Long-time reader and IEB friend, Joydeep Mukherji sent us this article with a comment:

The West Bengal government has decided to import one lakh tonne of coal at higher rates to fuel the thermal power plants which have not been able to meet the power demand recently for wet and substandard coal.

The resulting rise in the cost of power would have to be borne by the consumers, State Power Minister Mrinal Banerjee said when replying to a motion moved by the Leader of the Opposition Partha Chatterjee in the Assembly today. (ET link)

This article highlights the lunacy behind the intersection of economics and politics in India. India has the third largest deposits of coal in the world, and much of that is in Bengal. However, India imports coal since it is easier to procure and cheaper to buy abroad. Even Bengal is now importing coal since its own coal industry is hopeless.

The problem lies with the monopolies granted to Coal India and other public sector companies, leading to government restrictions and pricing policies that breed black markets and shortages. The coal sector has barely been liberalized despite nearly two decades of reform.

Politically, any ambitious politician from Bengal, Jharkhand or Bihar imemdiately seeks the Coal Ministry (or the Railways as a back up). The goal is not to develop the coal sector to make Bengal and Eastern India a prosperous region based on ample energy. On the contrary, the goal is squeeze as much bribery out of that industry and employ as many party workers in it as possible.

With such an outlook, is it a surprise that Bengal is importing coal? The fact that few people in India even see the irony of this situation shows how deeply the rot has set in.

Strategic fools occasionally write about Indian energy companies buying or investing abroad, often in competition with Chinese firms, describing such actions as if they were epsiodes of combat in a ‘Great Game’. Note that no one points to the reasons at home that lead firms to look for supplies abroad.

Here lies the crux of the matter. If use of new seeds, fertiliser use, irrigated land, cropping intensity, and private capital stock growth are not rising fast enough, then where is this credit going? To put it another way, what is the Indian farmer doing with the extra credit if he is not using it in seeds, fertiliser, water, capital or land? [IE]

In the last five to seven years, India has grown on the basis of its knowledge economy and consumerism. The IT industry, and its related industries, provided jobs for Indians. As Indians earned more, they spent more, and that’s how consumerism drove economic growth as a whole and also led to a huge growth in the retail-credit and consumer-credit business in India. As we peak today, this growth in consumerism is leading to a huge investment cycle in India. Because manufacturing capacities have been fully utilized, and infrastructure needs to be established, people are now investing in manufacturing capacities and infrastructure. I estimate the Indian corporate sector has plans today to invest about $700 billion in manufacturing and infrastructure, which will be spent over the next three years. The next wave of growth for India is going to come out of capital investment.[IK@W]

The Indian government has already accepted a little dent in its prospective growth rate this year. It is widely believed that India’s internally driven growth, has increasingly decoupled its fortunes from the US economy. It is certain that an US slump will impact India to a lesser extent now, than it might have done a few years ago. Indian companies are more resilient than ever to a global downturn these days, with lower borrowing costs and healthier debt-equity ratios. Nevertheless, there are some challenges.

Inflationary pressures loom on the horizon. Inflation triggered by higher food and oil prices could deflate the rapid economic growth curve in India. The tight monetary policy of the RBI is related to inflationary pressures. With large-scale credit contraction in the Western markets, the growth plans and capacity expansion at Indian companies will find it difficult to access overseas credit .

The uneven growth in the middle to short term, with the states of Madhya Pradesh, Orissa, Uttar Pradesh and Bihar having seen lesser growth than others, has led to increased social and political tensions. The increased spending on social sectors and populist largesses in the election year, including recommendations of a new pay commission, can also impinge on the growth story. This spending, however, can be met by the dramatic increase in direct tax collections (by over 40% in each of the last two years).

As a banker, Kochar can probably view certain propitious omens that most other economic commentators in this country cannot. The jury is, however, still out on her hypothesis and previsions of a sustained growth rate for the Indian economy.

In the short run: Spin-off Benefits

A space program generally involves the development of cutting edge technologies. Even if something has been done before, and particularly if it has been done before, it can be done in a more efficient manner. Till 2005 ISRO had received 150 patents (not all international) and equally importantly had transferred 268 technologies to industry. In an age where we cannot compete with China on producing new PhDs and fall woefully short of the developed countries, it makes sense to invest good money on a space program if it can generate technologies which Indian industry can commercialize. In a way this would optimize meager resources.
Eventually patent royalties can help finance the space agency, but that is besides the point. Focusing on a space program using nationalist jingoism and defense hawkishness to drum up support can actually help stimulate industry with hi-tech inputs, besides acting as an incubator for world-class research capabilities. This would actually enable us to “splurge” on space research. Of course the aim should be to reach the standards of the best in the world, and aggressively seek to commercialize spin-off effects and rake in the royalties to make the research self-sustaining, eventually.

In the medium run: Strategic Advantage

India’s current space ambitions are something we would not have realistically thought likely even 10 years ago. The Space Recovery Experiment was a fantastic achievement. If the Chandrayaan mission is successful we will have high quality remote sensing maps of the moon, and also will have landed a craft on the moon. Over the next 2 decades, we aim to send a human into space, and eventually to the moon. Maybe even have a manned space station.

If our ambitions are remarkable then they are so by our own standards. In the United States, which is the leading space faring nation right now, these achievements have become so mundane that private industry is aiming to commercialize them. While Virgin will take customers to space, Bigelow Industries already has a prototype (unmanned but with living organisms) space station in orbit. Google is sponsoring a competition for organizations to land a spacecraft on the moon, with little or no government assistance.

That takes a lot of the glory out of the achievements but it does raise another important point: commercial exploitation of space technologies is becoming the newest frontier for business and the sky is literally the limit here. We do not know at this stage how big this business is going to be in the near term, so there is no urgency for India Inc to jump in immediately. But as ISRO builds these technologies for the future, it should ensure our domestic economic are not denied an edge that could be crucial.

In the long run: Necessity

Predicting future trends beyond a few years is always wrought with danger. Based on current trends there are two resources for which human civilization should eventually have to look to space for: solar power and mineral resources.

The sun is a huge nuclear fusion reaction and economically capturing power from the sun is the holy grail of the energy industry. When the technology is feasible, space-based solar power would be a resource that will beat any form of solar power generation on earth.

Big as the current energy crisis on earth is, in the longer run a bigger problem concerns our pursuit of mineral resources. As urbanization grows our cities are getting bigger and bigger – as are our buildings. A logical extension of this growth would be the eventual construction of the giant structures propagated in arcology. Currently designs exist for buildings that can house upto a million residents, and such buildings will become cities by themselves.

An era of such mega structures is imminent, and in view of our dwindling mineral resources and growing environmental concerns we are likely to look to space to meet our requirements. A time when mineral resources from the moon or the asteroids is comparable in cost to those from earth is very far. But when that time arrives the space faring nations will beat a huge advantage – especially if extra-terrestrial matter is going to get “colonized” by us humans.

Conclusion

A space program even while catering largely to defense and political needs, presents a big opportunity to give the economy a competitive edge in the short, medium and long run. Even though this mutual benefit is not a foregone conclusion the upside potential certainly exists and only remains to be adequately exploited.

1. People who don’t currently have connections will now get connected. And once they are on the network, they have an option to get clean piped water.
2. For people who already have connections, their monthly costs will shoot up. Maybe double. However, given that the average water bill amount is quite low, and is an extremely small proportion of monthly expenditure. So small that even a 100% increase won’t have much of an impact.

It’s time to revisit that case, given that Kundapur, a coastal town in Karnataka has decided to privatize it’s water supply. To summarize, so far, this town was dependent on ground water. Now, they are getting water from the river Varahi. Residents have to pay Rs. 4000 for the connection (half of that refundable), and the monthly bill will come within Rs. 100, they’ve said.

There are two points to note here. Firstly, this is the first time that Kundapur is getting piped water supply. The second is that there is a huge up-front cost. When I had talked about privatization giving the option of water supply to everyone, I had said that the costs should be structured such that the fixed charge is low or non-existent, and only usage is charged. This way, I had said, there won’t be any adverse impact on the poor (who are outside the system in the first place).

In this context, a financial restructuring of the Kundapur plan might be necessary. The TMC and the water supply firm will have to work out a scheme where they heavily subsidize the up front fee (to say about Rs. 500) in exchange for a higher per-unit charge for water. That kind of a structure would have several benefits.

Firstly, it would be far more inclusive and more people would be brought into the safe water plan. More people would be able to buy the option to get safe drinking water. Secondly, a higher variable charge will also result in more judicious consumption, which is critical for a limited resource such as fresh water. Thirdly, due to the changed payment structure, the heavy users of water (more likely to be the rich and upper middle classes) will end up cross-subsidizing the low volume users (usually the poor). Thus, the adverse impact on the poor can be brought down, and the people who wil have to pay more would be those who won’t mind paying a bit extra.

Of course, there is still a long way to go. The private partner who will handle the operation and maintenance is yet to be selected. There are also bound to be a large number of protests against the privatization itself. The TMC needs to get past that. Also, it seems to be the first time when such an exercise is being conducted in the country. So, other hurdles also can’t be ruled out.

Nevertheless, this outsourcing of operation and maintenance of water supply is a welcome concept, and if implemented and priced in the right way, might become a model to emulate in the rest of the country.

The BBC reports that the World Bank is considering the first ever proposal for a loan of $3.5 billion to be disbursed and repaid in rupees and not the US dollar. This is being done to ostensibly counter the fluctuating rupee- dollar rate. However, it needs no saying that a continually strengthening rupee and forecasts of a double-digit Indian economic growth make the proposal extremely lucrative for the World Bank.

The Maharashtra state government is seeking a loan worth some $3.5bn but is concerned about the fluctuations in the value of the dollar.

If approved, it would be the first time the World Bank has agreed to a such a loan in rupees.

The idea is that the loan would be sanctioned in dollars, but would be handed over in rupees.

All repayments would be in rupees too.

This would prevent any changes in the amount to be repaid caused by fluctuating exchange rates. [BBC]

That’s one of the proposals Sushant Singh puts forward in his article on moving towards an endgame in Jammu & Kashmir:

…unemployment among the youth of the valley remains to be adequately addressed. Handing out of doles and packages to the state government and public sector institutions is not the solution. An alternative would be to incent the private sector, perhaps even outside the state, with an offset to employ a certain percentage of people from Jammu & Kashmir.

The idea of converting the entire state into a virtual special economic zone (SEZ) has been mooted. The state has a special status under the Indian Constitution. So do SEZs. What is required is the repositioning the state to one that leverages its special status to achieve socio-economic development.

It would also require a rebalancing the distribution of fiscal transfers from the central government between the public and private sectors.

This will undermine the separatists’ main economic grouse—step-motherly treatment by the Centre and no attempts at development in the state. [Pragati - The Indian National Interest Review]

There is no truth to his claim that Gujarat’s poverty reduction figures are the result of it shifting the goalposts. He presents insufficient evidence to prove his claim about the public health system’s failings. In contrast, the reduction in the infant mortality rate—the barometer of a public health system—suggests that public health delivery is likely to have improved. His argument on the widening rural-urban divide falls flat for want of evidence. He makes wrong associations to imply causal links between low agricultural productivity and a decline in the state’s production of foodgrains, while falling into the illiberal trap of denying farmers a way out of agriculture. He offers incomplete facts to mischaracterise Gujarat’s power sector, which happens to be among the best in the country. And he dismisses the state’s investment and employment record without bothering about such inanities as facts. We saw that the UPA government’s inability to reform India’s restrictive labour laws is hurting Gujarat’s ability to translate the investments it is attracting into more jobs for its people.

Shivam is on firmer ground on the Sardar Sarovar project: according to the Comptroller and Auditor General’s report, the state’s water authorities diverted water designated for “drought prone areas” to the urban areas of Gandhinagar. It is good to see Tehelka—whom one would usually associate with the anti-dam agitation—making these arguments. Similarly, Shivam might have a point when he talks about people displaced by development, underscoring the need for India to make its property rights regime more robust.

Where does this leave us? Well, that apart from some clever juggling of facts, Tehelka doesn’t really offer enough evidence to support its conclusion that Gujarat is ‘just another socio-economically vulnerable state’. The Congress party in Gujarat, Shivam writes, “wants ‘development’ to be the key issue in the elections”. More power to it. The interests of Gujarat’s electorate will be best served if it can present robust and well-supported arguments to argue where and how the state could have done better. Now that would cause some tehelka, wouldn’t it?

Neither the commercial viability, nor the putative military strategic benefits, were adequately scrutinised.

The commercial case for the project rests on the time and cost saved due to a shorter route. The time saving will be most significant for India’s domestic littoral trade. If ports on either coast improve their efficiency, bulk cargo and container ships may be able to provide an attractive alternative for domestic freight that currently depends on India’s inefficient railways and abominable highways. As for international trade, Indian ports have a long way to go before the canal route can be compelling enough for global shipping for global shipping companies to consider.

Jacob John points out in a recent issue of the Economic and Political Weekly, project benefits are being overstated. “The promises of the project may be valid for some ships,” he concludes, ”but there has been a serious deficiency in studying its impact for other ships. This deficiency is likely to make the project economically unviable and more expensive for some ships to use. It is a project that is also likely to cost considerably more than what was originally proposed due to a lack of study on the amount of dredging needed. Given the likely escalation of costs and its extremely limited benefit, there is a need for mechanisms that ensure accountability of the project to its original claims”.

The trend in the shipping industry is towards larger ships. The canal, however, will allow only the smaller ships (those less than 20,000 DWT) to pass through. Even these have to slow down to be piloted across the canal.

It is inexcusable for the government to sink public funds into a project of questionable viability without a study of alternative means to achieve the same objectives. For instance, investing in improving highways and domestic gas pipelines can arguably achieve the same economic goals, with much larger external benefits.

It is possible to bring economic development to coastal Tamil Nadu without having to create another public sector behemoth. It is possible to improve domestic trade by building better highways and making the railways more efficient. And it is possible to strengthen maritime security by buying more hovercraft and ships for the coast guard and the navy. But if the government goes ahead with the project, it will not be possible to repair the damage it will cause to the environment. That alone should compel the government to explore alternatives than to stubbornly insist on sinking money down the Palk Strait.

Excerpted from “Dredging the Palk Strait”, Pragati – The Indian National Interest Review, Issue 7 – October 2007. Download | Subscribe

Determined to build a domestic arms industry, India is requiring foreign suppliers to make a sizable portion of any military goods in this country. In the case of the jet fighter contract, the successful bidder must produce goods worth half the contract’s value in India.

The NYT report surmises that India will be the world’s largest defence market in another five years-

Over the next five years, military analysts expect the country to spend as much as $40 billion on weapons procurement alone, more than its entire annual armaments budget today — upgrading systems as diverse as jet fighters, artillery, submarines and tanks in its largely Soviet-era arsenal.

The NYT guesstimate is only 40% of the figure provided by Dr Kiran Chadha, head of the MoD’s Defence Offsets Facilitation Agency (DOFA). In April this year, the DOFA chief claimed [as reported by Broadsword] at a CII meeting of Indian and European defence industry that India will buy $100 billion worth of military equipment over the next five years. As per India’s defence offset policy which has been promulgated as a part of the new Defence Procurement Plan 2006, every foreign defence contract worth Rs 300 crores or more requires the foreign vendor to invest a minimum of 30% of the contract value as offsets. As has been done in the case of the fighter jets, this percentage of offset obligation can be varied by the Defence Acquisition Council. These offset obligations include-

• Direct purchase of defence products, components manufactured by Indian defence industries.
• Provision of “Services” by any Indian defence industries. “Services” will mean maintenance, overhaul, up gradation, life extension, engineering, design, testing, defence related software or quality assurance services.
• Direct foreign investment in Indian defence industries.
• Direct foreign investment in Indian organisations engaged in research in defence R&D as certified by Defence Offset Facilitation Agency.

Interestingly, the first reports of the offset tie-ups have already started trickling in. Broadsword reports-

India has just finalised it first offset agreement, worth $15 million (Rs 60 crores), with Israeli company ELTA, in a deal to supply India Medium Power Radars. ELTA’s offset partners will be private companies, L&T and Astra Microwave from Hyderabad. The offset proposals for the purchase of the navy’s newest fleet tanker involve 8-10 Indian companies.

The NYT adds -

In February, Raytheon and the electronics division of the Indian giant Tata Power signed such an agreement. The same month, Boeing signed an accord with an Indian engineering firm, Larsen & Toubro, to develop new projects. And Northrop Grumman has signed on with Bharat Electronics and Dynamatic Technologies, both of Bangalore, to investigate joint opportunities.

A quick calculation to place these figures in perspective. If we assume the total defence spending for next five years to be $60 billion and 75% of that is on foreign acquisitions, the offset benefits for Indian defence industry would be $13.5 billion (Rs 60,000 crores) over next five years.

The numbers are indeed impressive. But, there are early signs of resistance from the the foreign vendors against the offset requirements. The US government has officially declared offsets as undesirable, as it believes that they increase the cost of a deal.

Till now, the MoD has stuck to its guns. It will have to continue to resist all internal and external pressures and implement the offset policy with gusto. Even then, there will be no big ticket sales and stupefying results by the Indian defence industry in the short term. These measures and government support will only aid this sunrise sector in taking surefooted baby steps.

The fledgling Indian defence industry is ideally suited to emulate the Israeli model, which was initially based on successful tie-ups with major defence manufacturers. Notwithstanding this, the Indian domestic defence industry may still not be in the major league in next five years; but it could be a significant player in the international defence market by then.