There cannot be a case for a windfall tax` Naresh Nayyar, Managing Director & Chief Executive Officer, Essar Oil

There cannot be a case for a windfall tax`
Q&A/ Naresh Nayyar, Managing Director & Chief Executive Officer, Essar Oil

High crude oil prices have impacted Ruias-promoted Essar Oil’s working capital. The company, which has interests in exploration, production, refining and marketing, has seen a significant increase in its working capital requirement from $600 million (over Rs 2,600 crore) to $1.6 billion (over Rs 6,500 crore) in recent times.

Naresh Nayyar tells Kalpana Pathak and Nevin John that a windfall profit tax (WPT) on private oil companies will only worsen the situation. Excerpts:

Do you think the idea of a windfall tax on private players is feasible?

No. In the case of refining companies, the high price of crude oil has already multiplied their costs and led to an increase in the working capital.

Refinery business profits are determined by the difference between finished product prices and crude oil prices. Finished product prices are not moving in tandem with crude oil prices. It is determined by the available capacity and the demand-supply balance of finished products. The refinery business is cyclical. As a matter of fact, there is tremendous pressure on refining companies and there cannot be a case for a windfall tax.

How has the increase in crude oil prices impacted your day-to-day operations?

We buy around 8 million barrels of crude oil every month for refining. When oil was at $70 a barrel, our working capital requirement was close to $600 million. But now with the price doubling, our working capital requirement for 45 days has gone up to around $1.6 billion. There is huge pressure on funding the working capital.

Besides, the recent monetary policy has squeezed liquidity in the market. Whatever money available costs a lot as a result of a higher interest rate. Our costs have certainly multiplied.

Will the liquidity crunch affect your expansion plans too?

We have fully tied up around $6 billion for expansion of our projects. Of this, the promoters will infuse $2 billion fresh equity, $1 billion will come immediately after the financial closure and another $1 billion by March 2009.

We also expect $1 billion from internal accruals during the project execution stage at the existing refinery in Vadinar. So around $3 billion of fresh equity would be coming in. We have an existing equity of about $1 billion, making a total equity of $4 billion. We are raising fresh debt of about $5 billion. Of this, we have already arranged for around $4.3 billion debt and will announce the financial closure shortly.

Is the volatile crude oil price putting pressure on your profit margins?

Yes. There is a significant pressure on our profitability. There is a time lag of 45-50 days between buying crude oil and selling our finished products in the market. We take an oil price risk during this period. If we buy crude oil today at $140 a barrel and by the time we process it and sell it in the market, oil prices fall by $20, it hits us. The fluctuation is so much in the marketplace right now that it has tremendously multiplied our risks, impacting our profits significantly.

Is Essar still in the race for Kenya Petroleum Refinery?

We were never out of the race. The Kenyan government had asked Oil Libya to induct Essar Oil as a partner, with Oil Libya and we sharing a 25 per cent stake each in the company. There are some issues at the political level in Kenya that need to be resolved.

Only 20 of your fuel stations are operational of the total 1,274. Do you plan to shut them and go for an alternative use of the land?

We are maintaining all our 1,274 outlets and compensating the dealers to the tune of Rs 100 crore every year. Our fuel is priced at Rs 5-6 a litre over what the public sector outlets sell. So the footfalls are very less and, therefore, there are limited options for the alternative use of land. But we do hope that the market will see a correction.

In fact, in the next few years, we plan to increase the number of outlets to around 5,000 when we see that the market is ready for private sector players with a level playing field. We have our blueprint ready for the same.

Meanwhile, we have taken up with the government the issue of a large retail network of Essar and Reliance lying idle, which the government can think of utilising as national assets.

Do we see any surprises from Essar in the exploration and production (E&P) segment this year?

We are looking at various E&P opportunities globally. We recently got a block in Vietnam. We are gradually expanding our portfolio and our focus is on quickly implement the work on blocks that we have acquired.

The prospects in some of the blocks are very promising and we see large gas reserves in the Vietnam block.

What will be your refining capacity in times to come?

We plan to take our refining capacity from the present 210,000 barrels per day (bpd) to 1 million bpd in the next three years. With the expansion at Vadinar, our capacity will go up to 700,000 bpd. As for the remaining 300,000 bpd, we are looking at opportunities for greenfield and brownfield expansion and acquisitions.

We will weather this crisis: Chidambaram

We will weather this crisis: Chidambaram
Govindraj Ethiraj

Finance Minister P Chidambaram talks on growth, inflation and other issues plaguing the Indian economy in an exclusive interview with Govindraj Ethiraj, Editor-in-Chief, UTVi. Excerpts:

Do you think that today we are facing a financial crisis the likes of which has never been seen before?

We have a problem on hand caused by world developments, oil shock, etc. Earlier we had a food shock, before that we had turbulence in the industrial credit market. This is not a crisis of the proportion we saw in 97-98 when there was a meltdown in Asia or what India went though in the 70s with high inflation and low food production and security problem. India has a stronger economy and political scenario today…we will have to weather this and we will.

Inflation is at a 13 month high, interest rates are at a 6-month high, in hindsight, were you prepared for this?

The 13 year high means that 13 years ago inflation was even higher. I was even mentally prepared for this, in fact I hinted about this in my budget speech, I said oil is at a high at $100 a barrel, monetary prices have elevated, food prices are also under pressure, I had warned people they must prepare to tackle inflation. No one expected Oil prices to go further than $100 a barrel to $146 a barrel. Just look at the evolution of oil prices, in May 2004 oil was $34 a barrel, in Aug 2007 it was $70 a barrel, and in June 2008 it is $140 a barrel. And the OPEC says it will go up further…so we’ve seen a four fold increase in oil prices in four years, a doubling in 12 months and a 40% increase since the budget was presented. No one expected it, but we will weather the shortage too.

Is it correct to say that the govt has run out of fiscal opportunities and is relying only on monetary options for inflation control?

The basic inflation management objective is to moderate and reduce aggregate demand. The best instrument to reduce aggregate demand is monetary policy. That’s why the RBI, the monetary authority, is the first line of defence. Fiscal steps like cutting taxes, etc. help to a point, but you can’t cut taxes indefinitely, because after a point, there’s nothing to cut…you need the revenues also, but there are some other fiscal steps that can be taken…if your fiscal situation is under pressure, obviously you have to moderate demand of the affluent sections…that’s something which we have to consider in due course of time. At the moment…it’s the monetary steps that are relied upon to moderate aggregate demand…

You mean things like higher taxes on SUVs…can we expect other similar steps also?

Such steps are a mix of many things… increasing taxes is mainly to discourage people from buying SUVs, it is also a fuel conservation measure, but revenue receipts from that are very minimal.

As I said, as we go on, we’ll see more options available, but the idea is not to burden people with higher taxes, the idea is to use monetary instruments and try to influence behaviour so that aggregate demand is moderated. In our everyday life, there are a number of things that we can do to moderate demand like not driving your car everyday, switching off all the lights when you leave the room, buying what is cheap on that day… if thousands of homemakers follow this we’ll surely see a fall in prices.

Is the government sending out price signals on fuel?

We have indulged the people of India, we have made them believe there is an amazing supply of oil at moderate prices which can even be sold at even cheaper prices by subsidies… we have not prepared the people that we are dependent on oil import for 70% of our needs…and that is a collective failure. Oil prices are rising further. All that we are saying is there are still inflation expectations and we are trying to anchor these inflation expectations. My message to the people is there are not price rises all the time, some prices have stabilised, some have declined and if behaviours adjust further more will decline further. Aggregate demand will come down.

What is your take on the understanding of the common man?

He will understand…people complain even today when the government is subsidising 1 LPG cylinder by almost RS 350, they understand that, but it they are asked to pay Rs 50 more they will complain.

Comments on the functioning of the government…

Everybody harbours grievances and to that extent, the government has to be sensitive. We have to patiently explain, take for example… we move LPG from the subsidy basket to the price basket to the extent of Rs 50… we still subsidise a cylinder of LPG by almost Rs 303 and people must understand that the government’s ability to subsidise is not infinite. It is limited. Ultimately the subsidy money also comes from the people through taxes and non-tax revenues.

Credit expansion that could be curtailed in hindsight…

Interest rates are low when inflation is low and growth is low…we are not comparing the growth economy. Growth during the NDA period was 5.8% during the 6 year period and if you leave out the last year it was 5.3%. That means aggregate output is lower, aggregate demand is lower, and we have low inflation that’s why inflation and interest rate are low. When growth dramatically rises to 9.4% then 9.6%, even today but for the turbulence in the international market, growth would have been 9%. Today, aggregate demand is higher and then there are capital flows into the country, inflation is higher due to the high oil and commodity prices all this leads to higher interest rates, I don’t think you can look at each column separately the interest rate column must be seen along the inflation rate column.

Credit expansion expected…

An economy growing at 9% needs a larger amount of credit, this debate between growth and price stability is an unending debate. Do you want growth or not? We could have said in the beginning of our term that we want the remainder of the 10th and the 11th plan to return growth rate of 6% and we could have eased along smoothly with low inflation and low Interest rate. But as a nation in the National Development Council where all the state CMs are represented, it was resolved that our growth rate in the 11th plan must average 9% and touch 10% in the last year, and that was the national plan. If that is the national goal – to finance an economic growth at 9 to 10%, requires a larger amount of credit, and if credit expands, if prices and commodity prices had not flared up this credit expansion there would have been only moderate inflation but oil prices and commodity prices have made matters worse and therefore there is high inflation. We are trying to resort to the tried and tested monetary steps, mainly interest rates, to cool demand.

Do you consider yourself an economist or a politician?

I’m neither an economic administrator nor am I politician. My discipline is law, I’ve tried to learn economics. I receive advice from all shades of economists, I have with me some outstanding economists in the ministry today. The PM himself is a distinguished economist. Anyone who thinks I take these decisions without the PMs approval is naïve to believe that. Every one of the decisions are taken with his guidance.

What is your take on the price of crude oil?

No one knows. I was in Jeddah, I had the Kuwaiti PM telling me, no one knows where crude will go. Hope it won’t go higher, if it does we have to tighten our belts …if it moderates I can breath more easily.

Worst case scenario…

We have to tighten our belts very seriously we have to adopt very strong conservative measures. Lets not think about that at the moment, though there is the internal thinking going on.

Your take on market movement…

If the markets are rising it has to be an orderly rise, if there is a fall it has to be an orderly fall. Even today the markets are about 13,500 points or so. When this government came into office it was 4000 points, that says the market is 3 times when the government came into power and PE ratios are still slightly higher than PE ratios in some Asian markets. But our growth is better than they in some Asian markets. Going forward, in 2008/9, I’ve just got the NCR projections and they have 2 scenarios one of growth at 8.5% the other pegs growth at 8.8%. I personally think growth will be at +8%. If +8% growth follows an average of 8.9%, why are we so despondent. We should be one of the happiest countries in the world. Yes, there is inflation, there is inflation world wide. We have to fight inflation to help the poor, that why we didn’t increase the price of kerosene and made a modest increase in diesel, we tried to increase the supply of foodgrain to the PDS while keeping the issue price of rice or wheat constant. We have to understand these problems…we are a nation moving forward, growing… The Chinese too have inflation, they have increased oil prices by 18% or so but yet they are a confident country, we too will weather this crisis and become an economic power…

Your take on the global financial sector…

We are being drawn into a global financial system, where we have greater capital flows, inflows and outflows… where there are mergers and acquisitions. When there are greater capital flows. The Indian financial system is being drawn into the global financial system. We cannot be completely insulated and that’s why we are affected by what happens to global economies, that’s exactly what the PM said on his flight to Japan.

Your take on FDI and insurance…

FDI is very strong, looking forward to FY09, FDI will continue to be strong. As far as insurance is concerned, it is still on our agenda, we want the insurance bill to be passed, it has been passed by the Parliamentary Standing Committee which had objections to 1 or 2 clauses. I’ve asked the Left to clear it – let’s see what happens… I have hope. Remember in 1997. I introduced the Insurance Bill it was defeated by the BJP lead by Manohar Joshi. The very same bill was passed in 1999. I’ve hope this bill will be passed in the term of this government.

Disinvestment in public sector companies…

As I announced in the budget public companies will be listed on the stock market by IPO or modest dilution of 5% or so, piggy backing on the IPO. The markets are still very volatile. But we will try and list as many companies as possible, listing public sector will improve the governance of public sector.

Public sector companies must be listed, the people of India must be able to acquire stocks in public sector companies. Of course, the government will remain the majority owner that will also improve that is the way to go.

Your take on market sentiment…

The market is still very uncertain and volatile but when the market comes down, as I hope it will, there is no reason why the markets should turn volatile. The market rises or the market falls, it makes no difference to me…the markets should be calm…we are a growing economy, we are a stable economy, our macroeconomic position is the envy of many countries…we have a problem with inflation, we will get over the problem, but the market must remain calm…

Is there an unfinished agenda?

We’ve had 8.9% growth in four years, and it can’t be stronger, I can read to you any number of parameters, indices comparing 2004-2008…yes, there will always be an unfinished agenda. Who said 5 years is the time frame to complete all that you wanted to, there will be an unfinished agenda, but we are the government and the next govt will also have reformers…Every generation will throw up reformers and they will take the process forward…