Business Daily from THE HINDU group of publications
Friday, Jun 16, 2006
Industry & Economy - Petroleum
`Right fuel pricing is the only way to efficiency'
Mr R. Seshasayee, President, Confederation of Indian Industry, spoke to Business Line about the economy, the impact of the fuel price hike and issues relating to the manufacturing sector. A chartered accountant by training, Mr Seshasayee, Managing Director, Ashok Leyland, has been chairman of a number of national committees of the CII. He was a member of the government delegation to the Doha Ministerial Round of the World Trade Organisation.
Excerpts from the interview:
On the fuel price increase and its impact:
It was unavoidable. The CII has consistently supported a market mechanism that is matched by adequate supply and competitive forces, as otherwise it would be harmful to the economy. The ideal position is to have a regulator, adequate supply and competitiveness and not be dominated by any single player, or small number of players, in the market. Till then, there must be a mechanism by which input prices are factored through a formula and priced out, which means that if there is a decrease in crude price, you must similarly price this out.
There is a dearth of hydrocarbons worldwide and the growth of India and China at the current pace is going to put even more pressure in terms of demand on the limited and exhaustible supply of hydrocarbons. It must, therefore, reflect in terms of higher prices. Only when that happens will the market move towards efficiency.
Although India has not been as gluttonous in fuel as some of the developed countries, indeed not even as voracious as China, our own energy efficiency is far from satisfactory. Right pricing is the only way to bring about efficiency. Otherwise you don't realise the value of what you are consuming. Unfortunately, because of political pressure, by not pricing fuel correctly, our efficiencies have suffered.
The pricing must be capable of generating enough resources for upgrading technology to improve yield and conversion. We shouldn't get caught in this vicious cycle of low price and losses and therefore not enough resources to clean up the output from the refineries, and therefore higher emission, which ultimately the public pays for. On both these accounts I don't see an option but to reflect the cost of input.
I will put two caveats to that. One is that to some extent the pricing factors in some of the legacy inefficiencies in the petroleum sector. The newer refineries are able to manage with this price much better than the older ones, which are not as efficient. Pricing, which does not take into account certain pressure to be put on inefficient refineries to improve their operational efficiencies, would be counter-productive.
We are saying that politics should not come into economics. We should get the market forces to operate in a manner that it targets efficiency improvement of the entire chain and it brings the best value to the consumer. We have said that we should move towards trade parity rather than import parity. Beyond $70 (a barrel of crude oil) giving oil companies the freedom to price out is also a welcome step.
Globally, politics is intertwined with hydrocarbon economics. Global politics may be unavoidable, but let us keep local politics out of the hydrocarbon market. If you combine both global and local politics, you get a complex scenario and it is completely distorted.
An oil price increase will impact economic growth. There are varying kinds of studies where, at the current level of increase, estimates have been made that it will impact GDP by 0.5-1 per cent. To my mind the key aspect is not the impact in terms of the global economy, it is in terms of India's relative performance. Therefore, if we can improve our competitiveness and be more responsible users of energy, we would probably be even more competitive. Inflation is certainly worrisome.
If there is a toss-up between inflation and growth, I would any day vote for lower inflation even if that implies lower growth, purely because inflation is far more punishing on the lower strata and is not a sustainable framework for growth for long. We can't continue to have a growth and high inflation situation. Growth must come with low inflation.
On trade deficit:
In the short term there is this issue relating to surging imports and the trade deficit, which is now moving up quite dramatically. The deficit at the current level of $30 billion is sustainable. I would be worried if the trade deficit widens. There is a need now to look at how we can further strengthen our efforts for exports. As an economy, our external engagement is 38 per cent, which is significantly higher than even the US in terms of external engagement. China is 70 per cent externally engaged. All that it underscores is that we are still not even reaching a unit figure in exports. We have got headroom and we have to exploit that headroom to support our external engagement, increase exports and bring down the deficit.
I don't believe that we should look at exports as coming out of concessions. Exports should be promoted by improving competitiveness. Improving competitiveness, increasing the level of enterprise and seeking new markets are within the domain of private enterprise. There are issues relating to competitiveness which get impacted because of government policy. Right on top of this issue is logistics and poor port and airport facilities. That, certainly, is a dampener. Our inefficient infrastructure is a major handicap in the export capability of a large number of industrial and service sectors.
More than infrastructure perhaps, today our exports are handicapped because of skill availability. One thing that strikes you is that most industries are talking not about problems of infrastructure, they are talking about lack of people. That underscores the fragile nature of our growth. It is not sufficiently broadbased.
On long-term issues and CII's agenda for the year:
The CII this year has mounted four missions. One is about inclusive growth. We are talking about inclusive growth not because it is politically fashionable, but because unless we have inclusive growth we are not going to be able to expand the market. The market itself is not large enough.
The market in China is so large that it is capable of supporting large capacities. In most industries, the scale ratio between India and China is 1:5 or 1:10. Which means that you need a large domestic market. You can't get a large domestic market unless you broaden the base of the pyramid and make it more inclusive. That means you need larger number of people who can be employed and who can participate in the market. Inclusiveness is an imperative of increasing the market.
That inclusiveness is also necessary because that is the only way we can retain our advantage as a competitive, low-cost producer. Otherwise, we are creating islands. We need a constant inflow of skills. It helps both our ability to keep our competitiveness and it creates a market. Above all, inclusiveness is the only equitable way of growth.
The second mission pertains to sustainable development. Our growth is coming at an enormous cost to the ecology and we are not sensitive about it. We need to understand that this growth means that we need more water, more power, we generate more waste and our water resources cannot sustain the kind of growth rate we are projecting unless we get a lot more efficient in the use of water.
Our energy resources cannot sustain this growth. We have no policy to deal with the waste that we are generating with this growth without affecting the environment. I think we need to sensitise across the spectrum, we need to get even our legislators sensitised about the impact on the environment. How we grow is even more important than how much we grow.
On the manufacturing sector and job creation:
We are going through what I would call the hot stick situation. In the last 7-8 years, manufacturing industry has been growing and but has been increasing its productivity too. That has primarily come from getting more out of existing resources and people. I think industry is beginning to add people.
Going forward, as industry scales up and brings large investment, employment will happen quite dramatically.
In the hot stick formation, we are just seeing the dip or static situation because the industry was getting to be more competitive by improving productivity. We are reaching a stage where productivity levels are pretty good in most industries and it will begin to rise, so we will see employment happen. We are also ignoring the fact that, in the last 4-5 years, there has been an explosion of individual enterprise. A large number of people in the unorganised sector, employing a small number of people who have taken away the service part of industry.
In manufacturing, there is lot of service also. Earlier, we employed people for canteen, security and office work. A lot of that is being contracted out, which is not counted in this. Certainly, jobs are getting created and they are not getting counted. You are paying for contractors to give you even salesmen.
These jobs are going somewhere in the unorganised sector. I am quite confident that we will begin to see a rise in employment numbers in the coming years in the manufacturing sector.
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