governance, political economy, institutional development and economic regulation

Posts tagged ‘electricity’

Avoid the global climate leader trap

Paris cops 1

What is it about the Indian elite, which makes them salivate at the thought of global leadership? Barely had President Trump pulled the US out of the Paris accord, that we were exulting at the thought of an “opening” for India at the high table of global climate leaders.

The tail can’t wag the dog of climate change

Can India, which contributes just 3 percent of world GDP, substitute for the US with 23 percent of world GDP? The key to mitigate climate change is to decarbonize GDP. Only those who have the GDP can contribute significantly.

Rich, developed countries contribute 68 percent of world GDP, each with a per capita income above US$12,476. Of this the European Union and North America each account for 25 percent. Not even China is part of this select group,

China figures as a newly emerged economy in the upper middle-income group, which contributes 24 percent of world GDP with per capita incomes starting at US$4036. China, with a per capita income of US$7380, has a share of one half of the GDP of this group.

To put this perspective, India, with a per capita income of just US$ 1590, will take 11 years of growth at 9 percent per year, to enter this group. We must remember that we are puny – with a per capita income just above the average for 34 fragile and conflict affected areas. Even heroic actions within a 3 percent share of world GDP does not count for much.

China is the key climate leader

Xi Merkel

President Trump is right in backing away from leadership in climate change. The US faces a fundamental, domestic, economic crisis; a fragmenting social compact and a deteriorating external account. This constrains its ability to influence global agendas. Ageing Europe and its ATM – Germany, will struggle to just hang in there and keep national welfare levels at current levels. Russia is similarly in relative decline and cannily, already a junior partner in the China bloc. It is China, to whom we must look for world leadership, in limiting climate change.

But there are things we can also do, which are aligned with national welfare.

Get the private investment cycle going


First, “counting our pennies” carefully before splurging public funds is a fail-safe option for sustainable development, poverty reduction and managing corruption.  We have failed to do this over the last fifteen years. The results are the bad loans of the publicly owned banks, aggregating to around 5 percent of the GDP. The RBI, has been newly anointed to clean the clogged balance sheets of the banks and corporates. But the magnitude and complexity of the task will require that discretion be applied judiciously for a quick resolution. In the current environment of heightened distrust, this is possible only via an empowered committee of ministers; select representatives from the opposition in parliament; the RBI; the CAG and the higher judiciary to cut through the mess in a practical, fair and conclusive manner. Only then can we get the investment cycle restarted.

Use public funds to leverage private investment in “green” tech

go green

Second, mitigating climate change means allocating capital wisely to “green” technology – renewables, storage systems, efficient transport, eco-friendly habitats, carbon sinks, organic farms and bio-nutrients. Whilst using public funds, ensuring that private investment has sufficient “skin in the game” is necessary, to retain the “bottom line” compass in projects. This requires effective collaboration or tweaking the sarkari plumbing – new rules delegating financial and administrative powers; well-defined codes and processes and clear oversight to fix accountability. The existing system is overly centralized. A Secretary to the Government of India is seemingly “personally accountable” for all decisions within a department.

Manage local pollution to enhance well-being and global empathy


Third, managing local pollution is an immediate priority. Using solar power and gas for household energy needs is a welcome step. Ideally, the Solar Alliance should provide ready access to infrastructure and fiscal incentives to international research labs to set up shop in India. Facilitating Chinese companies to invest in India for manufacturing solar technology components and products can integrate India into global supply chains and encourage mutual learning and collaboration between Chinese and Indian entrepreneurs.

Remain within our carbon emission envelop

Fourth, coal fuels two thirds our power generation. This worries external observers, like President Trump, particularly when they visualize massive future emissions led by economic growth. But this is a false hypothesis. India’s carbon emissions at 1.7 tons per capita is just 10 percent of the per capita US emissions of 17.1 tons per capita. The ever so dreamily liberal and socially conscious Canada, emits 14 tons per capita. Even if our emissions increase by three times to 5.1 tons per capita, these would still be lower than emissions in the Euro zone of 7 tons per capita. The targeted increase in the share of renewable energy (other than large hydro and nuclear) to 40 percent of electricity generation, is further proof that India’s plans are aligned with sustainable growth targets.

Wash coal at mine mouth

air pollution

But we need to start washing all the coal we use. Indian coal is of poor quality. Fortunately, it is also low in Sulphur, so unlike Australian and American coal it does not contribute to acid rain. Washing capacity remains limited at around 10 percent of mined coal. Even this is under utilised. Power generators, say it is not financially rewarding to wash coal since they cannot pass through the cost under regulated tariffs. Coal India, the publicly owned coal monopoly, has no incentives to improve quality since they work on a regulated rate of return basis. Washing costs only around Rs 40 per Ton of coal. Coal India should only supply washed and sized coal to large customers. The additional cost can be met through a differential Clean Environment Cess (currently a uniform Rs 400 per Ton) for washed and raw coal.

Manage domestic and global expectations

Widespread poverty – affecting an estimated 40 percent of our 1.25 billion people – and low growth rates have constrained India’s carbon footprint. Delinking carbon from growth is far from easy in a desperately poor, decentralized, democratic country like India. True leadership, in this game, will be to remain below the global radar of carbon emission targets but substantially above the domestic radar of expectations on economic growth and jobs. Better monitoring of all three vectors – carbon emissions, growth and jobs, will be key in convincing the constituencies for each, that India is pulling far above her weight in all three. People who are the change also lead.

Modi Xi

Albert Pinto’s Gussa Redux


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The defining feature of India today is bottled up, seething anger. It erupts unexpectedly anywhere — in the plush drawing rooms of the rich, on our choked roads, in crowded, middle-class colonies over parking rights or in the ramshackle dwellings of the poor, over imagined insults and petty money disputes.

Saeed Akhtar Mirza’s 1981 celebrated film — Albert Pinto Ko Gussa Kyoon Aata Hai (What makes Albert Pinto angry?) starring the blessedly talented Naseerudin Shah, explores the roots of societal anger. It concludes that, contrary to modern liberal belief, it is difficult for individuals to go from zero to hero overnight. Society functions best when individual expectations align with the pace of social change.

Political pundits have forever advised politicians not to raise expectations too far beyond what can be realised or delivered, precisely to avoid such a backlash of sullen resentment or angry outrage. Yet, this has never stopped politicians from continuing to make rash promises.

Contrast this with the behaviour of bureaucrats, who are usually conservative with promises and targets. This could be because they have little to gain from aiming high. With no upside, why take a risk? Is risk aversion holding governor Raghuram Rajan of the Reserve Bank of India from lowering interest rates and thereby risking inflation? This could be one, albeit implausible, explanation.

Alternatively, maybe, the RBI governor and his team have watched Albert Pinto… carefully and remember that nothing can be worse than creating expectations and not meeting them. This government was voted in on the plank of restoring fiscal stability and providing jobs. Inflation can totally disrupt both objectives.

The political problem, of course, is the 10 million young people, who join the workforce every year. They voted the government into power and are now looking for the jobs they were promised. Telling them now that they lack a job because they lack skills, is a Kafkaesque googly that could result in a Pinto-type outburst on a massive scale. Hence the political pressure to kick start growth.

But what is the surety that lowering interest rates alone will result in more jobs. The world is finally flat — at least in terms of prospects for economic growth. In this dull market, with large inventories and surplus manufacturing capacity, new manufacturing jobs can only be created by ramping up protection for domestic industries. This option, as anyone who has driven an Ambassador car will know, has disastrous long-term consequences for productivity and competitiveness.

A better option to increase the competitiveness of Indian exports and provide protection to domestic manufacturing, would be to depreciate the INR as China and other competitors have done. But here again the ghost of potential inflation lurks via higher landed cost for petroleum and edible oil. The possible flight of foreign capital threatens the stock market and the external account. The higher cost of servicing the foreign debt of businesses is also a downer.

In any event whilst the macro-economic variables are tweaked, direct, rapidly deployed interventions for growth and employment are needed to meet expectations. Three “win-win” options stand out which are reasonably non-inflationary; targeted at jobs and quickly implementable.

First, get a grip on administrative reform and focus on tangible outputs and outcomes. The determination to get the Goods and Services Tax (GST) implemented by April 1, 2016 shows the way, as does the focus on ramping up highways construction and making Indian Railways more efficient.

Second, the steps being taken to increase domestic coal production via the transparent allocation of mines and gas production via price incentives for exploration in difficult fields, are necessary foundational work, albeit with medium term benefits.

More immediately, the Union government needs to restructure the accumulated loss of Rs 2 lakh crores of the electricity distribution utilities, as was done previously-albeit at a much smaller scale- in 2001. This is the only way to reactivate the demand side and realise the downstream benefits of enjoying, for the first time, an idling surplus generation capacity. But the 24×7 “electricity for all” mission can only be sustainable if it is linked to reasonable cost recovery for the utility and the complete stoppage of theft. This is one subsidy hole which is completely avoidable.

Third, an interim option to whip up “employment”, in these troubled times, is to offer a two-year National Service Mission for all young citizens of ages 19 to 25. One million young adults, each paid a stipend of Rs 6,000 per month by the government, could be offered this opportunity with a relatively nominal annual outlay of Rs 14,000 crore. For the young, this interim employment could be a “holding plan” while they look for a job. For the government, it buys time to create the environment for incremental private employment.

To weed out the rich, the poorly motivated and the faint-hearted, these young men and women would need to work in the 6,000 rural development blocks which dot the country and acquire skills on-the-job, in forestry, agriculture, irrigation, civil engineering, policing, security, public health, sanitation and education. They would function as management trainees and be placed according to their aptitude, education and skills. Trainee doctors are already required to do such service.

If the scheme were to be presented as just an opportunity for the unemployed and the poor to earn some money, it would end up being a less useful replica of its cousin, the Mahatma Gandhi National Rural Employment Guarantee Act. To brand the mission appropriately, it must attract the educated young across the social and economic spectrum.

To profile it as an option for high achievers it should be made compulsory for all aspirants to public office — budding politicians, potential judges and future civil servants — to start by experiencing life at the bottom of the public service ladder even before they fight an election or take the entrance exams.

Considerable social benefits are possible by bringing together the young from disparate groups in a competitive environment over extended periods. The resulting cohort networks of “desh sevaks” would be unique. Unlike educational or social networks these would cut across class, regional and religious rigidities and narrow the gap between “people like us” and “others”.

The first step in anger management is to feel equally responsible for the situation one is caught in. Albert Pinto and his ilk might have been less disillusioned and less angry had they had the chance to be a “desh sevak”.

Adapted from the authors article in the Asian Age August 13, 2015:

Why spend more on babus? 7th Pay Commission


Babus are looking forward to another bonanza, courtesy the 7th Pay Commission, which the previous government constituted just before demitting office. The armed forces, always better organized, are first off-the-mark with an earmarked Pay Cell already created, headed by a two star General, to lobby for better terms and conditions. Other Unions and Associations will also gather themselves together, once PM Modi signals the go-ahead.

Here are five reasons why he should not do so.

First, the history of Pay Commissions (the first was in 1946 with the rest following almost every ten years) validates that they achieve very little beyond finding the lowest commonly agreeable formula, for farming out pay increases to babus and the armed forces.   Never has the pay increase been linked to higher productivity or even to aggregate measures of productivity, like economic growth. Growth, admittedly an overly-broad measure, is now on the downslide and expected to remain that way for at-least another two years. Aam admis find it difficult to swallow, that babus should get paid more, whilst they themselves are struggling to make ends meet.

Second, babus have been getting 100% inflation neutralization twice a year, since 1996. The dreaded inflation (often itself the outcome of loose fiscal control and inefficient expenditure policies) consequently, flows-off babu backs, like water-off a duck, but swooshes down onto aam admis and makes their life miserable. The biggest sufferers are the 700 million poor.

The urgency for another increase in the “real” pay of babus is difficult to justify, in a strained fiscal environment, where subsidies have to be gradually moderated and administered prices of petroleum products, electricity, fertilizers increased-all of which stoke inflation.

Government also has to increase the tax-GDP ratio in 2014-15 to provide the funds needed for stepping up long forgotten defence equipment; higher outlays for education, health, sanitation, water and infrastructure; all this within a fiscal envelope which does not further aggravate inflation. Increasing existing babu compensation, in real terms, will only stoke the flames of inflation.

Third, if the government feels that the existing pay structure does not promote efficient functioning, it has only to look at the reports of the past two commissions. Both Commissions recommended excellent measures for linking pay enhancement to productivity, which remain unimplemented. The Administrative Reforms Commission did similar stellar work in 2008. Throwing more money at the problem of inefficiency is a highly ineffective way of trying to deal with it, which is bound to fail. Better to brush the dust of previous research and get down to implementation.

Fourth, less than 4% of India’s working age population of 500 million (ILO) is employed by government. The total formal sector employment (including in government) is less than 10%. Unlike government, in the rest of this “labour aristocracy” there is no assured inflation indexing and individuals have to justify every year, why employers should even neutralize inflation let alone give them an additional increase in “real” pay.

The residual 90% of other workers live in a jungle, where they survive by their wits, with no help from law or regulation. The Minimum Wage Act is a non-functional piece of legislative gloss, which is regularly contravened in the unorganized sector. None of us, including babus and politicians, who employ household help or buy products made in the informal sector, where “sweat labour” is the norm, walk-the-talk, by being willing to pay the prescribed minimum wage rates.  Even the lowest level of compensation in government is way above the minimum wages.

Fifth, the process of babu pay determination has acquired a routine automaticity, which needs to be disrupted. Opponents of abandoning the business-as-usual stance, argue that the outcome of stagnating babu pay in real terms will be higher levels of corruption. This is difficult to buy. Despite the consistent increase in babu pay since 1952, corruption has also grown not decreased. Babus, even at the leadership level, including the previous PM, “passively accepted” corruption, even if they have not actively associated themselves with the loot. They have not endeared themselves to aam admis by such behavior.

PM Modi has already started the process of interacting directly with babu-level chains of command and demanding from them, measurable, targeted performance, aligned with the government’s priorities. Pay rewards should follow only in 2018 (one year prior to elections in 2019) if performance improves.

Between now and then, the government should start publishing Annual Service Delivery Report Cards for every urban ward and every rural village, listing the manner in services have improved. Pay rewards beyond 100% inflation indexing (which already exists) should come only if the citizen reports show improvements from 2015 to 2017.

Let’s apply the same “value for money” standards to public finance, which resonate so well with our personal lives, vividly captured in the “kitna daite hai” (how many miles does it go in a liter of fuel?) metric, popularized by MARUTI.      

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