microsoft and Google together have cash reserves of more than $ 100 billion.  Similar is the story with other corporates. At the other end of the spectrum, USA has today an unprecedented unemployment rate of close to 10 per cent. 

This situation is not confined only to turbulence in global finance.  It has laid the seeds of a more fundamental crisis.  As the burden of sovereign debt is passed on to the common people, their purchasing power correspondingly declines.  Combined with the growth of unemployment, this leads to a sharp contraction in domestic demand.  Further, this global crisis has drastically reduced global trade.  Germany, for instance, saw its exports fall sharply in June to a growth rate of only 3.1 per cent compared to 20.1 per cent in May.  Under such circumstances, the manner in which the USA has handled its debt ceiling issue impacts not only its domestic economy but the global economy. With the contraction of domestic demand in all the major economic powers, save China, the contraction of GDP in all these countries is inevitable.  This, in turn, will lead to a further contraction in governmental revenues, imposing further debt. The servicing of this would lead to imposing further burdens on the people.  This vicious cycle has been set in motion, imposing unprecedented burdens and misery on the people.  This would lead to many ugly manifestations of social tension like the spreading riots of loot in the UK.

For us in India, it is important to draw the correct lessons.  Clearly, what is required is to boost domestic demand as a means for achieving not only substantial growth but also arresting the growing economic inequalities.  This would mean that the process of foregoing legitimate tax revenues in the name of stimulus packages must be reversed.  During the last two years, over Rs 9.5 lakh crores was, thus, foregone according to the budget papers.   Instead, these huge amounts should be collected and utilised for massive public investments to build our much-needed infrastructure. This will generate high levels of employment and bolster domestic demand fuelling a sustainable growth trajectory.  Further, given the global financial turbulence, India must not be foolhardy to rush into `Gen next’ financial reforms.  In the first place, if India could protect itself from the devastating effects of the global meltdown in 2008, it was because the Left parties had prevailed upon UPA-I not to proceed with such financial reforms that were waiting to be legislated. Such wisdom must prevail to protect the Indian economy and people from being devastated by this global turbulence.

From 2G to KG: Where Does the Buck Stop?

by Dipankar Mukherjee

THE government of the day does not own the natural gas from Krishna Godavari (KG) basin. It is a natural resource owned by the people of this country and the government is only the trustee. National resources are owned by the doctrine of public trust as held by the Supreme Court. Natural gas being one of the main sources of energy for production of power and fertilizer, higher price of gas means higher tariff from gas-based power plants and higher fertilizer subsidy. That is why the recently revealed CAG’s draft report very correctly categorises the loss on KG gas scam as “unquantifiable” unlike 2G scam where the quantification is more specific to the tune of Rs 1.76 lakh crore.

But the most glaring difference between these two cases is on the issue of accountability i.e. where does the buck stop in the KG gas scam? Let the facts speak for themselves.

GENESIS OF

THE CASE

Till recently gas production and marketing was entirely with the public sector and pricing was administered. This was opened up for private participation in the nineties. The New Exploration and Licensing Policy (NELP) was announced in 1997 and M/s RIL was awarded the contract in the first NELP round for operating KG basin, which has India’s largest gas discoveries. A Production Sharing Contract (PSC) was signed between the government and RIL, the contractor, to govern gas production and pricing. The opening of gas production and marketing to private sector resulted in dual pricing of gas: administered and market-linked. Administered Price was through “Administrative Pricing Mechanism” (APM), which comprised actual cost of production plus reasonable profit, determined by the government. Before the production and marketing of KG basin started in 2009, the pre-dominant part was covered by APM @ 1.83 US dollar/unit. Before the marketing of KG gas, market pricing was done for relatively small volumes by private operators which were in the field before NELP.

CAG’s draft report has actually vindicated one of the two major charges leveled by CPI(M) MPs against government-RIL nexus on KG gas viz the “gold plating” or “manipulating the development cost of the gas fields”. The other charge was regarding high price of Reliance gas @ 4.2 USD/unit fixed up in 2007 by an Empowered Group of Ministers, in spite of the fact that actual production cost of KG gas was 1.43 USD/unit, the APM cost of ONGC was 1.83 USD and most shockingly RIL itself had quoted 2.34 USD/unit to M/s NTPC, the Maharatna PSU, in response to an international competitive bidding in 2004. This issue of pricing of gas has not been dealt in CAG’s Draft report.

CHRONOLOGY

OF EVENTS

                               I.            The question was first raised in Rajya Sabha on December 12, 2006 by CPI(M) MPs late Chittabrata Majumdar and Tapan Sen. The government informed that M/s RIL-Niko consortium had submitted a development plan that envisaged increase in production from 40 to 80 mmscmd and increase in expenditure from 2.47 billion dollar to 8.84 billion dollar. It was immediately pointed out in a letter dated 21.12.2006 to minister of petroleum and natural gas by Tapan Sen, MP and a member of Standing Committee of Petroleum and Natural Gas that the expenditure per unit of production, which should come down with the increase in production due to economy of scale, had been inflated abnormally, warranting immediate intervention by the government.

                            II.            This was followed up with three letters dated 25.01.2007, 27.02.2007 and 12.03.2007. On April 30, 2007 a detailed letter was again sent to minister of petroleum and natural gas with copy to the prime minister about the likely impact of gold plating on price of natural gas. On 15.05.2007 in reply to a question in parliament, it was informed by the government that the revised capital investment has been approved by DGH.

                         III.            Three more letters dated 11.6.2007, 4.7.2007 and 13.7.2007 were sent by Tapan Sen to the prime minister directly for his intervention to stop gold plating and ensure that the price of natural gas is not arbitrarily increased. No action was taken other than mere acknowledgement of letters.

                        IV.            The prime minister and his office swung into action only when the then chief minister of Andhra Pradesh late Y S Rajasekhar Reddy raised a number of issues on KG basin gas, including the gold plating and pricing of gas in a series of three letters dated 16^th, 29^th & 30^th June 2007. Some of issues raised by Reddy were common viz

a)     The proposed market discovery price of natural gas produced from KG basin @ $ 4.5 to $ 5/MMBTU would mean an increase of 256 per cent from the present APM prices.

b)    RIL has obtained bids from consumers with stranded assets and claim this to be market driven price forgetting its own bid to NTPC. This bid should be treated as market price because this price came through global competitive bidding.

c)     The government should monitor the investment by the contractors and have it scrutinized by independent and autonomous authority so that costs are not unduly inflated.

d)    It will also be necessary to constitute an independent autonomous regulatory authority to decide upstream pricing of gas.

                           V.            PM/PMO immediately referred these letters to a Committee of Secretaries headed by cabinet secretary which was assigned to give report on issues related to supply and pricing of gas.

This raises an immediate question – why did the PM/PMO selectively choose to refer only the three letters written by Andhra Pradesh CM to the Committee of Secretaries ignoring the letters from an MP, that too an MP who was a member of Parliamentary Standing Committee on Petroleum and Natural Gas? Were these letters that contained several facts and figures ignored only because he was neither a Congressman nor someone from civil society? Who is responsible for this sidelining of a people’s representative in parliament?

REPORT OF THE

CABINET SECRETARY

The Committees of Secretaries met on 29.6.2007, 2.7.2007, 6.7.2007 and 10.7.2007. And on development cost of the gas field, as per available information, the cabinet secretary reported:

‘The accountability of Management Committee mechanism for approval of various costs needs to be enhanced. For this purpose, Ministry of Petroleum & Natural Gas would draw up guidelines and mechanisms with the approval of the government as large amounts of government revenue in profit share are involved. Effective audit mechanisms through C&AG or other reputed agencies would be put in place. It is noted here that under Article 25.5, “The government shall have the right to audit the accounting records of the contractor in respect of petroleum operations in the accounting procedure.” The government must, in consultation with the CAG, appoint an international auditor who has sufficient experience in the field of oil exploration and production.’

The report was sent to PMO. Did the prime minister/government consult CAG and appoint an international auditor? Who should be blamed for not taking any preventive step to stop the revenue loss, though cautioned repeatedly by CPI(M) MPs, AP chief minister and even the cabinet secretary? Where should the buck stop?

GAS PRICING

FORMULA

What did the cabinet secretary’s report say regarding the pricing formula offered by RIL as per which the “well-head” price (i.e. the price at the production point) was 4.33 dollar per barrel and the delivered price at the user end would be 4.76 to 5.98 dollar without taxes? It reportedly said “the RIL formula may be taken up for approval only after a policy is put in place. Prima facie the formula appears to suffer from several infirmities in respect of the formula employed and the bidding process.”

The above was based on the presentations by the ministry of fertilizers and NTPC/ministry of power, which specifically stated:

·        RIL price formula is flawed;

·        A delivery price beyond 5 dollar/unit will be prohibitive for fertilizer sector and every increase of 1 dollar will involve an additional Rs 2000 crore subsidy;

·        Gas price beyond 2.34 dollar will be prohibitive for power sector;

·        Pricing should be fixed by Petroleum & Natural Gas Regulatory Board after amendment in the Act;

·        It was not prudent to fix a price which will jeoparadise the NTPC's case wherein price of 2.34 dollar was arrived at after International Competitive Bidding.”

Not only that, the chairman & managing director of NTPC in a letter dated 24.8.2007 wrote to the chairman of EGoM:

“In continuation of the presentation I made on the gas pricing issue of Reliance Industries Limited for KG Basin with particular reference to NTPC contract, I would like to convey that implication of the price differential between gas price as delivered at Kawas/Gandhar as per NTPC Contract and RIL's proposed price, will be of the order of Rs 24,000 crore for the quantity contracted by NTPC during the entire contract period of 17 years. This aspect may also please be kept in view.”

Inspite of the above, the EGoM approved the price formula in a great haste on 12.9.2007 though the production of KG gas started only from 1.4.2009. The rate was slightly reduced from 4.33 dollar to 4.2 dollar/unit. Why this hurry when there were serious question marks on development cost, pricing formula, loss to NTPC, financial impact on fertilizer and power production? Who is answerable to the parliament on an issue concerning three ministries viz Petroleum & Natural Gas, Power and Fertilizer? A minister or a Group of Ministers or the prime minister?

WHY

EGoM?

As outlined at the outset, gas pricing was mostly based on cost plus reasonable profit basis as per APM and there was no sacrosanct formula for pricing for non APM gas produced by private sector, which covered very small volumes before KG basin gas. Keeping this in perspective the "Integrated Energy Policy" document of August 2006, prepared by the Planning Commission, recommended:

"As long as there is shortage of natural gas in the country and the two major users of gas, namely fertilizer and power, work in a regulated cost plus environment, a competitive market determined price would be highly distorted. The prevailing regime of fertilizer subsidies & power sector subsidies would further amplify such distortions and cross subsides. In such a situation price of domestic natural gas and its allocation should be independently regulated on a cost plus basis including reasonable returns."

The prime minister is the chairman of the Planning Commission and there was a gas shortage in 2007 which continues till date. Then who decided to overrule the Planning Commission recommendation for “Cost Plus” pricing and went for a distorted market determined price through a fast-track EGoM?

And finally what was the rationale for forming an EGoM headed by external affairs minister to fix gas price when Energy Co-ordination Committee (ECC) headed by the prime minister and comprising ministers of Finance, Petroleum & Natural Gas, Power, Coal, deputy chairman of Planning Commission, chairman of Economic Advisory Council to PM, with principal secretary to PM as convener was already in place since July 2005. Need for rational pricing to promote inter fuel substitutions (in this case gas, coal and oil) is one of major issues before ECC. Still, why a separate EGoM? Is it a case of shirking responsibility or of willfully insulating oneself from another ‘G’ series scam? Who will answer? Obviously not Jaipal Reddy, Deora, Sibal or Digvijay Singh. WHERE DOES THE BUCK STOP?