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14th September 2011
Amit Sen Gupta
"Capital is as terrified of the absence of profit or a very small profit as nature is of a vacuum. With suitable profits, capital is awakened; with 10 percent, it can be used anywhere; with 20 percent, it becomes lively; with 50 percent, positively daring; with 100 percent, it will crush all human laws under its feet; and with 300 percent, there is no crime it is not willing to dare, even at the risk of the gallows."
When Marx wrote about the crimes Capital can commit, given the right circumstances, the present intellectual property system was just being born. A hundred and fifty years later, perhaps nothing exemplifies better, Capital’s thirst for profit, as the current regime of intellectual property protection. It is a system that seeks to generate super profits through monopoly control over knowledge. When applied in the medicines sector, it translates into millions of deaths and destitution for an even larger number. Today, products to treat a range of diseases are denied to those who need them most because they cannot pay for them. It is denied to them not because these medicines cannot be produced at affordable costs, but because a few multinational corporations treat the knowledge as their property and sell these medicines at exorbitant prices. They also, use the monopoly created by patents, to prevent other companies from producing and selling these drugs at much lower prices.
Current Patent System: A Crime Against Humanity
The current patent system, as part of the global intellectual property regime, has assumed proportions that are unthinkable. It is the perpetrator of one of the longest standing, persistent and nefarious crimes against humanity. It denies a majority of humankind the benefits that can accrue through advances in science. Nothing illustrates this better than the impact of the HIV/AIDS epidemic in Africa. Half the continent of Africa has virtually lost two decades – developmental and health indicators at the turn of this millennium in 2000, were worse than in the 1980s. A major reason for this has been the decimation of the most productive section of the population – in many countries over 1/3rd of people in the 15-45 age group are infected by HIV/AIDS. A whole generation suffered and died, not because HIV/AIDS could not be treated, but because those who had the knowledge to make the necessary medicines used their patent monopoly to sell the medicines at costs that almost nobody in the African continent could afford. In 2001, the annual cost of treating one patient of HIV/AIDS was $10,000. Some African countries would have had to spend more than half their GDP to procure these medicines for those who needed them. The tragedy is, that these medicines need not have been so expensive. In 2003 the Indian company Cipla, finally started selling the same medicines at $250 per annum – at 1/40th the earlier cost! Even this was high, and the same drugs can be accessed today at less than $100, for a year’s supply.
India was mercifully spared the effect of medicine patents till 2005 because it had one of the most progressive patent laws in the world, enacted in 1972. That ahs however now changed and the signing of the WTO agreement in 1994 also marked India’s accession to a patent system that puts profits before people. India’s earlier patent Act worked on a very simple principle. It said that patents (a monopoly over use of a product) would be allowed in all sectors except the two that were most vital for human existence – food and health. So patents on medicinal products were not allowed in India and new medicines could be manufactured by a range of Indian companies without hindrance. This is why Cipla, was able to manufacture and supply HIV/AIDS medicines at a fraction of the earlier costs. Much of this enabling environment for Indian companies changed when India amended its Patent Act in 2005 – after completing the ten year transition period allowed when India signed the WTO agreement in 1994.
The History of Novartis’ Battle in India
A clear example of profiteering at the cost of peoples’ lives, in India, has been the case related to a vital anti-leukemia (blood cancer) drug called imatinib mesylate. The drug was introduced in 2001 and has quickly become the key drug that is used to treat a form of leukemia, called chronic myeloid leukemia (CML). For patients suffering from CML the drug is the difference between a healthy life and a death sentence.
Imatinib mesylate has been patented in many countries by the Swiss MNC, Novartis, which sells the drug under the Brand name of Glivec. In India, the initial patent application for the medicine was rejected by the patent office in 2006. Novartis persisted in its efforts to get a patent and appealed to the Patent Appellate Board. When the Board rejected Novartis’ application again, the company challenged the decision in the Chennai High Court. Not only that, it also challenged a key provision of the Indian Patent Act, that had been cited by the Patent office while rejecting the Glivec patent application. The Chennai high court rejected both the appeals by the Swiss company. Novartis has, however, continued to persist in its efforts to secure a patent for its drug. The final step is its, now pending appeal, before the Supreme Court of India.
In the Supreme Court Novartis is now challenging the interpretation of a crucial section of India’s Patent Act – Section 3(d). When India amended its patent laws in 2005, Parliament tried to ensure that the amended law would contain some safeguards against rampant profiteering by foreign MNCs. One of these safeguards introduced was this section. Section 3(d) essentially stipulates that trivial changes in existing molecules cannot be candidates for fresh patenting. Such trivial patenting (known as ‘evergreening’) is an old ploy used by drug companies to extend their monopoly. Companies first apply for a patent for the basic molecule and then attempt to extend the life of their monopoly by subsequently applying for fresh patents after a few years on as lightly different version of the original molecule.
In the case of Glivec, the original patent was filed by Novartis in 1993 for the ‘amorphous’ molecule of the chemical, Imatinib Mesylate. An amorphous salt is what exists in nature and is usually a mixture of different variants. In the late 1990s Novartis filed a fresh patent for the Beta variant of the molecule, which is already present in the amorphous salt that they had earlier patented. They also claimed that the Beta variety is better absorbed by the body. The 1993 patent was not recognized in India as at that time Indian law did not allow patenting of medicines. When the law was changed in 2005, Novartis applied for a patent for the Beta variety of the salt. The patent office rejected the patent and opined that under Indian law a slightly modified version of a known molecule cannot be patented. The patent office also said that the patent application does not fulfill two necessary criteria for patenting – novelty, and inventive step. The beta salt of imatinib was not an entirely new product, and neither was there any major inventive step involved in preparing a purified beta salt from the existing amorphous salt.
As we mentioned earlier, Novartis’ subsequent appeals in the Patent appellate board and Chennai high court were rejected. Interestingly Novartis also challenged Section 3(d) of the Indian Act in the high court, claiming that it was in violation of India’s obligations at the WTO. The Chennai high court pointed out that domestic courts cannot be asked to give an opinion regarding international treaties and obligations, and Novartis should take its complaint to the dispute settlement mechanism in the WTO. Novartis, has never done so and clearly Section 3(d) does not violate international obligations.
This time around, in the Supreme Court, Novartis has decided to use a novel plea. Instead of challenging Section 3(d) itself, they now argue that the section has not being properly interpreted. The section says that minor variations in an existing molecule cannot be patented unless there is a ‘significant’ enhancement in efficacy of the medicine. Now Novartis claims that since the Beta variant is better absorbed (by about 30%) it constitutes a significant enhancement. Clearly Novartis and its panel of expensive lawyers are clutching at straws! The patent office, while rejecting the company’s earlier patent application, had stated that anybody trained in chemistry would know that an amorphous salt is made up of different variants, and it is common knowledge that the variant are likely to have slightly different properties. However, it is this trivial piece of research, that is the basis for the entire case that Novartis is now fighting.
Novartis: Philanthropist par excellenece!
How much would Novartis gain if its patent were to be upheld? The mathematics speaks for itself. A month’s supply of Glivec costs Rs.120,000 – way beyond the means of more than 99% of Indians. Remember that the drug has to be taken lifelong. Yet the same drug is sold by several Indian companies at a price of Rs.8,000 for a month’s supply – 1/15th of what Novartis charges! Marx talked about capital willing to dare any crime for a 300% profit, here Novartis is fighting for a 1500% profit! At the heart of Novartis’ battle is a $ 4 Billion plus global market for Glivec – about Rs.20,000 crores, which is equal to the entire Union health budget of India for 2010-2011.
Novartis tries to give a different spin to the whole issue of access to the medicine. It claims that price is not an issue in India because ‘eligible’ patients are covered by a programme called GIPAP – Glivec International Patient Assistance Programme. The only problem with Novartis’ spin on the issue is wrong mathematics. Novartis claims that it supplies the drug, free of cost, to about 11,000 leukemia patients in India. The Cancer patients Association in India estimates that there are over 100,000 patients in India who suffer from chronic myeloid leukemia and that 20,000 odd new patients are added every year (the disease has an annual incidence of 1-2/100,000 population per year). Studies also show that the disease strikes earlier in India – among a younger age group – than in Europe and North America. Yet, Novartis’ publicists glibly continue to claim that all ‘eligible’ patients in India are cared for by GIPAP.
The GIPAP programme itself is an interesting case study. Novartis has regularly flogged it to claim credit for an act of charity. How altruistic is the GIPAP programme? The programme was launched in 2002 and Novartis claims that it reaches 35,000 patients in 80 countries. In 2003 the New York Times carried an investigative report that blew the lid off the claims of altruism. The NYT report (as well as another report from Argentine) documents how GIPAP has been used by Novartis to first create a demand for Glivec and then to pressure governments and heath management organisations to reimburse the cost of the medicine. The NYT reported: “In wealthier countries like South Korea, Hong Kong and New Zealand, Novartis, meanwhile, has encouraged patients who have received free drugs to become advocates, pressing public health systems to pay high prices for the drug. One company document declared that drug donations along with media campaigns and legal tactics were part of a concerted plan to win reimbursement for Glivec”.
The story gets even murkier. The website, www.healthyskepticism.org documents GIPAP’s record in Argentine and reports of a case filed in the country’s court: “The Program kept a 3-month reserve supply of Glivec for the patients. When the doses for the first phase of the treatment were delivered to the patients, including a 30 day supply to cover their immediate initial needs, the patients or their relatives were instructed to retain an attorney to start legal proceedings against the health care institutions which did not include Glivec in their formularies. After that, the provision of Glivec by the Foundation through their GIPAP Program was stopped. The investment by Novartis consisted of a single treatment [i.e. for one month] and then the company recovered its so-called donation by forcing the health care institutions to buy the product”….”the claim also details other illicit practices, such as the making of secret payments of bribes to doctors in order to position Glivec in Argentina, or the giving of gifts to oncologists”.
Novartis: The Victim!
Novartis has consistently played the victim in the Gilivec case. It says that it is not fighting the case to make money but to uphold the principle that it deserves credit for the investment it has made in research to develop the drug. What Novartis does not tell us is that Glivec was granted ‘orphan drug’ status in the United States and was therefore eligible for tax rebates equal to half the cost of clinical testing (the major cost for drug development). We turn to what Brian Druker, one of the scientists involved in developing Imatinib while working in Oregon Health and Science University Cancer Institute, has to say. In a signed article in livemint in 2007, Druker wrote: “In the recent debates on patents, pharmaceutical prices and access to essential medicines, the critical role of scientists and resources of the public sector and academic institutions involved in medical research have often been overlooked. As one of the scientists behind the development of the medicine ‘imatinib’ (marketed as Glivec by Novartis), which has allowed the effective control of a devastating form of cancer, I have witnessed the vital role that academic researchers and public institutions play in bringing new medicines to the market.
“Many scientists, if not most of those I have collaborated with in these settings, are engaged in research primarily motivated by the pursuit of knowledge as a means to help patients. For many of these scientists it is, therefore, of great concern that the results of their efforts can’t reach patients and save lives because of pricing strategies and patent policies such as “patent evergreening” (minor changes to existing molecules designed to extend patent monopolies) used by partners further down the drug development process”.
Druker, goes on to relate how a large portion of the research was made possible because of public funding and how the company was actually not very interested, initially, in pursuing the research on a cure for CML. He writes: “My work in Oregon on a therapy for CML was primarily funded by public sources, particularly the National Cancer Institute. My persistence with scientists at Ciba-Geigy (now Novartis) helped to keep the development of imatinib on their agenda despite uncertainty from product managers. As imatinib progressed through early and late clinical trials and demonstrated outstanding results, scientific and media interest in our discovery increased. The approval of imatinib by the FDA in May 2001 for use in CML was the culmination of a 10-year project for me, something I had dreamed of since medical school”. And yet, Novartis laments that it is not being given due credit for its ‘original’ research!
Corporate greed versus the lives of millions
Let us complete the Novartis story in India. What Novartis is challenging in the Supreme Court of India is not just the order denying the company a patent for Glivec. Novartis is challenging the very heart of the Indian Patent Act and its attempt to balance the rights of patent holders with the needs of the Indian people for access to treatment that is affordable. Section 3(d) of the Act has been used several times by the Indian patent office to deny patents for other similar trivial inventions, especially in the case of HIV/AIDS medicines. If the section is diluted or overturned, all these cases will be reopened. Not just that – it will open the door for a flood of applications, many of which were not filed by companies because of the existence of Section 3(d). So the case can have implications for access to medicines not just for CML patients but for a whole range of patients who are today able to access cheaper drugs made by Indian companies. These patients are located not just in India but in over a hundred countries in Asia, Latin America and Africa. For example, over 80% of all patients in developing countries who consume HIV/AIDS medicines are able to do so because Indian companies supply them at an affordable rate. This is a case that Novartis must not win because it is not about corporate pride. It is a case that sets corporate greed against the lives of millions across the world.
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Last Updated on Wednesday, 14 September 2011 05:12 |
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Prabir Purkayastha
26th October 2011
THE brand new National Telecom Policy 2011 (NTP 2011) proposed with a lot of fan fare has the same objective as earlier such policies – NTP 1994 and NTP 1999 – how to create new scams or justify existing ones. Sibal, while paying lip service to various other policy objectives such as teledensity, self-reliance, etc., makes clear that this policy is primarily to help “.. ensuring continued viability of (private) service providers in a competitive environment.” Too many licenses have been given with not enough spectrum and not enough money for putting in infrastructure. Now the challenge is how to allow the existing license holders to either sell their licenses or provide services without building the necessary infrastructure.
If NTP 1999 was to help the telecom companies to escape from the committed license fees running into thousands of crores of rupees to a revenue sharing regime, NTP 2011 game-plan appears to be designed to help the existing licensees to escape from their roll-out obligations for building a network and allow them to sell their licenses acquired at 1/10th the market price.
In Raja's scam, apart from his infamous first-come first-served policy, there were two other steps that he took. One was to change the mergers and acquisitions guidelines, allowing the parties to sell equity to others, the second was forcing BSNL to provide their infrastructure to these new operators for providing services through intra circle roaming. As a consequence, these new licensees could start getting subscribers and providing services without rolling out their network. That is why by making only marginal investments, they could still claim that they had started services, making their market value much higher. Without this, Unitech and Swan may not have been able to sell their shares to Telenor and Etisalat at 10 times what they had paid for the license fees.
FORCING BSNL INTO LOSSES
Raja's scam ridden Department of Telecom (DoT) regime had amended the licenses of the operators in June 2008 and permitted “intra circle” roaming. What it meant was that an operator could provide services in its service area even though it had not rolled out its network. Earlier, roaming was always for areas where the operator did not have a license and therefore his subscriber was forced to “roam” on a network provided by others. Along with these modifications, Raja also forced BSNL to provide such roaming facilities to companies who had received licenses in January 2008 so that they could start providing services, virtually without any further capital investments.
TRAI had objected to DoT's amendment of the licenses on various counts. The chairman of TRAI had written in July, 2008 pointing out that as per the TRAI Act, such an amendment to the license could have been issued only after seeking recommendations from TRAI. He had also pointed out that:
(i) Such intra-circle roaming should not be considered as a substitute for roll-out obligations specified in the license
(ii) It distorts various spectrum issues including quality of service, imbalance in spectrum utilisation
(iii) Has implications for additional spectrum entitlements
(v) It has security issues with subscribers not being easy to track as they could shift in and out of two networks continuously
One of the reasons that BSNL from being a company having huge reserves to one that today is making losses is that it has been used by the government to allow its competitors to piggy-back on BSNL.
In 3G services, some of the telecom majors – Vodafone, Airtel and IDEA -- have now extended intra-circle roaming to provide services in areas where they do not even have licenses. Step by step we have reached a regime where companies are now providing services without infrastructure or even licenses.
LEGALISING VIOLATIONS
If we look at the current bunch of license holders, particularly the ones who are party to Raja's 2G scam, TRAI is on record that their licenses should be cancelled as they have all reneged on the roll-out obligations. DoT has been dragging its feet over this. Some notices have been issued and noises are being made. But the intent is clear – how to allow such parties to sell their licenses rather than cancelling them.
The Draft NTP 2011 is the policy framework designed to make all such violations legal. In any case, this has been UPA policy in telecom. When companies such as Vodafone violated the 49 per cent FDI cap, the then finance minister P Chidambaram increased the cap to 74 per cent, arguing that since the cap is being violated, there is no point in having the cap. Now Kapil Sibal seems to be following in his foot-steps.
The key pronouncement in Draft NTP 2011 is the separation of physical infrastructure from services. What it means is that the network – cables, towers, cells etc. – can belong to one party while the other party provides services – a kind of providing the roads while other drive the cars.
Theoretically, separation of physical infrastructure from services is feasible. However, it brings a host of new issues – both technological as well as legal. The problem here is that if it is considered feasible to separate services from infrastructure, should we not then consider building a common infrastructure very much in the way that highways are? Without a common physical infrastructure, what would be the purpose of this separation?
The Draft NTP 2011 appears to view that the existing infrastructure can be separated – Vodafone's physical infrastructural will become one company while its services become another one. If fragmentation of the market is the problem and consolidation is the goal, then it appears such a separation will only fragment the market even further.
As it happens with all UPA policy, the explanation of the policy is not what is stated in the policy document. The target appears to be the huge cable network that BSNL owns. If this can be separated from BSNL, then it can become the common infrastructure of a number of private companies who can provide services without building any infrastructure. We are back to where we started from – the entire thrust of the policy is how to help existing license holders provide services without investing money. No capital expenditure, no roll-out of network, mint money by acquiring subscribers without pain and then sell licenses. This is what Sibal's policy claims as “exit” policy for companies.
Draft NTP 2011 has some lip service about indigenous manufacture. In concrete terms, all that it promises is that if everything is equal, then domestic manufacture will have a preference. Unfortunately, the issue in domestic manufacture is not about final prices of equipment but about the current excise and customs regime, basic infrastructure for manufacture and a host of other issues. If we want to promote manufacture, the only way to do so is to look at the gamut of issues and not make a token gesture of a kind that has no value.
CONSPIRACY TO DESTROY BSNL
Currently, the excise and customs regime is one where importing handsets and equipment enjoys duty preference. We have an inverted duty structure where raw materials and intermediate goods have a higher duty than finished goods. What it means is that it is cheaper to manufacture in China and sell in India. For equipment manufacturing, China had a clear policy. It forced the major equipment companies to transfer technology to Chinese companies in lieu of major orders – it utilised its market power to acquire technology. Compare this to what we have done – in spite of having the second biggest telecom market in the world, we have wound up even the manufacturing that we had earlier. C-DOT and ITI no longer are players for either equipment or technology.
Without indigenous technology, the current telecom regime is making buying telecom equipment impossible for BSNL and MTNL. DoT insists that all suppliers of equipment must also give source code which no international supplier is willing to give. The only exception are Chinese equipment suppliers. And here is the catch – the home ministry is now insisting that for security reasons BSNL should not buy Chinese equipment. If we take both the ministries together and look at the domestic manufacturing scenario, it makes sense if we only see the ministries working as a tag team to destroy BSNL. Are we to believe that the ministers are all naïve about the telecom sector, specially when the two concerned ministers have been deeply involved in telecom litigation in the past on behalf of the major telecom players? Or is there some other interest in sabotaging BSNL and MTNL by denying them expansion?
The telecom policies in this country have more to do with telecom scams than a clear enunciation of the country’s requirements. The 1994 National Telecom Policy lead to Sukhram and his case by case policy, and discovery of suitcases with crores of rupees in his bedroom. The 1999 policy was wholesale escape for companies who had secured licenses from paying license fees. The current NTP 2011 policy is to help companies who have secured licenses at throw away prices to sell them at huge profits. A scam today is the policy tomorrow: this appears to be the brief of successive ministers in the telecom sector.
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Last Updated on Wednesday, 02 November 2011 10:38 |
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D. Raghunandan
September 29, 2011
In a move with far reaching consequences, the Defence Acquisition Council of the Ministry of Defence (MoD) last week gave in-principle approval to divestment of 10 percent stake in Hindustan Aeronautics Limited (HAL), currently a 100-percent state-owned defence public sector undertaking (PSU). HAL will be the third out of nine defence PSUs in which the state has off-loaded shares. The state has already divested 25 percent stake in Bharat Electronics Limited (BEL) and 34 percent in Bharat Earth Movers Limited (BEML).
For several reasons, the HAL disinvestment has greater significance. HAL with annual sales of over Rs.130 billion or Rs.13,000 crores ($3 billion) is much larger than either BEL or BEML. BEL makes radars, other defence-related avionics and instruments, while BEML manufactures a range of four-wheeled vehicles, transporters including mobile missile carriers, railway coaches and earth-moving machines, but neither is the sole manufacturer of such items even within India. HAL is India’s only defence aircraft manufacturer and arguably Asia’s largest. Indeed, MoD has in the past even resisted proposals to separate the Kanpur Division of HAL which makes mainly civilian aircraft, despite government’s keenness to have HAL focus only on defence aviation, because of the strategic importance of HAL in the Indian aviation industry. India’s national security and its hard-won self-reliance in high technology areas, especially in the crucial defence sector, are thus interwoven with HAL and its capabilities and role.
Proposals for disinvestment of HAL have been doing the rounds for a long time, having first been mooted as far back as the ‘80s, but were always and quickly shelved precisely because of the sensitivity of such divestment in the defence aviation PSU. But clearly there has been greater readiness to embrace the idea in the new climate of privatization especially under UPA-II. Disinvestment of profit-making PSUs is now virtually mandatory. Government divestment policies have also been tweaked to permit PSUs to retain substantial proportion of divestment proceeds for reinvestment in infrastructure, capacity enhancement and technology upgradation, rather than handing over the proceeds to the treasury for meeting social sector expenditures. Whatever be one’s views about disinvestment of PSUs in general, surely defence PSUs require to be regarded differently, and other strategic considerations must come into play.
Rationale Given the strategic importance of HAL and therefore the significance of the move to off-load some government stake, the rationale behind this decision has not been made clear at any level.
Several government spokespersons have cited “lessening of the government burden” for HAL’s ambitious yet essential modernization programme as the prime motivator. HAL expects to invest about Rs.200 billion or Rs.20,000 crore over the next decade in upgrading its facilities. These modernization plans are necessitated, not only by the obsolescence of much of HAL’s several decades-old facilities, but especially by the upcoming license-manufacturing or sub-contract tasks in connection with the many new military aircraft that India has ordered or will soon be ordering.
In years gone by, HAL could only have approached government for these funds. But this is no longer the case. Navratnas including HAL now have greater autonomy. HAL has huge cash reserves, reportedly over Rs.9 billion or Rs.900 crores, and excellent credit rating. With the new and forthcoming acquisitions, HAL’s order books have swollen and in 2010 are Rs.85 billion (Rs.8500 crores) more that last year! HAL is already manufacturing the Sukhoi Su-30 MkIs and Hawk Advanced Jet Trainers, and will soon start work on the over $10 billion (Rs.45,000 crores) Medium Multi-Role Combat Aircraft (MMRCA) and later on the Russo-Indian Fifth Generation Fighter Aircraft (FGFA) expected to be worth over $30 billion (Rs.135,000 crores) in all. HAL will start serial production of the “indigenous” Tejas Light Combat Aircraft in a few years. HAL will also be undertaking offset work for several other smaller but financially significant recent or forthcoming acquisitions, such as the Boeing P8i reconnaissance aircraft, Eurocopter and the carrier-based MiG 29s expected to come with the Admiral Gorshkov, and will also participate in upgrade contracts for the Jaguar, Mirage 2000 and so on. HAL will remain one of the most profitable PSUs, having registered a profit of around Rs.20 billion or 2,000 crores in 2009-10, because of its privileged cost-plus pricing structure. With all this going for it, HAL can easily raise the funds it needs from financial institutions.
So why should HAL go in for divestment? Some commentators have opined that “going public” would help improve corporate governance. This is hardly credible. The modalities of divestment are not yet decided upon, and there is considerable doubt if it will take the form of an IPO for retail investors. Past experience also shows that 10 percent stock here or there makes no difference to how a company is run.
If improving HAL performance were really a goal, there are many measures government or the Department of Defence Production (DoDP) could take. Greater autonomy for HAL, professionalization of its management and proper oversight has long been required but never seriously addressed. Government, MoD, DoDP and HAL, have always hidden behind the “secret” veneer of defence and other strategic establishments, and a cloistered cost-plus pricing policy reaping profits without accountability. Greater functional autonomy for the different divisions of HAL has also long been called for. And, contrary to government’s apparent desire to reserve HAL for military aviation, increasing the civilian aviation component in HAL’s portfolio would increase efficiency, capabilities and culture of user-responsiveness.
Of course all this can be discussed, but rationale for divestment of HAL appears not to lie in these considerations but in an ideology of privatization and, perhaps more important, in the on-going efforts by vested interests to pry open India’s defence manufacturing sector and gradually hand it over to corporate houses both Indian and foreign.
Privatization of Defence Production Strenuous and determined efforts are being made to open up defence production in India to the private sector and to foreign direct investment (FDI). First the defence industry was opened up in 2001 to 100 percent private participation including upto 26 percent FDI. Then the Defence Procurement Policy as modified various times till 2010 introduced a compulsory offsets policy under which foreign suppliers would sub-contract work to Indian partners upto some percentage which, combined with the huge spurt in defence acquisitions earlier opening up of defence manufacturing to the private sector, encouraged large corporations to enter the defence sector in a big way. Finally, a new Defence Production Policy was announced which explicitly promoted private participation in defence manufacturing and in fact invited the Indian corporate sector to participate in the much-anticipated bonanza of Indian acquisitions of an estimated $50 billion over the next few decades (see http://www.delhiscienceforum.net/peace-and-disarmament/432-defence-production-policy-.html).
As if all this were not enough, the Department of Industrial Policy and Promotion (DIPP) put out a formal Discussion Paper in May 2010 http://dipp.nic.in/DiscussionPapers/ DiscussionPapers_17May2010.pdf calling for raising the ceiling of FDI from 26 percent up to 74 to 100 percent! The ostensible rationale was that if foreign manufacturers were to be compelled to transfer technology through the offsets provision, they would not part with state-of-art technology and risk its leakage unless they had greater control. In other words, if for instance Boeing were to sell F18s to India and part with related technologies, they would do so only if they were permitted to open a dominantly Boeing-owned entity in India which would then undertake the offset manufacturing. DIPP further argues that this would also promote export of military hardware from India. The DIPP’s great concern for the interests of the foreign vendors, or even its focus on the commercial aspects, do not unfortunately extend to a similar concern for building indigenous technological capability which obviously would not happen if the technology was simply going to be transferred from Boeing USA to Boeing India!
We have already seen that HAL is likely to be a major beneficiary over the next few decades through license manufacturing or offsets contracts, since a considerable proportion of big-ticket Indian defence acquisitions are likely to be in the aviation sector. It may therefore well be that the divestment of HAL is a first step, but a very important one at that, the thin end of the wedge if you like, to prize open Indian defence aviation industry to the Indian and foreign corporate sectors.
Straws in the wind here are already several significant pointers to this. The trend of Indian corporate majors such as Tatas, Mahindras, L&T and so on setting up substantial infrastructure for military hardware production is by now well known. Pipavav is set to emerge as a major partner of the state-sector Mazagon Shipyards, if not overtake it, as regards warship and even submarine production.
Former Chairmen, other retired senior HAL executives and numerous defence and industry commentators have started raising a chorus of calls for stepping up the privatization of the Indian defence aviation sector. It is argued that 10 percent divestment in HAL is too small, and that bringing in retail investors will not serve the purpose, so efforts should be made to attract corporate investors including foreign companies. Indeed that may already be the government thinking, as revealed by a source off-the-record to some business dailies. The Society of Indian Aerospace Technologies and Industries (SIATI), with over 300 corporate members, has called for converting HAL into a public limited company with private partners. Even otherwise well-meaning Air Force spokesmen, while bemoaning that the Indian private sector has a poor record in R&D and has unknown capabilities when it comes to defence hardware, argue that India’s defence PSUs including HAL are over-burdened and stretched to the limit, and that private sector involvement could help. But defence PSUs sub-contracting work to private sector players is a very different proposition to having major private defence manufacturers in India, or even foreign defence majors with Indian subsidiaries. And the latter is what many powerful voices are pushing for. In an Editorial on 14 September, the Financial Express called the HAL divestment “inadequate” and argued that, just as handing Suzuki a dominant stake and role in Maruti promoted the Indian automobile sector, what HAL needs is a strategic stake sale! So if Maruti-Suzuki, why not HAL-Boeing?
The saving grace is that the HAL divestment is not a done deal yet. It now needs to get clearances from the Finance Ministry, Cabinet Committee of Economic Affairs and go through different levels of government. Can this dangerous move be stopped?
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Last Updated on Thursday, 29 September 2011 12:16 |
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D. Raghunandan
1st December 2011
An advertisement currently running on TV for Chevrolet’s Beat Diesel has the closing line “Fuel is getting less expensive.” Since the sharp rise in petrol prices was headline news just recently, one was surprised at first, then shocked. Which was surely the intention, to get the viewer to think and figure out the message namely, DIESEL is NOT getting more expensive, so buying a diesel car makes sense. Indeed the entire series of ads General Motors has run for the Beat Diesel has focused on the low price of diesel. And thereby hangs a tale.
The nation has been gripped by one scam after another, with allegations, findings by statutory bodies and even criminal cases of wrong doing, bribery and corruption. Commonwealth Games contracts, the Karnataka mining scandal, 2G telecom spectrum, KG basin natural gas exploration: there is a long list of dubious deals with corrupt politicians, officials and businessmen conniving with each other to subvert public policy, to favour a chosen few and rob the exchequer as well as the taxpayer. Public anger against this venality was evident during the Anna Hazare led agitation against corruption by public servants.
Many on the Left had argued that such crony capitalism went beyond individual corruption or rent seeking, and that systemic corruption had increased sharply since liberalization of the Indian economy in the early nineties, which ironically had been ushered in supposedly to curb the license-quota system. It was also pointed out that public policy could also be, and was being, subverted even without any obvious bribery, yet favouring a whole class or section of industry, and transferring huge amounts of money to this favoured group at the cost of the taxpaying public and the exchequer.
The scam in diesel passenger automobiles is a typical example. Whether or not there is any bribery involved only time will tell, but there can be no doubt that a scam of monumental proportions is taking place under our very noses and in broad daylight.
Diesel continues to be heavily subsidized, and is therefore considerably cheaper than petrol, following a decades-old policy. Thus even while petrol prices have been de-controlled since 2010 and supposedly follow global market trends, diesel prices continue to be fixed by government at comparatively much lower rates even though international prices of both commodities are roughly the same. Argument has been that diesel is used by farmers for pump sets and tractors, and by heavy road transport vehicles and the railways to move essential commodities including foodstuff and other goods, and therefore any rise of diesel prices will have a cascading effect on consumer prices especially of food items, with particularly severe impact on lower income groups.
But of late, an entirely different class of people, middle-class and wealthier owners of diesel powered personal vehicles and automobile manufacturers are benefiting from this subsidy, entailing a huge transfer of money to these sections and a massive loss to the exchequer and to oil marketing companies. The UPA government and supporters of its neo-liberal policies continually and stridently advocate dismantling of subsidies even in food grain as witnessed in the on-going debate on food security and the public distribution system. Yet the UPA government is coolly watching this transfer of resources to corporates and better-off sections through diesel subsidies, and yet is doing nothing about it.
Diesel car sales galloping
Even a recently as a decade ago, diesel passenger vehicles constituted only 4% of all 4-wheeler personal transport vehicles in India. But with the large price difference prevailing between diesel and petrol, consumers of passenger vehicles are shifting to diesel vehicles in huge numbers.
Currently as much as 30% of all passenger vehicles sold have diesel engines, and this is expected to go up to around 50% in the next few years. Demand for passenger vehicles has roughly doubled in the past decade, but within that, demand for diesel vehicles has gone up by a shocking 430%! According to some industry analysts, current demand for diesel passenger vehicles is already around 60% if one accounts for all categories and for pent up demand. So much so that all manufacturers today have a waiting list of several months for diesel models while petrol driven cars can be bought over the counter.
All automobile manufacturers have launched diesel models over the past two years. Volkswagen launched diesel versions of the polo and Vento last year, and of the Jetta a few months ago. While European car makers have a long history and even currently high sales of diesel automobiles, even US and Japanese manufacturers which do not have joined this dieselization trend in India, and that too with a bang. Apart from GM’s Beat diesel, Ford launched diesel variants of the Figo in 2010 and of the Fiesta in 2011. Even Toyota which was initially reluctant, has launched diesel versions of the Corolla Altis, Etios and Liva during 2010-11. Market leader Maruti Suzuki has launched diesel models of its SX4, Kizashi and the highly popular Swift, and in some models almost 85% of sales are of diesel variants. Tata Motors’ Indica and Vista, Mahindra’s Verito, Hyundai’s new Verna and Renault’s Fluence are other recent additions. Earlier, diesel power was common mainly for larger vehicles, and concerns have been expressed by many commentators at the sudden spurt in purchase of gas guzzling SUVs. But now, given the present trend, even tiny cars such as Maruti’s Alto and Tatas’ Nano are coming out with diesel variants.
So high is the demand for diesel vehicles forecast by Suzuki, which has limited capacity to make diesel engines in India and does not itself design diesel engines in any case but manufactures them under a joint Suzuki-Fiat venture, that it has recently announced a deal to buy 100,000 diesel engines from Fiat which manufactures these engines in a Tata-Fiat joint venture plant in Maharashtra. Ford which has taken an early lead in the diesel stakes in India, has enhanced its Pune plant manufacturing capacity to 250,000 diesel engines. Hyundai is planning a new Rs.1500 crore diesel engine plant in Tamil Nadu while Honda, which like most Japanese car makers is globally almost exclusively a petrol car player, is also reportedly contemplating a diesel engine for its soon to be launched small car in India.
Loss for whom, Subsidy for whom?
From the buyer’s point of view, as sought to be exploited by the GM Beat Diesel ad, the choice is clearly driven by cheaper diesel prices. Diesel vehicles are more expensive than their petrol variants. In mid-size models, difference in price is around Rs.70,000 to Rs.100,000. But the diesel costs about 40% less than petrol, and also typically give 20% or so more mileage. Contemporary diesel engines are fuel-efficient and maintenance free unlike those of a few decades ago and the earlier image of dirty, smoke-spewing noisy engines no longer applies. Running costs are therefore 60% or more lower than petrol driven vehicles, a huge benefit in the eyes of cost-conscious Indian buyers. A diesel car owner can thus recover the additional initial cost in around 4 years based on an average use of 15,000 km a year.
Clearly, buyers who can afford to pay up to a lakh of rupees extra for a mid-size car are the ones who benefit from the diesel subsidy to the tune of around Rs.20,000 to Rs.25,000 annually. Not to mention buyers of large luxury diesel vehicles such as Mercedes, BMWs and the like who don’t blink at the lakhs or even crores for these luxury cars but who also benefit from diesel subsidies.
Diesel powered passenger vehicles are today the second largest consumers of subsidized diesel with 15% share of total diesel consumption. Agriculture and public transport buses account for only 12% each. While trucks account for 37% diesel consumption for goods transport, railways consume only 6%: unfortunately freight transport by rail has been grossly neglected by successive governments even though trains use only one-fourth the fuel of road transport for equivalent weight and distance.
Oil marketing (OMCs) companies complain that under-recoveries in diesel are now hurting them badly. They estimate losses of around Rs.67,500 crore annually on diesel alone, about 60% of the total losses of the OMCs, a figure confirmed by the Ministry of Petroleum & Natural Gas! At 15% consumption of diesel by passenger vehicles, this amounts a direct subsidy of over Rs.10,000 crore annually to owners of diesel cars!
Loss to the exchequer was the main issue in the 2G scam.
In the case of subsidized diesel for passenger vehicles too, the exchequer is losing massive amounts. The Central Government earns Rs.14.74 as excise duty on each litre of petrol sold. But it earns only Rs.4.93 per litre for diesel, a loss of close to Rs.10 per litre of diesel. At total diesel sales for passenger vehicles amounting to over 7.8 billion litres (15% of about 52 billion in 2009), this amounts to a loss to the exchequer of around Rs.7800 crores annually. And with each increase in petrol prices, and with galloping demand for diesel passenger vehicles, the annual losses to the exchequer will skyrocket.
Diesel Pollution
There is another important reason to curb the dieselization of private transport in India, and that is the extremely harmful effect of pollution by diesel vehicles. Limitations of length prevent a more detailed discussion, but a few salient facts may be highlighted.
Delhi followed by other cities banned diesel buses, taxis and autorickshaws and mandated their conversion to CNG because of diesel pollution. As pollution monitoring data has shown, and citizens of Delhi will aver, pollution levels came down considerably due to this measure. But the effect has now been completely nullified, indeed the situation has got worse, due to the proliferation of diesel passenger vehicles in Delhi.
Pollution monitoring data by several agencies including the Central Pollution Control Board testify to the worsening of air pollution in Delhi, chiefly in respect of increase in particulate matter (PM) especially PM10 (particles of 10 microns and smaller, which enter the respiratory system) and PM2.5 (which can penetrate into the lung, and classified as carcinogenic by WHO) and NOx (nitrous oxides), both known diesel pollutants and dangerous to human health.
These show PM10 declining from 2001 onwards but starting to increase again after 2005. PM10 levels in residential areas which was at 149 micrograms per cubic metre in 2001 registered 209 in 2008. The Institute of Tropical Meteorology, Pune, found that PM2.5 was at unsafe levels all year round and had reached 280 micrograms per cubic metre against the safe limit of 60, and well above the level classed as ‘very unhealthy.’
Govt unwilling to tackle
Even in the face of all this evidence, and the mounting burden of this totally unnecessary subsidy to better-off personal vehicle owners, incentive to automobile manufacturers and huge costs to public health, government has been unable and unwilling to act. And this despite strong recommendations by numerous studies including by government appointed committees.
The Expert Group on Viable and Sustainable Pricing of Petroleum Products chaired by former Planning Commission Member Kirit Parikh had in February 2010 made a series of recommendations. There may certainly be disagreements with several of them including the central one of total decontrol of petroleum prices. But one recommendation pertaining to the issue of personal diesel vehicles has immense merit and has been welcomed by many quarters. Indeed a similar measure was independently also suggested in these columns a few years ago.
The Expert Group Report suggested that, in order to offset the loss to the exchequer and to provide a level playing field to users of both petrol and diesel driven vehicles, an additional duty of around Rs.80,000 be charged and remitted to government on each diesel passenger vehicle up-front at the time of sale. The amount was arrived at based on average usage of each vehicle (taken as 8000 km/year) and the benefit that the user would have got through lower excise duty on diesel over a 10 year period. This author has a different set of calculations that would put the up-front levy at around Rs.125,000.
Whatever the figure, the proposed measure has several advantages. Chiefly, it avoids a disastrous resort to dual pricing, one price for trucks and trains, and another for passenger vehicles, which would only encourage a black market in diesel, besides being almost impossible to enforce. It neutralizes the running cost advantage and subsidy that diesel vehicle owners enjoy now, levels the playing field between diesel and petrol driven cars, and avoids ruinous losses to OMCs and to the government through revenue losses.
Seems a win-win. Petroleum Minister Jaipal Reddy spoke of such a measure being one possible way of avoiding loses to OMCs but said the Finance Ministry would decide among several alternative proposals sent to it. However, a Group of Ministers headed by Finance Minister Pranab Mukherjee decided in June this year not to accept the Expert Group recommendation of an additional up-front duty on private diesel vehicles. At the same time, faced with mounting losses of OMCs and loss to the exchequer, as well as with embarrassing questions from many quarters, he announced in August that “some measure” would be taken to curb subsidies to private diesel vehicle owners, but failed to say what, and no decision has been taken by government since then.
Meanwhile, automobile manufacturers are laughing all the way to the bank, while more and more better-off car owners happily pocket thousand of crores of subsidy on diesel meant for freight transport and agriculture.
And all the time the powerful Society of Indian Automobile Manufacturers (SIAM) which is not only a highly influential industrial lobby but also has representation on all important government committees, have lobbied hard against any move to curb dieselization of personal transport and have categorically stated that they are “very strongly opposed” to any additional levy on private diesel powered vehicles.
Whose government is it anyway? |
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Last Updated on Thursday, 01 December 2011 12:05 |
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