Power
reforms vital for fast India
growth By Siddharth Srivastava
NEW DELHI - Prime Minister Manmohan
Singh's claim this month that the economy will
grow more than 6.5% in the 12 months to March will
be severely tested given the dismal state of the
country's power infrastructure, highlighted by the
two widespread blackouts in July that left more
than 700 million people without power.
Manmohan, who is also finance minister,
said the economy will grow "a little better" than
the 6.5% achieved in the 2011/12 fiscal year. He
was speaking after the grid failures, the worst
anywhere in history, swept 20 states and left
trains, hospitals, offices, commercial
establishments and traffic lights without power.
The lights may be back on now, but the
underlying weaknesses
remain. The problem
relates to increasing gaps between supply and
demand and a failure to institute much-needed
reforms in the electricity generation and coal
production sectors. These include passing on the
full cost of power to end-users, and increasing
the incentive for investment in the power
industry.
Failure to develop a viable
power infrastructure could further weigh on
stalling economic expansion - gross domestic
product growth in the March quarter hit a
nine-year low of 5.3%.
"Some harsh
decisions need to be taken in the immediate future
to prevent such a collapse from repeating itself,"
Montek Singh Ahluwalia, deputy chairman of the
Planning Commission, told Asia Times Online,
making points similar to those highlighted by
rating agencies such as US-based Moody's, Fitch
and S&P.
"The key element is
appropriate pricing of fuel and fixing tariffs
that reflect cost of inputs such as coal. This is
the reason that state electricity distribution
companies have accumulated huge losses and are
unable to implement reforms or buy power,''
Ahluwalia said.
"It is mistake to think
that raising fuel prices will raise inflation.
India has to prepare to internalize the real cost
of energy. A sick energy sector, idle power plants
and rising deficits to bail out companies is not
good for inflation either. It becomes worse over
the longer term.'' he said.
Fuel Price
Reforms Underlining the main cause of
India's deficient generation sector, Ahluwalia
said this is related to "lack of sufficient
investment".
"The key to driving capital
into the sector is by making adjustments in fuel
pricing that allows investors to cover their costs
and returns," he said.
State distribution
companies make losses while selling electricity at
the retail level due to officially depressed
tariffs. This drives away private and foreign
investors while limiting the ability of state
entities to make productive deployment of funds
and set up an efficient transmission network. It
impacts the revenues and margins of power
generators thus slowing progress.''
Speaking on coal pricing, Ahluwalia said:
"India's coal imports have risen over the last few
years. But, domestic energy prices, including
coal, oil and gas produced within India, quote
much below the international prices. The local
prices have to be aligned to global rates to
contain the huge subsidy element involved in fuel
consumption in India today that directly impacts
government's ability to manage the fiscal deficit.
The present oil and gas-pricing formula too cannot
sustain.''
Protecting the
poor However, Ahluwalia did caution that in
a democracy such as India, harsh decisions cannot
be pushed through quickly due to political risks
involved.
"Any decontrol [of prices] has
to be done intelligently in order to protect
consumers while the inflationary impact will need
to be closely assessed. We should be looking at
partial decontrol to begin with. It is important
to adopt a gradual approach given the political
aspects involved. At the same time fuel subsidy
cuts are necessary to rein budget deficits at
state and federal levels to retain investor
confidence.
"The subsidy in fuel supply
needs to be separated from the business side of
decision making. If the government needs to be in
the picture it should extend doles at stages where
the consumer needs protection rather than setting
the parameters within which businesses should
operate. That should be left to freer market
determination.''
Overall
concerns Rating companies that keep an eye
on India's power sector have also emphasized the
need for change following the grid collapse.
According to Moody's: "The recent outage presents
an opportunity to engage and seek sector reform,
thereby improving the availability and reliability
of electricity. As the structural challenges of
the power sector affect each step of the value
chain, meaningful improvement will take time and
focus.''
According to Standard &
Poor's, India's poor power infrastructure is a
matter of prime concern. "The blackout was, in our
view, a consequence of capacity growth and
infrastructure improvements that severely lag the
country's mushrooming demand for power," S&P
said.
Fitch Ratings said India should be
looking at radical reforms such as opening up the
coal sector to private mining firms, changes in
the auction of coal blocks and backing Coal India
Ltd's efforts to purchase overseas coal assets.
The future "Multiple variables
need to be looked at. Even as fossil fuels
continue to dominate, we are trying to push
nuclear, renewable and hydro energy in India's
energy consumption basket. The government is
extending incentives for hybrid fuels and electric
vehicles,'' Ahluwalia said.
"Technology,
policy, political will need to combine in a way
that contributes to India's overall progress. The
country's gross domestic product growth is
slipping. It will be a challenge to raise it to 8%
levels as happened earlier. Managing India's
energy sector efficiently will be crucial to such
achievement.''
Siddharth Srivastava is a
New Delhi-based journalist. He can be reached at
sidsri@yahoo.com
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