Mukesh Ambani: Action time

New Delhi, July 14: Reliance Industries chairman Mukesh Ambani today met Congress president and UPA chairperson Sonia Gandhi, Prime Minister Manmohan Singh and other senior officials, fuelling speculation that this was part of a lobbying effort to nix the Samajwadi Party’s demand for a windfall tax on private oil refiners.

Samajwadi Party general secretary Amar Singh has written several letters to the Prime Minister after his party decided to support the UPA government in which he also wanted the government to stop treating Reliance Industries Limited’s Jamnagar refinery as an export-oriented unit (EOU).

Ambani is believed to have explained to the Prime Minister that the withdrawal of EOU status to refineries such as the Jamnagar refinery would send out wrong signals to investors.

The Samajwadi Party’s support is critical for the survival of the UPA government, which is scheduled to seek a trust vote in the House on July 21-22. The Opposition feels that the Manmohan Singh government has been reduced to a minority after the Left withdrew support over the nuclear deal with the US.

Amar Singh is close to estranged brother Anil and the elder Ambani scion is concerned that the government might accept some of the demands which would hurt his businesses. Ambani also met cabinet secretary K.M. Chandrasekhar during the day.

Show of strength

The Samajwadi Party is expected to support the Congress in the floor test in Parliament.

The economic agenda unveiled by the Samajwadi Party in the run-up to the vote indicates that companies run by both the Ambani brothers could be impacted by policy decisions if the Congress government accepts even some of the suggestions.

Sources said the elder Ambani argued that the demand for the levy of a so-called windfall profit tax on private oil companies was predicated on the false assumption that world crude oil prices surging to unprecedented levels meant that the refiners were also making huge profits.

While the government shares production from oil and gas fields and is a beneficiary of high oil prices, the refinery business is highly cyclical. With new capacities due to come on stream across the world, Ambani is believed to have said that refinery margins would decline sharply.

Economic logic

In economic terms, a windfall profit tax would increase the marginal production costs. Profit maximising companies would respond to the changed scenario by reducing output and raising prices, stoking an inflationary trend that the government is already trying to control.

If the tax is imposed in the form of an excise levy, it would increase marginal production costs, reduce domestic oil production and increase the level of oil imports.

A windfall profit tax is a tax on actual profit or profit margins. If levied on actual profits, it would need to take into account the capital invested, asset base and other parameters. If it is imposed on profit margins, it would be necessary to look at margins of other businesses, especially during boom periods.

Ambani is believed to have told policy makers that the revenue gains from a windfall profit tax would be short-term in nature, but the economic costs of introducing an unstable fiscal regime could be long lasting.

However, critics have argued that while Ambani’s refinery makes huge profits because of the tax exempt EOU status that the Manmohan Singh government granted it last year, state-run refineries have been forced to sell at fixed low rates within the country, thereby suffering losses.

Samajwadi Party leaders say their demands have nothing to do with the rivalry between the Ambani brothers, though younger brother Anil is known for his proximity to the party. They contend that the government would earn over Rs 100,000 crore through the windfall profit tax on private refiners.

Cong response

Congress sources said Prime Minister Manmohan Singh made it clear that he would neither compromise on economic decision making nor involve the government in sorting out corporate wars. “We have not blatantly helped anyone so far. Economic decision making is always based on merit and any demand will be considered on merit But making one’s support (for the trust vote) conditional on a bailout package for a corporate house is not on,” a source said.