Informed by my understanding of various sectors of the Indian economy, I have prepared a comprehensive set of policy proposals to expedite growth. These are broadly divided into three categories -- proposals for raising investments and productivity, proposals for improving financial markets for enabling the businesses to have required equity and credit and proposals for improving economic governance.
In this article, we will focus on measures to raise investments with a special focus on the energy sector.
India’s investment rates have fallen to less than 30 percent. Such low investment rates are persisting for more than seven years now. Our investment rates exceeded 35 percent for some quarters during 2005-2014. China averaged investment growth rate in excess of 40 percent for 25 years (1993-2018) with a peak of 48 percent and still is clocking over 44 percent of the investment growth rate.
While the slowdown in housing and construction investment started about 7-8 years ago and is still persisting, there is a slowdown in road highways, power generation and telecommunications now.
Quite a few sectors where private sector investment was flowing in earlier have become unattractive for the private sector for different reasons. They include highways (unviability), telecom (regulatory excess), residential housing (capital appreciation disappearing) and power (unavailability of coal).
Energy requirements set to grow
Lack of oil and gas and the dominance of coal as our fossil fuel presents a complex challenge to meet energy needs, including the management of greenhouse gases and pollution load. Increasing commercialisation of renewable resources -- solar and wind -- presents a real opportunity for the energy transition.
Oil and gas and power sectors are dominated by public sector entities, especially in distribution. This presents enormous challenges in policymaking meeting expectations for free or subsidised supply of energy/ electricity for agriculture and residential consumers. The policy choices made have distorted pricing for productive sectors of the economy which has implications for India’s manufacturing competitiveness.
The private sector has entered into several spheres of the energy sector but the unprofitability of distribution businesses, most starkly in the electricity sector, has not only kept off the private sector in distribution businesses but has also made the upstream industry -- most spectacularly in the power generation as severely uneconomic.
What should be done?
Reform and liberalise oil and gas products market completely by eliminating LPG and kerosene subsidies over a period of three years closing the gap by gradually raising prices. The phase-out programme to begin with by withdrawing subsidies from the income taxpayers immediately followed up by withdrawing from households other than the poor as per SECC Census after a year. Subsidy for the poor/deprived as per SCC Census may be continued for a period of 3-5 years.
A national gas pipeline grid/ backbone network needs to be built by connecting importing ports and domestic producing areas with major industrial consumers and major cities under the control of a Central Natural Gas Grid Authority (CNGGA). Delivery/ distribution network from the CNGGA to actual industrial consumers and cities can be built by gas pipeline infrastructure companies. This CNGGA should be a designer, builder by granting concessions and system operator with actual pipelines being constructed on BOOT basis by private enterprises and GAIL. Existing pipeline asses of GAIL which fits in the National Gas Grid should be demerged from GAIL into a separate entity. These existing pipelines and also of private enterprises which can be integrated with this network. Remaining pipelines in appropriate size can be built on Tariff Based Bidding system.
Petroleum products may be moved to the GST system over the next two years. Presently prevailing effective tax rate (including the impact on input credits not allowed) for each petroleum product may be divided into two parts - GST rate and Non-VATable Excise Duty to ensure that there is no revenue loss to the government – the Centre and the states taken together -- in the process.
Petroleum product distribution should be privatised keeping only one public sector competitor along with deregulation of gas and kerosene prices and complete decontrol of petrol and diesel prices. Major oil sector public sector entities -- Indian Oil Corporation need to be restructured by separating the refining, product distribution and petrochemicals businesses. BPCL may be put on the block first by selling the government stake completely in one go. ONGC can off-load HPCL in two-three years. Product distribution business of Indian Oil may be privatised after some time when the real competition has got mainstreamed in the country.
Some steps to boost coal sector
Considering the coal resource endowment of the country, coal being the principal fuel for the generation of electricity and the fact that coal era may not last for more than 30-40 years, India’s coal sector policy and enterprises structure need to be transformed with the aim to make India a net coal exporter in 10 years. For this, coal mining allocation processes need to be fundamentally reformed to make a coal mine operational in 2-3 years in place of 6-10 years it takes now. Further, the monopoly of Coal India needs to be dismantled and the coal market needs to be converted from a totally sellers’ market to a buyers’ market. For operationalising commercial coal mining and 100 percent FDI, five mines packages of 100 million tons per annum production capacity each may be bid out on a competitive basis inviting the best of the global coal mining companies to participate in the auction. No restrictions (linkage, allocation, non-export, etc.) should be placed on such bidders and free use/disposal/sale of coal so produced be allowed. It should be followed up with privatisation of all the loss-making subsidiaries of Coal India. An additional test of simplification of mining allocation would be the faster and time-bound conversion of coal mining licences to power producers who are sitting over potentially 290 million tonnes of coal production every year. Over a period of five years, a very competitive coal mining Industry will develop in India producing more than adequate non-coking/ thermal coal for meeting all our needs, eliminating the need to import any thermal coal.
Management of coal transportation from collieries to power plants is quite outdated and inefficient. Coal India needs to make transportation of coal from collieries to dump yards to loading points efficient and IT-driven. There is an excessive charge of freight on coal transportation. Coal transportation by rail, along with most other commodities, should also be opened up by the Railways for the private sector, with no restrictions on the movement of coal by containers and the freight to be charged. Railways may recover their haulage charges on a commercial basis.
Power sector needs to be revamped
The industry structure of the electricity distribution business and also of transmission and generation business needs to be reformed. Sub-transmission (electric transmission from what is presently categorised as transmission to 11 kV sub-stations) and supply of electricity to consumers categorised as ‘distribution/supply’ should be reorganised into separate sub-transmission or the ‘line’ business and provision of electric current to the consumers or the ‘supply’ business. Entire transmission and sub-transmission business, which is profitable today, should be organised as concessions and privatised or monetised both by the Central and State utilities after removing the artificial distinction of inter-state transmission and intra-state transmission. The monopoly of state ‘distribution’ utilities in electricity supply business needs to be eliminated by introducing 3 to 4 additional distribution/supply licensees in each of ‘distribution/ supply’ area delineated on a basis that, as a contiguous entity, it generates a business of minimum Rs 50 crore in a year.
NTPC is the biggest generation CPSE in the power sector with about 60,000 MW of generating capacity. All other entities (NHPC, THDC, SJVN, NEEPCo, DVCs etc.) do not aggregate more than 30,000 MW. The Central governments’ generation companies should be merged/ organised in maximum two entities -- NTPC and one more by merging the rest of all generating companies. In fact, it might be best to merge all the generating companies in NTPC. Power Finance Corporation (PFC) and Rural Electrification Corporation (REC) should be merged (REC has in any case been acquired by PFC) as these are carrying out almost identical financing functions. Powergrid can be made a pure transmission enterprise by separating Central Transmission Utility (CTU), which needs to be organised into a separate regulatory entity. After the entire restructuring and reorganisation, there should only be three power sector entities under the Central government -- NTPC, PowerGrid and PFC.
Indian industry and businesses need to get power at competitive rates and not artificially enhanced rates with the loading of cross-subsidies and inefficient generation. They should be given complete freedom to source their power- buying from the supplying utilities, generate it captive or buy it from the market (other generators) or from the power exchanges. This would also require the implementation of a completely unrestricted and unburdened ‘open access’ system.
One unit of electricity does the same work whether consumed by industry, households or by farmers. Ideally, power should be supplied at one rate, modified only to reflect legitimate differentiation like the type of power (LT connection or HT connection). Consumer-based differentiation in tariffs must be eliminated to introduce real competition and to do away with market distortions. The governments can run their end-consumer based (e.g. farmers/ small consumers) welfare/ support programme by using direct benefit transfer (DBT) approach, like in case of LPG, leaving such targeted consumers free to buy their electricity needs from whichever source they consider most efficient and convenient for them.
The Central government should stop all investment support programme in the power sector. The Central government should, however, undertake one Final Power Sector Reforms programme. All the losses in the state power distribution system as on April 1, 2020, should be aggregated carefully. These losses can be shared in the ratio of 50:50 between the State governments and the Central government on condition and completion of power sector industry restructuring programme, allowing access to industry and business complete freedom to source their power and routing of all the end-consumer based subsidies by delivering on DBT basis. Taking over of the 50% losses should be back-loaded i.e. on completion of all the three components of reform programme. The central government may not fund this loss take over from the budget. It can create an SPV to raise debt and finance support to the States. This SPV debt can be paid back by allocating repayment to central utilities.
Sun is the primary source of energy. Technological developments have made it possible to generate electricity at more competitive costs capturing light from the Sun. Ongoing technological innovations and development would make the Sun the most competitive source of generating electricity, storing and providing it for consumption all 24 hours. In India also, 5-6% of total electricity produced in a year is now from Solar Photo Voltaic Technology. As India is short of hydro-carbons, including gas, and coal is a sun-set fuel, India’s electricity future lies in renewables, especially solar. To scale up the generation and use of solar electricity, India needs to start investing majorly in two streams of most promising technologies -- battery storage and hydrogen as the intermediating fuel (solar electricity during day time into hydrogen into electricity at the place and time needed). Investment in the infrastructure required for this should be supported by the State to the extent of cost disability. India should plan to have effective solar-generated electricity in the mix of 12.5 percent by 2030, 25 percent by 2040 and 50 percent by 2050.
India’s hydropower potential is less than 20 percent exploited. India’s neighbour Nepal’s development also can be financed a lot from potential revenues from hydropower generation. Together, in India’s, Bhutan’s and Nepal’s Himalayan region, the unexploited potential of about 2 lakh MW is awaiting right policies and investment. There are excellent co-benefits of hydro-power so generated in controlling floods in Bihar and other States and also developing the tourism potential of the Himalayan states. Investment in hydropower generation projects in the cascade of each of the tributaries of Great Ganga and the Brahmputra and development of tourism projects would be financially viable providing 20 percent free power generated to the host state. All access infrastructure costs should be borne by the host state. This hydro-power and tourism development should be planned by a joint authority. All projects need to be awarded to private project developers on a global competitive basis, who should be able to sell power so generated to companies in India, Nepal, Bhutan and Bangladesh.
Subhash Chandra Garg served as Economic Affairs Secretary and Finance Secretary of India. Garg, a 1983-batch IAS officer, demitted office on October 31, 2019. The former senior bureaucrat, who also served as an Executive Director in the World Bank, had prepared a note that listed major economic, financial and governance policy reforms India needs to adopt to build a $10 trillion economy by early 2030. CNBC-TV18 is publishing a series of articles based on this note. This is the fourth article in the series.
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First Published: IST