The recent Ambani Gas Dispute has raised many questions regarding privatization of national assets and competition law. The whole controversy mainly concerns with supply and pricing of natural gas between Anil Ambani and Mukesh Ambani. The dispute has its origins in Reliance Industries split in 2005, where a family agreement was reached between two brothers, brokered by their mother Kokilaben. According to the family pact, Mukesh Ambani headed Reliance Industries Limited (RIL) agreed to supply natural gas at the price of 2.34$ per unit to Reliance Natural Resource Limited, headed by Anil Ambani. Now after five years of the family pact, RIL says it can only sell natural gas for $4.20 per unit, claiming this is the price approved by the government. The core issue of the whole dispute is the legality of the family pact reached between two brothers during Reliance Industries split. In June, the Mumbai High Court upheld the claim by the younger brother Anil Ambani’s group, which was challenged by Reliance Industries in the apex court. The government too has intervened in the matter as an interested party, saying ‘gas’ was the property of State and cannot be fought between rival Corporate Houses.
This leaves us with a big question of privatization of national assets. It is important to delve into this question because in assets like natural gas and oil, any slight price fluctuation can have repercussions in the whole economy. I intend to provide a brief economic analysis of how and when it is feasible to privatize national assets, especially natural resources. As far as Reliance Dispute is concerned, this analysis is very important to understand the possible consequences of the outcome of pending litigation.
The choice of private or national form of institution depends on many factors like economic conditions, human capital, political regime etc. Normally, in developing countries the institutional choices are “volatile” and keep changing from one form to another. Among many other factors, this cyclic transition is mainly determined by economic conditions of the country. After economic recession hitting the economies across the world, we can easily see the transition from one form of institution, i.e. privatized, to another form, i.e. nationalized. This back and forth movement is natural and as mentioned earlier depends on many factors.
The choice of private or national form of institutions is mainly stated as a trade off between equality and efficiency. On a simpler note, nationalized form is preferred when the commodity is scarce and prices are high. The vice-versa of this is true for privatized form of institution. Apart from the type of commodity and price, other factors like tax regime, risk aversion and other exogenous costs determine which model is to be preferred. Globally, in natural resource and utilities sector, nationalization and privatization cyclic change are more frequent.
Developing countries like India are largely dependent on imported oil because of poor natural resources to manufacture oil. Due to this problem, generally, tax system proves to be inadequate because of fluctuating prices; therefore, all the more it is advisable to have nationalized form of institution to govern such sectors. Not only because of inadequacy of tax regime but also because of poor human capital in India, nationalized natural assets are more desirable. Privatization of natural resources in a country like India would only increase the already existing inequality. Latin American countries and South East Asian countries are live example and have already witnessed problems due to privatization of natural resources in the past. In my opinion, privatizing, as of now, will only worsen the conditions, and increase misery in poorly diversified productive structure.
By saying that, I am not proposing that “nationalization” is the solution of all problems in a growing economy and privatization is not required at all, but I am stating that in this cyclic transition, at this given point of time privatization of national assets is not required.
In Reliance Gas Dispute, it would have grave repercussions if two companies were allowed to deal with each other in a manner to determine prices of national assets by private agreements. Not only there is danger of worsening inequality, as mentioned earlier, but also of competition between corporates, which will be distorted completely. In view of this, many private companies have already intervened in the pending litigation in Supreme Court. Needless to say, that the Mumbai High Court Judgment is of little help in this regard when it ordered RIL to supply natural gas at the price settled in family pact after assigning NTPC certain quantity at the same price.
Taking all the above points into considerations, in my opinion, allowing Ambani brothers to carry on with family pact would not be a feasible decision in existing conditions. Not only the competition between corporates is jeopardized but also economy, as a whole, would suffer.
Now since the matter is pending before Supreme Court, we can expect that she keeps in mind the social justice point of view and take a strong stance on it. The oil found in Krishna-Godavari basin is one of the major and biggest discoveries not only in India but also in Asia. Any sort of dispute concerning oil distribution between two rival corporate houses will only delay the national progress. Moreover, at present, when the prices of commodities are zooming high, resolving this dispute should be of high priority for corporates, government, and the Supreme Court.
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