Petroleum prices: Kicking the can down the road
Petroleum prices have remained unchanged thanks to the provision of an amount of Rs 350 million from the Subsidy Reserve Fund. The retail price of Mogas should have been increased by Rs 0.85 per litre or 1.72% based on US$ 729.46 per metric tonne for Mogas and the exchange rate of Rs 35 per US$. Though the reason given for maintaining the prices at their present level is that the percentage increase is below the prescribed 4%, we believe that there was little choice for government at this juncture, despite the huge subsidy, when a possible hike in petroleum prices could have unsettled all its plans. It cannot afford to allow fuel prices to rise as this would aggravate its plunging popularity; the best it can do is to kick the can down the road. If fuel prices rise further, it will become increasingly difficult for Government to continue subsidising it; it will then have to work out how far down the road it can kick it further in view of next year’s general elections.
At this critical juncture when Government is moving its important pieces on the political chessboard, and juggling a delicate fiscal situation with a view to finding funds to feed its numerous ambitious projects ahead of the general elections, at the very least it did not want to risk displeasing the electorate. It also avoided the cascading effects on transportation costs which would have driven up inflation to above 3.5% and jeopardise the expected 3.9% gdp growth rate for 2018.
Our concern is different: is it justified to have taxes and charges comprising more than half the cost of fuel? Government’s arguments are that these taxes help it in meeting prioritised capital expenditures. Is that indeed the case? For the past three budgets, capital expenditures, excluding the off-budget expenditures, have hovered around a mere 1.7% of GDP annually; for budget 2017-18, capital spending was around 65% of the amount earmarked. Thus our tax money is not being used to build a more advanced economy for future generations, it is being spent on recurrent expenditure. This is irresponsible!
Moreover, fuel taxes are also a tax on production as transport costs are an important element of the cost of production. Gasoline prices around the world show that our fuel prices are much higher than many of our competitive textile producers, namely Indonesia, India, Turkey, Bangladesh, Malaysia, South Africa, Sri Lanka, Philippines, Kenya, Thailand, Morocco, China, and Madagascar. Thus the fuel taxes are harming our industry’s competitiveness.
If Government is not using our money properly and is affecting the country’s competitiveness, it must slash the fuel taxes and other charges. And concurrently, it should reduce wasteful spending and implement crucial reforms to curtail recurrent expenditure and find alternative sources of revenue like improving the progressivity of the tax system, hiking the taxes on Smart Cities and Property Development Schemes and carry out the divestiture of some public assets.
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A Demonetisation to Crackdown on Black Money
Some of the hawks in Government believe that they can regain some of their lost credibility, caused by a proliferation of scandals and blunders over the past three years, through a demonetisation exercise involving high denomination notes to curb counterfeiting and money laundering – which will certainly help to reverse the situation.
Their arguments are that it will deal a severe blow to the scourge of black money in the economy. We will not have to depend on our sole Hector Tuyau to hunt down and dig out those millions from “coffres forts” or “treasure coves” so common among the businessmen, traders, professionals, drug dealers, even hawkers… Is the MRA on leave or have they taken some long vacations approved by Government?
Besides curbing corruption and money laundering, they argue that demonetisation usually has a positive impact on the liquidity structure, on inflation, on the stock exchange, on tax collections, on e-transactions, on interest rates and investments, in the real estate sector with increased transparency in dealings, and it will definitely help to boost economic growth by a few percentage points. They also argue that Indian PM Narendra Modi dared to go for it in such a complex and not so monetised economy like India, despite warnings from eminent economists that it would be a disaster – it is true that the move was not well planned, thus delivering mixed results, and the banksters ensured that the gangsters got through the nets.
The hawks are also trying to convince their supporters that it will be a booster for the government and a surgical strike against Mafiadom and “havala” or black money. Even if in economic terms, it might turn out to be a flop, it would be a huge success in political terms. And deep down, the hawks know very well that that’s the real goal of the demonetisation exercise — as it has been the case in India all along. The PM will be personally praised for his courage; after trying to follow in the footsteps of his father in tackling the drug dealers, he will come out as a champion of the fight against illicit wealth and money laundering. That’s the main benefit.
The doves, however, are not that sure; they are of the opinion that we should not try anything that might disrupt the economy which is gearing itself for an above 4% growth rate powered by capital intensive infrastructure projects. In our case, our defaulters have long ago converted their black money to either shares and real estate or placed them in safe havens abroad, especially in Dubai. Demonetisation will hit only small-time savers and ‘concealers’ of income who keep their money in cash; it hit such people hard, not the big fish. For the doves, the losses may outweigh the gains, and it may not achieve anything. Bureaucratic and political corruption will be back just as before.
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The Alvaro Sobrinho Saga: A review
The e-mail of Mr Fernandes mentioned during the proceedings of the commission of inquiry on the ex-president has had the effect of a bomb in some quarters. For us it is an opportunity to prick the conscience of the great defenders of our “clean” financial centre who used to rush to its rescue and brand critics as unpatriotic because the latter dared to contend that our financial centre has some regulatory flaws and that it lacks substance, and was merely capitalising on the labour cost and tax arbitrage activities… It is also an opportunity for us to review the Alvaro Sobrinho saga and add a few touches that will help summarise the whole narrative for our readers:
The scenario of the Alvaro Sobrinho saga is as follows:
The Directors: Alvaro Sobrinho himself, the people in power – the all-mighty ones, of course – and not least, the ex-President. They set the stage for the whole saga to unfold. We thus saw the Banking Act amended to allow a more pliant FSC to issue an investment banking licence to Alvaro Sobrinho.
The Heroes: The four ex-directors of the board of the FSC who refused to bend so easily to the mighty and the ex-Governor of the BOM and staff who dared to look at Alvaro Sobrinho straight in the eyes while carrying out a proper due diligence. And one of the few exceptional ones, a rare breed which is slowly but surely going the dodo way – Mr R.L. – who resigned from the board of the ex-BOI.
The Villains: The newly constituted board of the FSC including the present Governor and former DG of the BOM who were rushed to a rapidly-convened Saturday board meeting of the FSC to constitute a quorum which had a clear mandate to open the floodgates to Sobrinho’s billions; the ex-BOI which granted him authorisation to buy property at Ebene; the DPM who seems to have lost his clairvoyance since and the ex-President who had to ignominiously vacate the premises on tiptoe, and other minions.
It would seem that it will require another commission of inquiry to go to the depth of the matter and to assess the role and motivations of the mighty of the land. As for the others, “ils n’avaient ni l’envergure ni l’expérience nécessaires…” to play a meaningful role.
* Published in print edition on 12 October 2018
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