First, let’s start with the good news.
India’s power generation has been increasing and so has been its per capita utilization, despite the increase in population.
Then comes another bit of good news—India’s per capita power consumption is way below world averages. True, it’s not encouraging for India lovers, but it points to an incredible opportunity for business. India will need to produce and consume a great deal more electricity to maintain even half the economic growth rate of the past two years. No wonder then that this sector has begun attracting big money.
Also Read R.N. Bhaskar’s earlier columns
In fact, it alone could become the next El Dorado for most investors, lawyers and fund managers. By 2012, India is likely to see an increase in installed power generation capacity of 51,250MW, according to estimates by financial services group Nomura, or 68,504MW estimated by the Planning Commission.
That should involve an investment outlay of anywhere between Rs2.56 trillion and Rs4.11 trillion—arrived at by taking the cost per MW of installed thermal power generation capacity of Rs5 crore to Rs6 crore. The private sector is delighted, because it is expected to pick up around a quarter (14,889MW) of this business.
But, in last two months, much of this glee has given way to worries. Some say, such large funds may not be available any more. But others say money can always be found. After all, almost all power equipment firms and construction companies are in developed nations. To generate jobs for their own countries, they will give suppliers’ credit.
Also See Power Play (Graphic)
However, government clearances are not likely to come in for at least eight months. All investments are, therefore, being deferred till the general elections are over and a new government is in place.
But why should anyone wait for a new government to interfere with project implementation? That is because Indian costs of installing one MW capacity—which typically cost $1 million (Rs4.9 crore) per MW in international competitive bids—is anywhere between 15% and 30% more.
This is because money is required to get clearances for power projects, and nobody wants to pay such sums, especially when a government is just about to relinquish power.
Asset pricing: a pyramid scheme?
In a brilliant 136-page report, ‘The Business of Ageing’, John Llewellyn and Camille Chaix-Viros of Nomura examine the potential effect ageing can have on financial markets.
“Economic considerations suggest that young societies, which have a relatively large proportion of their population at work, will tend to build up assets, while ageing societies, with a smaller proportion of their population in work, will run them down,” it says.
“This would imply that, starting in the coming few years, the downward underlying trend that has characterized (real) interest rates and equity yields in many OECD (Organization for Economic Cooperation and Development) economies could flatten out and then turn upwards; while in young societies, most notably the developing economies, the trend would be downwards,” it adds.
“In turn, that could imply that the underlying trend in the currencies of the ageing OECD economies would be upwards vis-à-vis the currencies of the developing economies,” the report says in a key finding.
This in effect means that all asset markets could be seen “in demographic terms... as a pyramid scheme,” explains ‘The Economist’ magazine. This is because each generation saves for the next convinced that, other things being equal, the value of the asset will go up primarily because there will be greater demand for it when the next generation inherits it—provided that the numbers of the next generation exceed that of the current.
It is one reason why many marketers describe India’s population as the demographic dividend. But, the demographic dividend can also be a curse. World Bank officials never tire of reminding Indian economists of Iran. Ten years ago, it enjoyed the demographic dividend among Islamic countries. But most people forget that when you have a large illiterate and unemployed population, a riot is always around the corner.
Lawyers and fixed fees
Last week’s comments on how the US law firm Cravath, Swaine and Moore Llp. has begun adopting fixed fees for its clients provoked some Mint readers to tell this columnist that this practice should become a law in India, as it could be one good step towards reducing the time taken to litigate and minimize the plague of adjournments. (Many law firms in India charge for adjournments as well.)
In a lighter vein, a Mint reader narrated an anecdote where a potential client asked a lawyer what his charges were, and he replied $500 for three questions.
“Isn’t that a bit steep?” asked the potential client.
“Yes.” said the lawyer. “Now, what is your third question?”
Will India’s policymakers take heed?
R.N. Bhaskar runs a company with significant interests in distance learning and examination certification and writes on corporate and business policy issues. Comments on this column are welcome at email@example.com
Graphics by Ahmed Raza Khan / Mint