Power cuts in a time of surplus

Power cuts in a time of surplus

24x7 reliable power supply to all at an affordable price would be the best gauge of power sector growth
Recent bids on power exchanges indicate electricity tariffs are at their lowest ever. In July, the Indian Energy Exchange saw a total 6.74 billion units put on sale, compared with purchases of 3.98 billion units at an average tariff of Rs.2.16 per unit.

Theoretically, this suggests India has finally become a “power surplus” nation, exactly 137 years after the first demonstration of electric light was given in Kolkata by P.W. Fleury & Co.

Yet, the stark reality is that many states are witnessing power cuts of 4-5 hours every day. In Uttar Pradesh, planned load shedding is as much as 11-12 hours in rural areas and 5-6 hours in urban, according to the Uttar Pradesh Power Corp. Ltd website.

What’s causing this anomaly? There are four reasons. The first is that while capacity addition has peaked, industrial and commercial offtake remains low. In the three years ended fiscal 2015, capacity addition was 74.72 gigawatts, the fastest in a decade. However, growth in industrial and commercial consumption—the highest-paying segment under the telescopic tariff structure followed—was only around 4.57%, as per a Central Electricity Authority (CEA) report, Growth of Electricity Sector in India From 1947 to 2015. Only the domestic consumer segment, which puts additional cost burden on the distribution utilities given lower tariffs, saw decent demand growth of 8.9%, as per CEA estimates. In some states such as Maharashtra, industrial and commercial consumption declined 0.73% while domestic consumption increased 7.81% in the three years.

The second is that cost of supply has increased, as have aggregate technical and commercial (AT&C) losses. Domestic consumers do not have the capacity to absorb all the incremental power produced, or pay higher cost. Distribution companies, or discoms, typically incur higher cost on supplies to this segment and earn lower revenues. Small wonder they are resorting to load shedding.

The practice of power cuts is more extensive in rural areas, where the cost of supply is significantly higher, demand density lower and AT&C losses higher than in urban areas.

There is also a limit to how much industrial and commercial consumers can be exploited to recover losses from electricity supplies to homes, or the so-called cross-subsidization. To boot, higher industrial and commercial tariffs are already impacting the competitiveness of domestic firms.

Third, local distribution continues to be a problem for want of infrastructure. In urban centres such as Noida, Faridabad and Gurgaon, inadequate distribution capacity has meant power cuts being extended beyond planned load shedding. Taking cognizance of this, the government has sharpened its focus on fund allocation under the Integrated Power Development Scheme to strengthen networks.

And fourth is the financial health of discoms and the challenges to their revival. Intermittent AT&C losses are a major reason—apart from the humongous debt burden—why discoms are in the doghouse. At the national level, AT&C losses are already high at 22.7%—meaning nearly a quarter of the electricity produced in India is wasted. That national average has been driven up because losses are significantly higher in five states: 46% in Bihar, 39% in Odisha, 32% in West Bengal, 28% in Madhya Pradesh and 27% in Rajasthan, according to a Power Finance Corporation report on the performance of state utilities.

While technical losses can largely be attributed to infrastructural issues and consumption mix at different voltage levels, the bigger problem is poor billing and collection efficiency. Additionally, disbursement of tariff subsidy by states is inadequate and irregular.

To be sure, the government has taken a number of initiatives, including initiating a road map to achieve reliable 24x7 power for all in every state, and improving the financials of discoms through the Ujwal Discom Assurance Yojana (UDAY).

UDAY has immense potential to cure discoms through initiatives proposed under four broad categories: improvement of operational efficiencies; reduction of cost of power; reduction in interest cost; and, enforcement of financial discipline through alignment with state finances. However, success hinges on relentless implementation by states.

In a nutshell, the ills plaguing the sector can be attributed to poor financials of discoms, inadequate investment in transmission and distribution infrastructure and lack of cost recovery from certain consumers.

Also such simple deductions of “power surplus” divert attention from the stark reality that there are more than 55 million households waiting to be plugged in. That latent demand is not part of any “surplus” calculus.

That’s why when measuring power sector growth—and planning to scale up for the future—using just the yardstick of “adequate availability of electricity” will be inadequate. A truer, holistic gauge would be 24x7 reliable power supply to all at an affordable price.

To achieve that objective, states will have to show strong resolve to reduce AT&C losses, invest in infrastructure development, ensure efficient commercial operation of discoms, make timely tariff revisions, and reduce the cross-subsidization that’s impacting the competitiveness of the industry and services sectors.

The time is also right, perhaps, to provide direct, targeted subsidies to electricity consumers who can’t pay much—if at all. The learnings from the LPG direct subsidy transfer project would be very handy here.

China launches 'hack-proof' communications satellite

China launches 'hack-proof' communications satellite
China on Tuesday launched the world’s first quantum satellite, which will help it establish ‘hack-proof’ communications between space and the ground, state media said, the latest advance in an ambitious space programme.
The programme is a priority as President Xi Jinping has urged China to establish itself as a space power, and apart from its civilian ambitions, it has tested anti-satellite missiles.

The Quantum Experiments at Space Scale, or QUESS, satellite, was launched from the Jiuquan Satellite Launch Centre in the remote northwestern province of Gansu in the early hours of Tuesday, the official Xinhua news agency said.

“In its two-year mission, QUESS is designed to establish ‘hack-proof’ quantum communications by transmitting uncrackable keys from space to the ground,” it said.

“Quantum communication boasts ultra-high security as a quantum photon can neither be separated nor duplicated,” it added. “It is hence impossible to wiretap, intercept or crack the information transmitted through it.”

The satellite will enable secure communications between Beijing and Urumqi, Xinhua said, referring to the capital of China’s violence-prone far western region of Xinjiang, where the government says it is battling an Islamist insurgency.

“The newly-launched satellite marks a transition in China’s role—from a follower in classic information technology development to one of the leaders guiding future achievements,” Pan Jianwei, the project’s chief scientist, told the agency.

Quantum communications holds “enormous prospects” in the field of defence, it added.

China insists its space programme is for peaceful purposes, but the US defence department has highlighted its increasing space capabilities, saying it was pursuing activities aimed to prevent adversaries from using space-based assets in a crisis

Nasa: Last month was Earth’s hottest in recorded history

Nasa calculated that July 2016 was 1.51 degrees Fahrenheit (0.84 degrees Celsius) warmer than the 1950-1980 global average

 Earth just broiled to its hottest month in recorded history, according to National Aeronautics and Space Administration (Nasa).

Even after the fading of a strong El Nino, which spikes global temperatures on top of man-made climate change, July burst global temperature records.

Nasa calculated that July 2016 was 1.51 degrees Fahrenheit (0.84 degrees Celsius) warmer than the 1950-1980 global average. That’s clearly hotter than the previous hotter months, about 0.18 degrees warmer than the previous record of July 2011 and July 2015, which were so close they were said to be in a tie for the hottest month on record, said Nasa chief climate scientist Gavin Schmidt.

Scientists blame mostly man-made climate change from the burning of fossil fuel with an extra jump from the now-gone El Nino , which every few years is a natural warming of parts of the Pacific Ocean that changes weather worldwide.

Georgia Tech climate scientist Kim Cobb said this is significant “because global temperatures continue to warm even as a record-breaking El Nino event has finally released its grip.”

Nasa’s five hottest months on record are July 2016, July 2011, July 2015, July 2009 and August 2014. Only July 2015 was during an El Nino. Records go back to 1880.

This is the 10th record hot month in a row, according to Nasa. The National Oceanic and Atmospheric Administration, which calculates temperatures slightly differently, will come out with its July figures on Wednesday. NOAA has figured there have been 14 monthly heat records broken in a row, before July.

“The scary thing is that we are moving into an era where it will be a surprise when each new month or year isn’t one of the hottest on record,” said Chris Field, a climate scientist at the Carnegie Institution and Stanford University.

This new record and all the records that have been broken recently years tell one cohesive story, said Schmidt, director of Nasa’s Goddard Institute for Space Studies: “The planet is getting warmer. It’s important for what it tells us about the future.”

India climbs 15 spots in innovation ranking

India rises to 66th position, based on the Global Innovation Index, from 81 last year, maintains top rank in Central and South Asia

India rises to 66th position, based on the Global Innovation Index, from 81 last year, maintains top rank in Central and South Asia

India climbed 15 spots, from 81 last year, to 66 in the Global Innovation Index (GII) and maintained the top spot in the Central and South Asia regions, according to the rankings released on Monday by Cornell University, INSEAD and the World Intellectual Property Organization (WIPO).

Switzerland, Sweden, the UK, the US, Finland and Singapore lead the 2016 GII rankings. This year, China joined the world’s 25 most-innovative economies, becoming the first middle-income country to enter the top 25 of the index in its nine editions of surveying the innovative capacity of over 100 economies.

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India scored high on tertiary education and R&D, the quality of its universities and scientific publications, its market sophistication and information and communication technology service exports, where it ranks first in the world, according to the index.

The index said that India has all the ingredients needed to become a global driver of innovation including strong market potential, an excellent talent pool, and an underlying culture of frugal innovation. India ranks second on innovation quality among middle-income economies, overtaking Brazil. “Relative weaknesses exist in the indicators for business environment, education expenditures, new business creations and the creative goods and services production,” it said.

“Digital has become a primary driver of strategy development and innovation for business in almost all sectors. I am convinced we are only at the beginning. Notably for established organizations, the challenge lies in finding ways to successfully innovate by using and transforming existing resources and business practices,” said Johan Aurik, managing partner and chairman of GII’s knowledge partner A.T. Kearney, in a press release.

The index said that India has the ability to create a unique spot in innovation history to meet its own market requirements by using its cultural advantages of frugality and sustainability. Stressing that India’s priorities for innovation need to be in the areas of energy, water, transport, health care, food security and digital consumption, the index said that India should strengthen its own talent pool and leverage global talent “in these market-pull areas”.

“The commitment of India to innovation and improved innovation metrics is strong and growing, helping to improve the innovation environment. This trend will help gradually lift India closer to other top-ranked innovation economies,” said Chandrajit Banerjee, director general of the Confederation of Indian Industry.

Why inflation targeting works

In absence of a specific mandate, monetary policy was often used to achieve targets unrelated to price stability

The Reserve Bank of India (RBI) officially adopted inflation targeting (IT) as a monetary policy strategy in February 2015. A few days ago, the government notified a consumer inflation target of 4% to be followed till March 2021. Some economists have expressed fresh concerns about the wisdom of adopting IT. These concerns are misplaced. Inflation hurts everyone in the country from households to firms. Even moderately high inflation is bad for growth as is inflation volatility. The primary objective of monetary policy should be to ensure low and stable inflation. IT offers a framework to achieve this objective in a credible and sustainable manner. The adoption of IT by the RBI is a significant step in the right direction. The RBI should stick to this framework and put in place the operating procedure needed to implement IT.

Central banks have the power to print “fiat” money. Unlike money backed by metals such as silver or gold in the pre-World War II era, fiat money gets its value from a legal decree. Every fiat money needs a nominal anchor to tie down the price level. A nominal anchor can take various forms such as money supply, nominal gross domestic product (GDP), value of domestic currency relative to a foreign currency or a price measure such as the consumer price index (CPI). Since the collapse of the gold standard, central banks have tried all kinds of nominal anchors but with limited success. The world has increasingly moved towards inflation targeting where the nominal anchor is the CPI.

IT requires a central bank to adjust its monetary policy instruments in response to the gap between the forecast inflation rate and a pre-announced target rate. Most countries today follow a “flexible IT” framework. This gives the central bank discretion to respond to shocks such as a growth slowdown in the short run and meet the inflation target in the medium run. This is the kind of IT framework that has been adopted by the RBI. The objective is to pin down the value of the rupee to the price of the CPI basket.

IT anchors the inflation expectations of the private sector. It imposes discipline on monetary policy. Before the adoption of IT, monetary policy in India was conducted in an ad hoc manner. The RBI would target multiple indicators ranging from inflation and growth to exchange rate and trade balance. There was no clarity about the primary objective of monetary policy. The lack of accountability, clarity and transparency in monetary policy introduced uncertainty. Uncertainty about the central bank’s monetary policy objective is a risk factor for the economy.

In the absence of a specific mandate to target inflation, monetary policy in India was often used to achieve objectives unrelated to price stability. For example, during 2004-07, in response to a surge in foreign capital inflows, the RBI lowered the nominal interest rate. This was done to prevent the rupee from appreciating. This meant interest rates were kept low at a time when the economy was growing at a very high rate fuelled by a credit boom. A pro-cyclical monetary policy triggered inflationary pressures. CPI inflation began exceeding 5% from February 2006 onward. Post 2008, in response to double-digit inflation, the RBI pursued successive rounds of monetary tightening at a time when growth had begun slowing down. IT acts as a guard against this kind of a discretionary monetary policy.

IT was first adopted by the Reserve Bank of New Zealand in 1989. Since then, the number of countries using IT as a framework to conduct their monetary policy has steadily gone up. As of now, 36 countries, including India, have officially adopted IT (see table). In addition, all 19 countries in the euro zone are bound by the inflation target chosen by the European Central Bank. This takes the total count of IT countries to 55.

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Since the 2008 financial crisis, questions have been raised about the effectiveness of monetary policy to boost demand in developed countries where interest rates are close to zero. Yet, IT has stood the test of time through shocks, including the 2008 crisis. No country has moved away from IT as a framework and newer countries have adopted it after the crisis. What has changed is not the overarching framework of IT but the instruments used to meet the inflation target. Under conventional IT, short-term interest rates are the instruments of monetary policy. In the post-crisis period, several developed countries started using unconventional measures such as quantitative easing to achieve the inflation target. IT has continued to be the framework used to anchor inflation expectations. A broad consensus supported by empirical evidence has emerged that IT is effective in delivering low and stable inflation and anchoring inflation expectations in developed and emerging countries.

The RBI has taken the first step towards stabilizing inflation by formally adopting IT as India’s monetary policy framework. A lot more remains to be done in order for RBI to actually become an inflation-targeting central bank. Equipped with the IT mandate, the RBI needs to focus its efforts on strengthening monetary policy transmission (MPT) and putting in place a comprehensive operating procedure. Unless financial market reforms are undertaken to strengthen MPT, small rate changes will not have any effect on aggregate demand and hence inflation. The RBI should consider bigger changes in the interest rate. Small rate changes of 25 or 50 basis points work well in IT countries that have strong MPT. One basis point is one-hundredth of a percentage point.

The RBI needs to build internal technical capacity to forecast inflation using sophisticated econometric models, improve the quality of publicly available macroeconomic data, publish its forecasts of inflation and related macroeconomic indicators at regular intervals, systematically track the private sector’s inflation expectations, form the monetary policy committee (MPC) that will decide the interest rate, and furnish the MPC with necessary information, including data, and models used to forecast inflation.

IT is a whole new regime in monetary policymaking in India. The policy focus should now be on understanding how the new regime works and how this framework can be used to deliver low and stable inflation on a sustainable basis.

No such thing as an economic miracle

The East Asian growth model, for all its wonders, belongs to history—slow and steady may be the only option left

One of the less heralded truths of economics is that growth miracles, while they make for good press, are overrated. It’s an insight that could help us better understand the outlook for developing countries such as China.

Most of the world’s wealthiest and best-governed countries got there without super-rapid bursts of growth. Denmark, which has a per capita income of about $52,000 and is frequently ranked as one of the happiest countries in the world, never experienced what anyone would call an economic miracle. If you Google that phrase, the main entry will be a research piece detailing how, in the 1990s, the country lowered its unemployment rate without having to dismantle its welfare state.

Denmark’s overall economic record is gloriously boring. From 1890 to 1916, per capita growth averaged about 1.9% per year, and if in 1916, you had forecast that this pace would continue for another 100 years, you would have been off by only about $200. Denmark had positive growth about 84% of the time and no deep recessions, according to a recent study by Lant Pritchett and Lawrence Summers.

Or consider the US, where per capita income surpassed Latin America in the 19th century—thanks mainly to the latter’s stagnation. US growth rates at the time were typically below 2%, and even lower up through 1860, hardly impressive by the standards of today’s China or India—or for that matter today’s US. The big advantage of the US is that it avoided major catastrophe for long periods of time, apart from the Civil War, and pushed ahead with fairly steady progress.

The 19th-century Latin American stagnation left much of the region with weaker infrastructure, poor educational systems and a more dysfunctional politics.

Slow growth doesn’t mean that the US or Denmark were failures in the 19th century. It’s hard for economies at or near the technological frontier to rapidly improve living standards, because invention is usually slower than playing catch-up by borrowing technologies from wealthier nations. Such borrowing of know-how, along with exports and rapid investments in education and infrastructure, is what later allowed the Asian tigers of Japan, South Korea, Taiwan, Hong Kong, Singapore and China to achieve growth rates of 8% to 10% a year.

If you are an investor, the experience of Denmark and other “no drama” growth stories provides some clues to the future of developing economies.

The East Asian growth model, for all its wonders, belongs to history. Slow and steady may be the only option left. For whatever reasons, few countries have been able to scale up their educational successes as rapidly as the East Asian tigers. Trade growth, which exceeded overall output growth in the late 20th century, now seems stagnant. Many export industries are automated and hence don’t create as many middle-class jobs as they used to.

In other words, today’s world may resemble the 19th century more than the past few decades. That could mean fairly low measured growth rates, a premium on stability, few if any “break out of the box” alternatives and a time to invest in institutional quality. American democracy arguably was working better by the early 20th century than it was during the presidency of Andrew Jackson, and that helped America cope with later crises.

What’s also striking about the 19th century is that some countries, such as China and India, didn’t keep up. They had some bad luck, pursued bad policies and suffered under colonial and imperial oppression. Foreign rulers often were more interested in control than in producing public goods for the citizenry.

In the next generation, the emerging economies may return to these 19th century patterns. Either they will learn to build slowly and steadily, or quite possibly they will go into reverse.

Vallabhbhai Patel and the making of India

Patel and his deputy V.P. Menon imparted the geographic coherence to India

India has come a long way since its independence 69 years ago. Back then, a hard-fought independence came with besetting problems—partition, communal riots and a refugee crisis. By 15 August 1947, the process of integration of princely states was almost complete but the holdouts—Hyderabad, Kashmir and Junagadh—were the toughest nuts to crack. Add to that the resource constraints, fledgling institutions if at all, and a colonial machinery ill-equipped to deal with changed realities, and the Jawaharlal Nehru government had too much on its hands.

Vallabhbhai Patel, India’s first deputy prime minister and the minister of home affairs, would not just handle these problems with dexterity but would go on to truly become—in the words of Shashi Tharoor—“the man who saved India”. By integrating more than 560 princely states, Patel and his secretary of the ministry of states V.P. Menon imparted geographic coherence to India and prevented its Balkanization, a fate which many predicted would befallthe newborn state sooner than later. Indeed, geographic coherence is far less lofty than the much talked about “idea of India”, but at the same time it is far less theoretical too.

Having made his mark in the satyagrahas of Kheda (1918) and Bardoli (1928), Patel was a strong contender for the role of president of the Indian National Congress in 1929. However, M.K. Gandhi chose Nehru. A loyal soldier of Gandhi, Patel fell in line. History would repeat itself, quite famously, in May 1946 when it was clear that the next Congress president would end up as independent India’s first prime minister. The provincial committees of the Congress favoured Patel, but Gandhi pressed for Nehru. A loyal Patel fell in line, once again.

Personal disappointments did not come in the way of higher duty. Patel would use all the tricks in the bag—including the use of force, as Hyderabad and Junagadh show—to integrate the princely states with the Indian dominion. An administrator by instinct, Patel sought to protect the privileges of the Indian Civil Service officers who were deemed to be compromised on account of their previous services to the Raj.

It is well-known that Patel had many differences with Nehru. On the economy, while Nehru was a committed socialist with a firm belief in state-led industrialization, Patel’s borrowed belief in Gandhian self-sufficiency was tempered by his personal advocacy of private capital. Patel argued against nationalization of industries and was for letting “those who have the knowledge and experience manage the industries and increase the country’s wealth”. He was a major driving force behind the liberal industrial policy resolution of 1948.

In their book Freedom at Midnight, Dominique Lapierre and Larry Collins quote one of Patel’s aides as saying: “Patel came from an industrial town, a centre for machines, factories and textiles. Nehru came from a place where they grew flowers and fruit [sic].”

Patel was among the few to see the dangers from China’s imminent takeover of Tibet. One of the foremost chroniclers of Sino-India relations, John W. Garver records: “Patel advocated a series of practical measures designed to strengthen India’s position: accelerated road building in the frontier areas, strengthening of India’s military capabilities, moves to better integrate the northeastern territories into India.” Garver goes on to say: “Had India adopted Patel’s recommendations in early 1951, history might have been very different.” On Kashmir, the realist Patel had advised Nehru against going to the UN.

These differences were natural as Nehru and Patel were two very contrasting personalities. Nehru was a visionary, abstract at times, Patel a hard-nosed realist, his clarity of thinking was matched only by Subhas Chandra Bose and B.R. Ambedkar among contemporaries. Patel was a man of few words but when he did talk, note Lapierre and Collins, “people listened”. Patel’s loyalty to Gandhi and “stoic decency”—to borrow Sarvepalli Gopal’s phrase—helped avoid an “open rupture” between him and Nehru.

The question often asked: What if Patel had become India’s first prime minister? Any attempt at answering will not just be an exercise in speculation but also unfair to both Patel and Nehru. This newspaper has said earlier that Nehru’s contribution to modern India is immense and cannot be discounted. While avoiding a comparison between the two, a tribute to Patel could be: While it is contested, sometimes bitterly, if Nehru was India’s best prime minister, it is overwhelmingly believed that Patel’s record as home minister has never been bested.

Is the Nehru-Patel comparison fair?