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India's gas dispute escalates further

Jul 29, 2009

There seems to be no respite in the battle between the Ambani brothers over Krishna Godavari basin gas. The latest round comes from the younger brother, Anil. The focus of the annual general meeting of Reliance Natural Resources (RNRL) held yesterday was entirely on the dispute. The comments were especially critical of the petroleum ministry, terming its role in the dispute as 'biased and partisan'. In a related development, Finance Minister Pranab Mukherjee met with the Petroleum and Law ministers to discuss the issue. It may be noted that besides Reliance Industries (RIL), RNRL and the Government of India, several independent power producers have joined the fray. Given how complicated the dispute has become, the question of who is right will eventually be decided by the Supreme Court. We find it disturbing that there is so much confusion over the contractual rights of the owner (the government), the operator (RIL) and the user (RNRL and others). This sends out a wrong signal to prospective investors into the sector, whom India is desperately trying to woo through the NELP (New Exploration Licensing Policy) auctions.

RBI admits to monetisation
Finance Minister Pranab Mukherjee had recently said that the government borrowing programme cannot be considered monetisation (refers to the printing of banknotes by central banks) and that it occurs only when the RBI lends to the government directly. However, as per a leading business daily, the RBI Governor yesterday admitted that the central bank buying bonds in the secondary market on behalf of the government does amount to monetisation.

It may be noted that the RBI can absorb government bonds in 2 ways. First alternative is the primary market, where the government makes private placement of bonds directly with the RBI and the second is the secondary market, where the RBI buys bonds through open market operations on behalf of the government. The Fiscal Responsibility and Budget Management Act (FRBM) prohibits the first alternative. So the government will resort to the secondary market.

Terminology apart, our opinion on government borrowings remains the same. Good companies use borrowings to tide over temporary difficulties but eventually focus on generating internal accruals, so should good governments. And just as businessmen should focus on building fundamentals, so should governments.


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