India’s coming energy crisis4 min read . Updated: 02 Jul 2011, 04:06 PM IST
India’s coming energy crisis
India’s coming energy crisis
Early Warning blog (http://earlywarn.blogspot.com) had come up with two interesting posts on the extent of vehicle population and on the total length of expressways (highways) in China. On both these counts, in the next few years or within a decade, China is expected to overtake the US.
Also Read |V. Anantha Nageswaran’s previous columns
To be sure, China’s vehicle sales have slowed and so has India’s. However, monthly numbers hide the fact that, in India, year-to-date (YTD) up to May 2011, domestic passenger vehicle sales have exceeded the YTD sale in 2010 and it has been rising every single year for at least the last seven years, if not longer. Clearly, consumption demand has not yet slowed materially in India. It was also evident in a recent A.C. Nielsen survey of consumer trends. Indian consumers, in general, were optimistic about their employment and income prospects and had solid acquisition plans for durable assets. For policymakers, it simply signals that their job of restraining the economy is still an unfinished job.
Further, such optimistic spending plans must result in supply-side keeping up. The power situation, at least in the near term is not improving in India as coal availability worsens for policy and security reasons. Lenders are balking at lending to power producers since their ability to sell the power produced and receive cash for the same remains suspect although “Open Access" (being able to sell to any bidder and not just to state electricity boards) is supposedly operational from 2009-10. It is not clear that it has resulted in industrial users being able to source quality and reliable power from wherever they wish or that it has pushed the state governments to reform their electricity boards.
Recently, the Haryana Electricity Regulatory Commission warned that the two distribution companies in the state are heading into crisis situations. Then, the Bombay high court dismissed the case brought by the Maharashtra State Electricity Distribution Co. to stop the state electricity regulatory commission from granting open access to industrial houses without recovering cross-subsidy surcharge from them. Interested readers can refer to the blog posts on these two news-items at http://indiapowerreforms.blogspot.com
If India is to restore or impart competitiveness to its manufacturing, it has to approach the energy problem in an integrated manner and urgently, too. Cost of energy inputs and transportation costs are significant. Market pricing of hydrocarbon fuels, reform of state electricity boards, rationalization of subsidized power to farmers, open access to industrial users, mining policy on coal consistent with environmental sustainability, public transportation and rational pricing of such transportation arrangements, energy metering are all necessary.
Indeed, even stable law and order situation is important for people to use public transportation alternatives. Reduction in the number of private vehicles that arises out of a safe, reliable and efficient public transportation network cuts time spent on roads, reduces pollution and enhances health. Further, it is well known that the depletion of groundwater and the receding of water tables in many states across India are due to the absence of proper price signals on power to farmers. So much is riding on energy and power reforms. The group of ministers that has to take a decision on ending the subsidy on diesel has postponed its meeting more than once, let alone take a decision.
At the beginning of this article, we focused on the rise in the population of vehicles in India and in China to highlight the upside price risk for crude oil, notwithstanding short-term concerns on global economic growth. The BP Statistical Review of World Energy 2011is out and the structural surplus of crude oil has been declining rapidly over the last several years. With demand exceeding production in the last several years, the world has been dipping into oil inventory and the inventory cushion has rapidly receded, despite the global economic crisis that temporarily restrained oil demand. Indian policymakers have to assume and prepare for higher oil prices for the medium term.
The Prime Minister has recently approved the national manufacturing policy drafted by the department of industrial policy and promotion. The policy relies too heavily on the creation of national manufacturing and investment zones to promote manufacturing and raise its share in the economy. Even if these zones turn out to be centres of manufacturing excellence with assured power and flexible labour, it would raise the costs of the rest of the unreformed economy to the nation. A more durable approach is to remove the bottlenecks that hold back manufacturing so that the whole country could become a global manufacturing force. It is possible.
At the least, well-informed ministers should communicate these challenges to the public to improve their understanding of issues and enlist their cooperation. However, for the message to be well received the messenger has to have credibility and that is a function of both competence and integrity.
V. Anantha Nageswaran is chief investment officer for an international wealth manager. These are his personal views. Your comments are welcome at email@example.com