INDIA: Amid Economic Pressure, Premier to Step into Energy Row

By Ranjit Devraj Reprint | | Print |

Ranjit Devraj

NEW DELHI, Sep 7 2001 (IPS) - Indian Prime Minister Atal Bihari Vajpayee’s announcement Friday of plans to intervene in a giant U.S. firm’s vexed dispute with western Maharashtra state is another sign of his government’s desire to revive a flagging economy through foreign investments.

Speaking at a gathering of Indian industrialists, Vaypajee said he was eyeing intervention in the U.S. energy giant Enron Corp’s long-time row with the government of Maharashtra state over the electricity project at Dabhol.

“The central government, in cooperation with the Maharashtra government, financial institutions and other partners, will facilitate an early and amicable resolution of the vexatious problem surrounding the Dabhol power project,” Vajpayee said.

Also present were Cabinet ministers heading key economic ministries, including Finance Minister Yashwant Sinha, Commerce Minister Murasoli Maran, Power Minister Suresh Prabhu and Disinvestment Minister Arun Shourie.

Enron wants to sell its 65 percent stake in Dabhol Power Co., which stopped producing electricity for the Maharashtra State Electricity Board (MSEB) after the utility stopped paying power bills that it claimed were based on an unfair tariff scheme.

But before things can move forward, the power giant has to first recover its dues from the state utility and has announced plans to go in for arbitration to resolve the dispute.

But the row — which has focused on claims by critics that the fixed charges of 250 million U.S dollars a year the Maharashtra govenrment had to pay Enron were unfavourable — is complicated by the fact that Indian public sector financial institutions have lent the project 1.4 billion dollars. Another 400 million dollars came from foreign lenders.

Last year, Maharashtra’s Chief Minister Vilasrao Deshmukh declared as financially unviable the power purchase agreement that a previous government had entered into with Enron in 1993. Earlier this year, the government agreed to pay millions of dollars in electricity bills owned to Enron.

The fate of Dabhol is seen as a test case for India’s decade- old privatisation and economic liberalisation plans. As it is, the country’s key power sector is in dire need of overhaul with the state-run utilities, having gone bankrupt through political interference, power theft and outdated equipment.

An economic crisis could only be headed off by “dramatically stepping up public investment and enabling private investments to ride on the back of higher public investment,” Vajpayee told his 13-member advisory council on trade and industry.

Clearly, he is keen to avoid development that could affect the slowing economy. American officials earlier this year said that businessmen’s “caution increases dramatically” when they see events that they interpret as breaches of contracts like that over the Dabhol project.

But critics like PRAYAS, an independent research organisation, have long called for public scrutiny of the electricity tariff arrangement with Enron, while others say the project shows the weaknesses of some of India’s trek down the road of economic liberalisation.

PRAYAS argues that most of the ‘fast-track’ deals entered into by the government with transnational corporations after India opened up its power sector to foreign investors in the early nineties, were marked by lack of transparency.

The Indian economy’s growth rate recently slumped to 5.2 percent from last year’s 6.4 percent, owing mainly to rising costs of oil imports and deccelerating agricultural and industrial output.

Last week, Vajpayee reorganised his Cabinet and handed over key economic ministries to colleagues in his right-wing Bharatiya Janata Party (BJP) who have a proven record of being pro-reform. Ministers from allied parties in the BJP-led ruling coalition were shunted off to head other ministries.

On Thursday, the international consulting agency the McKinsey Global Institute presented a study on the Indian economy and said artificial barriers are holding back growth by as much as four percent.

“What holds India back is not the scarcity of capital or human resources but barriers that prevent these resources from being utilised efficiently,” Shirish Sankhe, a McKinsey representative, said at the release of the study.

McKinsey listed the three main barriers as product market barriers or factors that distort pricing and quantities of goods, land market barriers or factors distorting land prices and government ownership.

The report claims that dismantling these barriers would “unleash productivity” in key sectors like construction, retail, food processing, telecommunications and power and allow for greater mobilisation of capital.

Removing these three barriers would also result in the creation of 75 million jobs and allow the economy to achieve an annual growth rate of 10 percent, according to the report.