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Pricing natural resources
Need for an inter-generational fund in India
Charan Singh
 Arvind Kejriwal
has raised an important issue on the pricing of natural gas. The debate on the pricing of gas is raging despite the fact that the expert committee headed by Dr C. Rangarajan had examined the complete issue in detail. However, there is a larger issue which has been ignored in our country and that is about the welfare aspects of pricing of non-renewable resources and inter-generational equity. Are we pricing our non-renewable resources and other mineral products appropriately, and are we properly using the financial resources collected from extracted resources from under the soil with some responsibility to our future generations? Philosophically, the current generation is simply connecting the past and future generations, and is a short-term custodian of the national wealth. The principles of economics, budgeting and finance cannot ignore the responsibility of the current generation to the future generations.In any case, apart from pricing, when gas is extracted from the ground and converted into cash, over the ground the nation's natural resources are depleted but our current system of national accounting does not take this aspect into account. These natural resources, which we have inherited from our past generations, do not exclusively belong to the current generation but also to the future generations. The future generations, unable to represent themselves at the current juncture, are impoverished with this exploitation of natural resources. In view of this impact on inter-generational transfers, in many countries, commodity or oil funds have been established. These funds came to be called by a generic name of sovereign wealth funds (SWF) after China established its SWF in 2007. A subset of SWFs, and historically, about a century old, is saving funds, stabilisation funds and development funds. Savings funds intend to share wealth across generations for countries rich in natural resources by transferring non-renewable assets into a diversified portfolio of financial assets, generally international, to provide for future generations. Stabilisation funds are set up to insulate the budget and the economy from volatile commodity prices. The funds build up assets during the good years and prepare for leaner periods. Development funds allocate resources for funding priority of socio-economic projects such as infrastructure. According to Prof Jeffrey Frankel, Harvard University (2010), many natural resource producers have commodity funds to save and invest for the future generations and the oldest and biggest funds are in the Persian Gulf. A number of funds have been constituted, illustratively, on the basis of oil and have existed for decades in many countries -- the UAE, Norway, Saudi Arabia, Kuwait, Russia, Brunei, Canada, and the United States; and other commodities like copper - Chile, and diamonds - Botswana. Kuwait established a Reserve Fund for Future Generations in 1953, according to the IMF (2008). Governments have established SWFs in many different forms to achieve a range of objectives. A SWF can be defined as an entity that manages state-owned financial assets, and is legally structured as a separate fund or fund manager owned by the state. According to the International Working Group of SWFs, SWFs are special purpose investment funds or arrangements that are owned by the general government. Created by the general government for macro-economic purposes, the SWFs hold, manage or administer assets to achieve financial objectives. SWFs are established with one or more objectives which could be as follows -- insulate the budget and the economy from excess volatility in revenues; help monetary authorities to sterilise unwanted liquidity; build up savings for future generations; or use the money for economic and social development. In the case of countries that are commodity rich, the depletion of non-renewable resources and volatile commodity prices lead them to transform non-renewable resources into sustainable and more stable future income. SWFs generally help to improve the potential return on the government's financial investments. In their investment activities, SWFs reflect increased financial globalisation as well as shifts in economics and financial power relationships in the global economy (Truman, 2011). There are two major considerations usually guiding such funds - allocation and distribution of funds. In view of the easily available resources in such funds, these are prone to squandered away, on some pretext, by politicians. However, in a number of cross-country studies collected and analysed by the IMF, it has been concluded that the mere establishment of a fund does not mean that the fund will not be plundered by politicians (Davis et al, 2001) and that reforms of oil companies, generally, face strong resistance from political parties and vested interests (McPherson, 2003). Therefore, a standard and prudent recommendation would be transparency in its operations and persistency in the pursuit of maximising financial well-being of the country, again noted in many studies documented by the IMF. In this context, it needs to be mentioned that the Oil Fund of Norway is considered as an example to emulate in terms of performance, transparency and accounting practices. India is rich in mineral resources. In sharp contrast to the present system of charging royalty, which then gets subsumed as a routine source of revenue in the annual budgets of the governments at the Centre and in states, there is a need to establish an Inter-generational Natural Resource Fund (INRF). The proceeds of royalty or some component of royalty should be deposited in this fund.As India is a vast country and different parts of India are rich in different types of non-renewable sources and minerals, the Centre and states should have different such funds. There should be independence and transparency in the operation of these funds. The accounts of the INRF should be maintained separately and invested in safe instruments, transparently, to get safe returns for future generations. A separate inter-generational fund would also help in establishing transparency in the pricing mechanism of our non-renewal resources as well as other minerals. This will help impose responsibility and accountability on the authorities, and preparation of a separate budget, annual accounts and reports for the inter-generational fund. Therefore, such a step will help in an informed public debate and, hopefully, the optimum use of our natural resources. This will enhance the welfare of our generation and that of future generations too. The writer is the RBI Chair Professor of Economics, IIM, Bangalore. The views are personal.
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When markers mislead
Harish Dhillon
 Markers serve as a means of identification and/or to indicate possession. They come in all shapes and sizes. A marker can be a number, written in indelible ink, on a white tape, stitched on to an article of clothing. It can be a barbed wire fence around a piece of land. It can be the secret number of an ATM account and it can be your computer password. It can be a landmark, like a skyscraper or a hospital, which indicates the direction you have to take. It could be the folded newspaper, which the undercover agent holds across his knee, the marker by which his contact will recognise him. Whatever form the marker takes, it ensures that our lives become easier and safer. But sometimes, just sometimes, the marker tends to go wrong. One of my friends is a frequent flyer. Her preferred piece of luggage is a medium sized, navy blue VIP suitcase. She soon discovered that this was the preferred piece of luggage of many other travellers too. So to avoid confusion, she tied a length of black cord around the handle. She could identify her suitcase immediately from amongst a dozen identical suitcases that came floating past on the conveyor belt, and get out of the airport with the minimum delay. All went well till a few months ago. She returned from a trip to Venice, reached home, and opened her suitcase to be able to give her father the exquisite crystal ashtray she had brought back for him. The first thing she encountered was a soiled item of men's clothing. Someone else had used the same marker as her. The road above my house had an old dilapidated truck parked just opposite my gate. It had been there so long that an eight foot tall Persian lilac had grown in the body. It served as a landmark for first time visitors to my house. "Just take the road to Sabathu," I would say with supreme confidence to prospective visitors. "Stop when you come to a wrecked truck with a Persian lilac growing in it, and turn left." All went well till last month. I got a frantic call from visitors who were already late for dinner. "We have reached Sabathu. How much further do we go till we reach the truck?"Sabathu is 14 kilometres further down. How had they missed the truck? I went up to the road. The truck was gone. My brother-in-law was out on exercise when I made my first visit to my sister in Ahmedabad. She had written to say that someone would come and pick me up at the station. I got off the early morning train and waited and waited. Then I noticed a scuffle taking place, about a hundred yards away. Two uniformed men were trying to 'kidnap' one of the tallest men I had ever seen. It turned out that they were my brother-in-law's driver and 'sewadar'. Their instructions had been to pick up the tallest man who got off the train - only this time there was someone taller than me who disembarked.
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The albatross around UPA's neck
A commission of inquiry should be set up not only to inquire into the recent naval mishaps and the circumstances that led to these, but also the over-all state of the naval armada
Kanwar Sandhu
INS Sindhuratna, which suffered a mishap, is docked at the Naval dockyard, Mumbai |
Through a rear-guard action on one rank, one pension (OROP) last fortnight, the UPA government tried to make up on its inaction on this and other issues pertaining to soldiers' welfare during its 10-year tenure. The decision was widely hailed, especially by soldiers who are at the fag-end of their life. However, by accepting the resignation of the Chief of Naval Staff, Admiral DK Joshi, post-haste last week, the government appears to have willy-nilly undone its recent gains. One's heart goes out to the families of the two naval officers who lost their lives in the recent submarine accident involving INS Sindhuratna, where a fire was reported from the battery compartment. The August, 2013, accident, which cost the lives of 18 sailors and sent the INS Sindhurakshak to the bottom, was even more tragic. It was indeed in the best traditions of the service that Admiral Joshi put in his papers accepting moral responsibility for these incidents. In fact, it is in line with the folklore of a captain going down with his sinking ship. Joshi has indeed set a very high moral standard, which his peers and successors may find hard to emulate. Accountability has been rare in the military history of post-Independence India. The example of Gen KS Thimayya, who resigned following differences with the Defence Minister, VK Krishna Menon, is often quoted and also how the Prime Minister, Pandit Jawaharlal Nehru, persuaded him to withdraw his resignation. In 2005 Admiral Arun Prakash offered to resign after the name of one of his relatives figured in the naval war room leak case.
Admiral DK Joshi making a point. Many commanders speak eloquently about the traditional ideals of military virtue but few actually practise what they preach. Against this background, Admiral Joshi has indeed set a very high moral standard, which his peers and successors may find hard to emulate. |
Many commanders speak eloquently about the traditional ideals of military virtue but few actually practise what they preach. There have been numerous claimants to the victories in the 1965 war and the conflict on the Siachen glacier in 1984, but few had the moral courage to own responsibility for the 1948 Kashmir losses and later the humiliation of 1962 against China (although Gen PN Thapar, the then Army Chief did put in his papers). So also for the disastrous conduct of Operation Bluestar in 1984 and the IPKF fiasco or later for the Kargil botch-up, where more than 500 soldiers were pushed on the killing fields and 1,200 maimed for life. Did any Chief of the Indian Air Force take responsibility for the MiG aircraft crashes? Against this background, Admiral Joshi indeed stands tall. But that is as far as the Navy and its ethos go. By accepting his resignation without even a blink, the government has apparently found an easy scapegoat to ward off criticism of its own lapses. But in doing so, it has overlooked a number of points, which are of paramount importance.  While accountability for any mishap is a must, it should start at the cutting edge, and not from the very top, unless, of course, its magnitude is of a catastrophic nature. In this case, besides the captain of the submarine, the next man up the line is the Commodore Commanding Submarines, West (COMCOS-W) under whose command the submarine squadron operates. A similar arrangement exists in the Eastern Command. Unlike other warships, COMCOS-West does not function under the fleet commander but directly under the Flag Officer Commanding-in-Chief (West), who in this case was Vice Admiral Shekhar Sinha. He is the Submarine Operating Authority (West). In view of the peculiar nature of the chain of command for submarines, the government should have with held Admiral Joshi's resignation and waited for the probe report to be finalised to establish wrong-doing, if any. Obviously, in this case, the entire submarine chain of command, including the Flag Officer Submarines, headquartered at Vizag, who is responsible for all submarine matters and also the Assistant Chief of Naval Staff (Submarines) at the Naval Headquarters would be involved. Two, in this case, since the submarine was still undergoing sea trials and there was an inspection team on board, the Navy Chief, at least on the face of it, can hardly be blamed. Media reports suggest that the submarine was in a "work-up phase" after undergoing a refit at the Mumbai dockyard. That is also explained by the fact that there were as many as 94 personnel on board, which appears far more than the usual crew of a submarine of the Kilo Class. Let us face it: During trials anything can go wrong, though ideally it should not. Unless, of course, the Naval Chief forced the Submarine Operating Authority to put the submarine to sea against the advice of his subordinates and risked the men at work. Thus, Admiral Joshi's culpability would be called into question only if he was directly interfering in the chain of command of the Submarine Operating Authority (West) on a day-to-day basis. Lastly, by accepting Admiral Joshi's resignation in this manner, the government forgot that the Navy is not a separate entity but a part and parcel of the whole that forms the Defence Establishment of the country, which is responsible for the sorry state of affairs that things are in. Also disturbing are reports in the media that the relations between Admiral Joshi and Defence Minister AK Antony had not been on an even keel for the past few months, especially after the last Commanders' Conference. Some insiders even go to the extent of suggesting that Admiral Joshi felt that the Defence Minister was not trying to understand the constraints under which his force was operating. He might well have feared that, in the wake of the recent mishap and media's coverage of it, he could be eased out unceremoniously – a grim and stark reminder of what happened to Admiral Vishnu Bhagwat, who was sacked by the NDA government over his differences with the then Defence Minister, George Fernandes. What is more, whatever the circumstances, neither the Prime Minister, Dr Manmohan Singh, nor the Supreme Commander, President Pranab Mukherjee, thought it important to call Admiral Joshi for a one-to-one meeting before accepting his resignation. Such a gesture was even extended by President Barack Obama in the White House when the US Government decided to remove Gen Stanley A MacChrystal, Commander of the US forces in Afghanistan, in 2010. It must be remembered at all times that along with the spit and polish, courtesy and grace are intrinsic to the elan of the armed forces. Now that the government has accepted the resignation of the Navy Chief, the logical thing to do would be to ensure that the whole matter is probed in detail so that no other Admiral becomes a fall guy, should another unfortunate incident occur. It would be in the fitness of things to appoint a commission of inquiry into this and other incidents. This should be over and above the Court of Inquiry, which would be ordered by the Navy, as is the usual norm. Although comparisons are odious, one recalls how in Great Britain during the First World War, when Lord Jacky Fisher resigned his position as First Sea Lord in the Navy following differences with Winston Churchill in 1915, the Dardanelles Commission was asked to investigate the circumstances leading to the disastrous Dardanelles Campaign. The proposed commission should be asked to look into two aspects:
- The immediate circumstances leading to accidents in the Navy over the past few months. This should include the sinking of the submarine in August last, the running aground of another submarine recently and the latest incident.
- The over-all state of the naval armada. Are the war vessels that are undergoing a "refit" still basically sound, or has time and wear-and-tear made it cheaper and safer to replace them? Since the submarines, which have been in the news, were about 25 years old, should a time-frame be fixed for re-fitment? What has delayed the Scorpene Class French-origin submarines, which were to replace the existing fleet of subs? Is the promotion and command system in place or is it being interfered with by the MOD? This becomes important because of reports that the FOC-in-C, in whose charge various recent incidents have occurred, was not recommended for an operational command by his seniors.
Such a commission of inquiry becomes imperative as there has been a demand that the MOD should also take the responsibility for the state of the Navy. If the government shies away from fixing responsibility just because the Admiral has offered his head, the recent developments leading to the Admiral's resignation would hang around the UPA government's neck like an albatross, to use a term from Samuel Taylor Coleridge's poem.
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