Since the beginning of this year, the bt-50, a free-float stockmarket index, has lost 6.97 per cent; real-estate prices in Gurgaon, India's most happening residential and commercial district, have increased by 20 to 25 per cent; and the price of the entry-level model of Maruti Udyog's 800 has increased some 1.5 per cent. In the same period, the price at which India imports oil has gone up by nearly 33 per cent (it stands at $40 a barrel, Rs 1,717 at the current exchange rate, as this magazine goes to press). And on September 28, the price of crude on the New York Mercantile Exchange (crude is traded on a regular basis on the 21-year-old exchange), touched a record high of $50.47 (Rs 2,313) a barrel, a rise of 55 per cent since January 1.

It has been happy hunting for traders who have bet long on oil. The us invasion of Iraq, political tension in Venezuela (the third largest producer of crude in the Organisation of Petroleum Exporting Countries, OPEC), the Madrid bomb blasts, unrest in Nigeria, and a financial scandal involving Yukos, a Russian oil major, have ensured that oil prices have gone up, up and away. What's worrying, however, is an almost universal consensus among oil analysts that the current price is unsustainable, and that we could be due for another spike shortly. Demand-supply imbalances lie at the bottom of this. China's appetite for oil is expected to increase 15 per cent in the current year, and India's by 4 per cent. Add to that the unexpected revival in the American and Japanese economies and the result is one oil-starved world. The International Energy Agency predicts that 2004 will see the steepest rise in demand in 16 years, with the world consuming, on an average, 3.6 million barrels more every day in 2004 as compared to 2003.

India will not come off unscathed. The country imports 73 per cent of its crude-requirement. "Higher oil price will have an inflationary impact," says Sunil Sinha, Consultant, National Council of Applied Economic Research. "It will increase the cost of production and transportation of goods and also lower private consumption," adds Siddhartha Roy, Chief Economist, the Tata Group. The result? Everything from petro-products (including petrochemicals, which serve as inputs to a wide variety of industries from plastics to soaps and detergents) to fertilisers to cement to steel to paper to airline fares could now become dearer.

Left to market forces, economists claim, a $5 (Rs 230) rise in the price of crude could shave off as much as 0.25 per cent from India's Gross Domestic Product. Last year, the average price at which the country imported crude was $26.70 (Rs 1,254.9); this year, it is already $40 (Rs 1,840), and climbing. If Mr. Bharat hasn't yet felt the pinch, it is because the government has kept prices at an artificial low by reducing the custom and excise duties on petroleum and petro-products. And it is because intense competition has forced companies to absorb higher costs, although they would love nothing better than to pass it on to customers. Thus, although steel prices may be up 30 per cent, pig iron 170 per cent, and crude 40 per cent, inflation as measured by an increase in the consumer price index, CPI (though that measured by the wholesale price index, WPI, is galloping at 8 per cent plus, courtesy the increase in the price of crude) continues to hover at a respectable 4 per cent. It would be too much to expect that to last. Sooner than later, however, companies will have to choose between watching their profitability erode and hiking end-product prices (although they run the risk of stifling demand if they do so). And sooner than later, the government will have to choose between economic and political populism and fiscal prudence. Then, things could really go bad.

-By Ashish Gupta

PITCH
A CEO Steps Out

When prime minister Manmohan Singh set out on his first official visit to the United States (between September 21 and September 26), there was one very significant item on his shopping list: $150 billion (Rs 6,87,450 crore) of foreign investment. "India needs America's support in realising a dream of faster economic growth," he told captains of USA Inc.; that's an appropriate word-the representatives of 17 companies who had gathered to listen to him controlled over a trillion dollars in assets. Singh promised the listeners that his government would take hard decisions to achieve a 7-8 per cent growth (in gross domestic product). Not everyone is enthused. "What will motivate foreign investors is an adequate rate of return on investment," says S.K. Singh, India's former foreign secretary. Ergo, Singh has to sell his brand of economic reforms to his government's supporters, including the communist parties. His recent track record at that hasn't exactly been inspiring.

-Ashish Gupta

SECOND
No, Minister
Some laissez faire please, Mr Aiyar.

Money Talk: It makes economic sense

He may have been in the news for his (Veer) Savarkar-bashing exertions, but the Union Minister of Petroleum and Panchayati Raj, Mani Shankar Aiyar, hasn't neglected his ministry. What he has got to show for that, after four meetings-three with the CEOs and former CEOs of the four public sector oil companies that, with the exception of Reliance Industries, pretty much constitute India's oil industry, and one with dons from the Indian Institute of Management, Ahmedabad-is an original idea that has rapidly grown into a magnificent obsession. The strands of this obsession include vertical integration, state-sponsored mergers of the state-controlled companies (he has narrowed down on the merger of BPCL and HPCL with ONGC, and Oil India and GAIL with Indian Oil Corporation), even a joint venture of all four companies. These, Aiyar reckons, are the only things that can help the public sector majors take on the likes of Exxon Mobil, Shell, BP Amoco and Total Elfina.

Aiyar's rationale, popularly referred to as 'synergy in energy' is that all this will prevent duplication of efforts in the domestic market, and put an end to unhealthy rivalry between the Indian companies when they wish to go global. Size, the logic goes, will also increase their financial muscle. Experts think otherwise. Size, reasons a Mumbai-based oil analyst "may lead to inefficiency, lack of focus, and slow down the speed of decision making". Others of his ilk add that "innovation in the oil majors will come to an end", and that in the specific case of ONGC, the proposed merger will "make it lose its primary focus on exploration". Finally, Aiyar would do well to remember three things: the wave of global consolidation in oil was market-driven (not state-sponsored), and motivated by gains related to availability of and access to crude oil, geographical footprint, technology and the benefits of scale. It is unlikely that the super-companies created by the proposed merger will be able to rationalise manpower, not with the communist parties exerting the kind of influence they do. And finally, vertical integration is a misused word. Shell does not use all of its crude oil for refining purposes; the bulk is exported and the company buys crude from the spot market at the cheapest price for refining. QED.

-Kushan Mitra

LAFFERISM
The Cost Of Welfare

Guess who will foot the bill for the Rs 1,20,500 crore that will go into the Employment Guarantee Scheme (EGS) over the next four years? The taxpayer, who else? If the government goes ahead and levies the EGS cess, it will be the second add-on to the tax burden of salarymen; a 2 per cent education cess was levied in the 2004-05 budget. More of the same, and as the government moves closer to its ideal of a welfare state, people will move further up the Laffer curve and lose interest in earning more (simple, the post-tax returns will not really warrant the incremental effort). "There needs to be flexibility to let the market create its own jobs," says Subir Gokarn, Chief Economist, CRISIL, who argues that "ridiculous labour laws" have resulted in the normal economic process not generating enough jobs. "The guarantee scheme should only be targeted at residuals, if any."

-Supriya Shrinate

His Master's Voice
The rise and rise of Montek Singh Ahluwalia.

Super Planner Ahluwalia: The second most powerful man in India?

Circa October 2004, there are several contenders for the position of the second most powerful man in India. There's the leader of the Opposition, L.K. Advani; the grand old man of the communist movement in India, Harkishen Singh Surjeet; industrialist-turned-politico Anil Ambani; and the newly-named patron of the Board of Control for Cricket in India, Jagmohan Dalmiya (on present form, he is far ahead of the others named). However, the second most powerful man in India is none of the above mentioned; it is Montek Singh Ahluwalia, the 61-year-old Deputy Chairman of the Planning Commission, who, like his mentor and Prime Minister Manmohan Singh, is an Oxford-educated economist with a fondness for blue turbans.

As Finance Minister and Finance Secretary, the two had orchestrated India's first wave of economic reforms, so no one was particularly surprised when Singh summoned Ahluwalia back from the International Monetary Fund (he was the first director of the Independent Evaluation Office) to serve as head of the Planning Commission. Shortly thereafter, he was asked to prioritise the allocation of the Rs 10,000-crore Budget 2004-05 had put aside for schemes targeted at the social sector. A little later, the Prime Minister entrusted the Planning Commission with the task of defining the regulatory structure for infrastructure sectors such as roads, ports and airports. And soon after, Singh suggested that Ahluwalia monitor time- and cost-overruns in infrastructure projects.

What has really brought Ahluwalia to centrestage, however, is the fact that Singh chose to take him, and not Finance Minister P. Chidambaram, along on his first official visit to the UK and the US, a trip with the articulated agenda of hard-selling India as an investment destination. Around the same time, Cabinet Secretary B.K. Chaturvedi circulated a note to all ministries, making it mandatory for all proposals that have something to do with economic policy to be routed through the Planning Commission for its comments before being sent to the Union Cabinet for its approval. That makes Ahluwalia the super-boss of all economic policy-making. And, in our book, that is good enough to make him the second most powerful man in India.

-Ashish Gupta

IRONY
The Firm In West Bengal

Different State: Not so left of centre

Everyone seems to have got this one wrong. The Left (as the communist parties in India are called) is not opposed to foreign consultants. It is not even against seeking their advice on matters of State. "We're very happy with the work McKinsey & Co. has done for us," says Manab Mukherjee, it Minister in the Government of West Bengal. The US consulting major is advising the CPI (M)-led Left Front government of West Bengal on ways to develop the it and agro-business sectors in the state. But why is his party opposing these very consultants and their fellow professionals at the national level, specifically their inclusion in committees of the Planning Commission? "There is no disconnect between the two positions," says Mukherjee. "We're not opposed to seeking inputs and advice from foreign consultants. Our own experience in this regard has been very rewarding. But you don't invite friends into your bedroom." Ah! Now we know. All would have been well in Delhi if only Man and Monty had kept their bedroom doors firmly shut!

-Arnab Mitra