Stop This Bloody Business of Notional Losses

First published on 22.09.2012

Excuse me for the uncivilized caption, but what I am writing below deserves none better.

Notional losses, as the name suggests, means calculation of loss/profit on the basis of some fictional reference point. Year 2004 is the starting point for this non-sense. This is the year when the transformation of India from a License Raj Economy to a Market Based Economy is deemed to have been completed under the NDA regime. The fictional reference point is, therefore, now always decided by the market forces. The CAG has recently released two reports, which has lead to a big embarrassment for the reigning government, but now I have no sympathy for them; they deserve it.

Let us see what has happened, and why the things have happened the way they have happened. In both 2G report and Coal report, the losses/profits have been calculated by the CAG on the basis of the profits the private players are deemed to have earned in the open markets; however, it is completely irrelevant as a basis for calculating the losses to the exchequer. This shows the frivolousness of the approach adopted by the CAG in auditing the government accounts. The markets can’t be the basis of any calculations in conservative auditing exercise: They can go haywire; they can project unrealistic numbers on the basis of a few big deals — only the most naive investor believes that the markets are perfect. However, whatever the means, the ends were seemingly good as the reports were exposing the corruption though in a biased manner; however, being a finicky person, I supported the government in both the cases, but now I sincerely feel regretful.

This government has very clearly shown that it is wedded to the ruthless capitalistic ideology of market economics, and, therefore, they don’t deserve any better treatment either. This government has recently increased the diesel prices and put up a limit on LPG cylinders; both the decisions are going to have a very strong negative cascading effects on the poor of this country — it seems the politicians of this country are totally non-aligned to the needs of the poor, whom they can make fool at ease for furthering their ulterior objectives.

The often repeated phrase “under recoveries” has been used once again to justify the decisions taken by the government. “Under recoveries” is being projected as a measure of loss for the oil marketing companies. Well, it is a notional loss, i.e. the loss calculated on the basis of global crude oil market prices, not the actual cost of production. The oil production companies of India sell oil to the Indian refineries at cost plus margin basis, which reduces the refinery-gate prices at which the OMCs buy from the refineries, which means the cost of oil products for the OMCs is actually lesser than the global market prices; and that’s because, globally, the crude prices are decided on multifarious considerations including the effect of the US hegemony on the global crude prices; the global oil producing countries also often hugely mark up their seling prices because they don’t have any other income than selling oil. I fail to understand why India has not made any efforts first to reduce the domestic oil consumption and secondly to forge alliances with the oil producing countries to barter oil & gas as the South American countries do. The worst of all, the private oil producers (read Reliance) sell crude to the Indian refineries at the global market prices; not only this, they are also allowed to export crude oil in the global markets.

Ever since 2004, the Indian government has been issuing oil bonds to the OMCs to take care of their “under recoveries.” This means that the OMCs are being paid for their notional losses, not actual losses, at pubic expense, which generates profit only for few of their shareholders. I will present an analogy: I have a small kitchen garden where I produce potatoes at the costs of say Rs 5 per KG; I sell them to a  potato chaat producer at Rs 6 per KG; the chaat producer adds value to the potatoes and makes chaat say at the costs of Rs 2 per KG; so, the actual cost of chaat for the chaat producer is Rs 8 per KG; he sells the potato chaat to a chaat retailer say at Rs 9 per KG; the chaat retailer sells it for say Rs 10 per KG; he can’t sell it for more than that because the government wants people to eat cheap potato chaat; however, even then, he makes a clean profit of Rs 1 per KG; the chaat retailer, however, obtains a compensation of Rs 5 per KG from the government because the wholesale price of potato chaat in the US commodity exchange (yes US can even sell potato chaat at bourses) is Rs 15 per KG, and the chaat seller is deemed to have made a notional loss of Rs 5 per KG, i.e his selling price of Rs 10 minus his costs of chaat at Rs 15/KG as per the US commodity exchange; is this not non-sense?

A government which increases the price of diesel to cover up such a notional loss and instead of forcing the private oil producers to sell their crude at cost plus margin basis to the Indian refineries burdens the poor is nothing but a bloody *&&^&*, and, if this government has to go to stop this bloody business of notional losses, then so be it.

Comment dt. 25.09.2012
It seems the FM also realizes the above situation, and it seems he is concerned about it. Please visit this Indiatimes article.

©2012 Ankur Mutreja

About the Author

Ankur Mutreja
Ankur Mutreja is an advocate-cum-writer, and his blogs are amongst his modes of expression. He has also authored number of books, which can be downloaded from the links on the top menu.

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