Posted in Finance Articles, Total Reads: 2082
, Published on 06 September 2014
Power sector is one of the most important sectors for the Indian economy. It is this sector that governs the success of other sectors. India had a plan of “Power or all by 2012”. But, has the country been able to achieve that goal? Has the country been able to reach even half the goal? The answer to these questions is, of course, No. So, what went wrong? Yes, one of the reasons is the power sector. Let us see what went wrong for India, not only in terms of power, but in various other sectors as well.
India is a developing country. So is China. But, why is China today an $8.1 trillion economy, where as India is just $1.8 trillion. This is despite the fact that in 1991, India was a $325 billion economy, while China was just $355 billion. So, what happened? The answer is in manufacturing.
Image Courtesy: freedigitalphotos.net, njaj
India has lagged behind other developing countries because of the lack of investment in the manufacturing sector. Consider the comparison with China. China’s domestic savings rate is 45%, while that of India is 28%. This is the key difference which has restricted India from expanding its wings and flying, i.e. improving in terms of education, health, poverty, and various other important segments. Domestic savings rate can, in simple terms, be seen as the investment done so that some sustainable return can be obtained. Now, India’s domestic saving rate is low because not much has been invested in the manufacturing sector. The challenge for the new Prime Minister of India, Narendra Modi, is primarily to boost the manufacturing sector. Before discussing about what Mr Modi is doing, let us first see the importance of the manufacturing sector. Manufacturing sector deals with the building of industries, plants, etc. These industries when operated, provide employment to people. As a result, the condition of the people, who were earlier unemployed and now, provided work by these industries, improves. The net income of the society increases. With this money, people can buy necessary items needed for survival. Today, 1/3rd of the population of India doesn’t even get 2 square meals a day. So, the industries can basically provide the needy people with the basic essentials. Once, the need of food is satisfied, a person can buy medicines, clothes, or send children to school. Hence, an employment can actually make India move forward in terms of not only one aspect, but many interrelated aspects as mentioned above.
It is clear that the manufacturing sector is the key for India to come back to a high growth trajectory. But, wait. How India came down from a high growth trajectory? This is the question that needs some thought. India was growing near 10% few years back. Then how the growth nearly halved in just 4 years period. The answer to this lies in how the government utilises the most important resource, i.e. money. And, it has not been properly utilised by the UPA government. For that, let us talk about the budget. A budget has two components – Receipt and Expenditure. Receipt is the total amount obtained by the government through its sources, like tax collection, borrowing, etc. Expenditure is the spending of the government. Expenditure itself can be of two types. One can be planned and the other non-planned. The planning commission allocates capital to various sectors like education, healthcare, etc. It allocates these from the amount allocated to it by the government. The other is non-planned expenditure and that is the amount directly spent by the government.
It has been seen that the Planning commission allocates the amount allocated to it more wisely than that done by the government directly. Capital expenditure is the key to growth, since it is the investment which will yield good results. This is basically like investing in those industries about which we talked about. In the budgets given by the UPA, it has been seen that the capital expenditure is around 1/8th of the total expenditure. This is where the problem lies. The major chuck of money has gone in revenue expenditure, which is basically non-productive. Wait, let us see what Narendra Modi has done in the July 10 budget. The total expenditure has been increased to Rs 1794891 crores from Rs 1590434 crores. Capital and revenue expenditures, both have increased. UPA had allocated Rs 229128 crores last year to the total capital expenditure, though it actually happened to be Rs 190894 crores only, when the revised estimated came. But this time, the target is not even equal to the previous target. The capital expenditure proposed by the Modi government is just Rs 226780 crores. This is less than the previous set target. However, more important than setting a target is to actually achieve it. So, it is yet to be seen whether Modi will be able to achieve this target or he will be like the UPA government.
It is high time that the government be accountable to whatever it says or does. In the last budget presented by UPA, it was around 40,000 crore rupees (80,000 crore rupees according to moody) were deferred to the PSUs. This helped show the fiscal deficit of the government to be Rs 529,000 crores. The government should be strictly accountable to any decision it takes. The deferred amount to the PSUs will hamper any growth possibilities of these PSUs. Anyways, it is high time to improve the status of these PSUs. One possible solution is by disinvesting these PSUs and making them private. It is evident from the fact that the domestic savings rate of private sector is 9%, while that of public sector is -4%. Yes, you saw it right, it is negative. That means, public sector is harming the country the way investment is being done in the public sector. A big challenge in front of the Modi government is to disinvest these PSUs. That can help in increase in the manufacturing activities, resulting in higher growth of India.
Another important factor restricting the country is the SLR. This is the percentage of the amount of the banks that has to be put in the government bonds. Now, these bonds give low return. As a result, to make profit, banks have to charge higher interest from its customers. This results in lower growth of the businesses. Also, the money put in the bonds is with the government. This large amount with the government results in improper spending by the government. The large revenue expenditure, including subsidies, which barely reach the ones it is intended to give to, is a result of extra money with the government. If the SLR is reduced from 22% to somewhere around 10%, then government will get less amount of money, and will spend it wisely. Banks will provide loans at lower interest rates and hence, businesses will get a tremendous boost in India.
Modi government has taken some new steps recently. The FDI limit has been increased in insurance from 26% to 49%. This will help in the inflow of capital as foreign players know of the tremendous opportunity in insurance In India. 6 out of every 7 people in India are uninsured. But, insurance companies play an important role in nation building. The profit of the insurance companies (most of the revenue is profit) is invested in long-term projects. This helps in the development of the country. So, giving such a sector to foreigners is not wise. But, more important than that is the retention ratio, i.e. how much capital is invested in India from the total. If it is made sure that investment is in India, then even foreign ownership of insurance does not matter.
Challenges are many, but Modi has proved it before that he has the capability to deliver when it comes to manufacturing sector. He is considered as business friendly person. He has built a number of dams in Gujarat and that has helped the farmers a lot. The average agriculture growth rate of India is close to 3%, whereas that of Gujarat is 11%. This is despite of the fact that Gujarat is one of the states in India which receives the lowest rainfall. This shows that if the right things are done, then even the impossible-looking things can be made possible. But, for that a visionary is needed Modi seems to be that man. But, there is long time for him to set thing right. Considering the grave situation the country is in, a long time is in fact required to get the country back on track. But, once India gets back on track, then there is no stopping. With a median age of population as 26.5 years, India is full youngsters. With so much youth, surely comes optimism, hope, and the courage to face challenges. India will no doubt be a superpower after 15 years. But, for that, manufacturing sector needs to be improved.
Now, since we know that manufacturing is the key to success for India, we also need to understand that it is the Power sector that fuels manufacturing. For constructing various industries etc. large amount of power is needed. But, does India have sufficient power to sustain its much needed manufacturing. India currently has around 2.3 lakh MW of installed capacity. If it needs to grow at a pace of 8%, then at least 40,000 MW of power more is needed. For, that to happen, there needs to be tremendous investment in the power sector.
Let us explore the finances needed in the power sector. Each MW of power, on an average costs around 6-7 crore rupees. So, if 40,000 MW more capacity is to be added, then the total investment needed is around 25 lakh crore rupees. This is a huge amount. So, if the government cannot spent this in one year, then it should expend this in a 2 year timeline. So, an investment plan should be made immediately to execute such a plan.
This is not the only need of the hour. One more important aspect to consider is how India is generating the power. Currently, 17% power is generated through hydro. Though this contribution is significant, but it seems minimal considering the fact that this figure used to be 33% not long ago, and India has huge water reserves. Thermal power constitutes 68% of the power consumption. One very important thing to note is that nuclear contributes to around 2% of the power generation in India. This number seems very low, and some say that it needs to be increased, since nuclear is the fuel of the future. But, is it really true. Let us try to answer this question. Nuclear energy needs somewhere around 25 crores investment to generate around 1 MW of power, compared to 6-7 crores by thermal. Another, more important issue is the risk associated with a nuclear power plant. Japanese residents are willing to turn off their power at homes every day after 8 pm, just to make sure that no nuclear power plant is active in Japan. This happened after the Fukushima nuclear disaster. This is a big learning for all the countries of the world. US, UK, and many more countries have nearly frozen nuclear power generation activities. They know the risk that is associated with nuclear power plant. So, why India is continuing to import nuclear equipment worth $35 billion. Former PM Manmohan Singh once said that he wanted to increase the contribution of nuclear in power from 2 MW to 20 MW. But, times have changed, and India must also change, if it needs to survive in this world.Nuclear power plants are like sitting bombs. They just need some trigger to create destruction. This nuclear activity must be reduced significantly. Instead, investment should be made in cleaner forms of power like hydro. Solar power can also be more utilized by investing in solar. India has huge potential in terms of solar power generation. Wind energy also needs to be invested in.
This was about investments needed in power sector. But, what about the power that is being generated. In New Delhi, it is said that the total transmission and generation losses are upto 51%. This is despite the fact that the total domestic power consumption in Delhi is just 21%. It means that even if power of all the households in delhi is stolen, even then, the loss would be 21% only!
So, the need of the hour is to see where we are going wrong. Here, the government needs to step in and punish the wrongdoer. And, to do so, the person at helm should think selflessly of the future, and not think of the present and jeopardise the future of the country.
This article has been authored by Arshdeep and Shantanu from FMS