Power up Trading

Power sector being in the concurrent list has developed through the years with a state level bias and hence the developments vary significantly across the geography of the country. While the need for national level attention and need to frame policies from a national perspective was understood and action was taken as early as the late seventies, it was confined to Power Generation and Transmission of such power generated by these central plants. Only a few years ago, centre has provided funds and intervened directly for implementation of schemes at the distribution level.

This skewed thinking severely affected the Power market developing as a national one till the enactment of Electricity act 2003. The national policy and act of 2003 is an excellent guide and clearly envisages an integrated network where all key players have a choice which is the fundamental for any market driven approach to creation of a national asset.

It is now for the implementing agencies to come out in full force and provide the linkages which will help in interconnecting the grids and develop a national market for Power so that Power Traders can play a more active role.

However these linkages, as is now the practice, terminate at state level power injection / delivery points and from then on, it is the local network that provides the last mile connectivity even for large power consumers / demand centers. To free the market and Power up trading, it is this last mile connectivity which needs to be freed as envisaged under "Open Access".

To attract investments in this sector, the government has provided one major comfort namely a tariff based approach to guarantee investments, backed by a strong regulatory mechanism. There are severe execution risks posed by issues caused by non availability of right of way to environmental issues, which the promoters should grapple with. Such issues delay the project execution and increase the capital costs. These are beyond the reasonable control of the investor. Providing the incentive of long term cheap funds is one way of balancing these risks.

It is therefore essential that to increase cross regional power transfer capacity significantly together with last mile connectivity, government should identify sources of Long term cheap funds. It could be done by way of providing access to these investors to low cost Long term loans through the Infrastructure Funds being created with our foreign exchange reserves so as to reduce the capital costs of these projects.

The government, should do well to take these steps for bringing in the much needed integration of the grid and making the dreams of Electricity act 2003 a reality.

Credit Policy - Reddy has called it wrong

Reddy has called it wrong this time.

Indian economy is not leveraged asCredit Policy, Housing, much as that of the other developed economies and it is the supply side dynamics which is contributing to the double digit inflation. Some even argue that this effort of the central bank may further accentuate the problems caused by supply side dynamics due to the capacity addition being delayed mainly due to the steep increase in funding costs.

The policy initiatives of the nineties have dismantled the Long term Funding institutions, which has pushed India Inc to look at the global markets for raising long term funds. Having taken this route they are now forced to call correctly the exchange rate movement. The companies which are not capitalized adequately, or are afraid to go to the international market for want of loosing control, silently suffer. This in the long term, affects the economy as planned capacity additions do not take place. Policy makers have failed to acknowledge this void and take steps to correct.

At the other end of the spectrum, the needy do not have any access to institutional funds. Attempts to eliminate the usury rates charged by the middleman have failed miserably. With the so called growth in bank credit being fueled by indiscriminate lending to salaried and self employed persons for consumer durables and lavish spending, it is repaying time for these institutions, with even the central bank taking special interest in these advances. Defaults in certain locations are a staggering 40 % in this segment, if we are to believe unconfirmed reports.

For lending to the housing segment and make it robust, we have important lessons to learn from US. The Fed had openly issued government guarantees to Fannie Mae the share holder owned financial institutions with a public mission. These institutions are private in nature but backed by the government. Hence these banks could approach the international market to raise cheap funds and provide funds exclusively for the domestic housing market.

It is time we also did the same thing. The government should guarantee the bonds issued by say a division of ICICI or AXIS or HDFC bank or a combination of the divisions of the banks with a caveat that funds raised thus are exclusively used for a defined housing market.

In the last 3 years the housing sector saw a robust growth and provided the much needed overall growth in GDP. The current attempts by the central bank to chase the inflation is hurting these segments and will once again deprive many a citizen the chance of owning a home in his or her life time. Will the government at least intervene?

Oil Prices and Policy options for the Government

With oil prices zooming past US $ 130 and breaking new highs every week, policy makers have an issue at hand. Having relied heavily on prolific spending of the resources raised through indirect taxation of Petroleum products, the government is now being compelled to reduce the taxation to ensure that the recent spurt in the international prices do not hurt the economy and the poor alike. 

This would mean that the government should look at alternate sources of revenue to bridge the shortfall in revenue generation as one can not expect the government in election mode to cut down on freebies / cutdown on salaries etc. The main options are Direct taxes from services and new segments. With large scale retail formatting taking off, it is necessary that the taxman look at ways of cornering the piece of the action. as after all large scale retailing does use more of the public resources.

Export of petroleum products should also be taxed and influential corporate houses can not be allowed to have their say on avoiding the taxation. If refining margins have risen up to US $15 from US $ 6 a few years ago, such company's can well afford to share some of the largesse. I am sure with the capacities available in India, international buyers cannot ignore us.

Two more initiatives need to be put in place simultaneously. 

The first and foremost is to discourage the growth of private transport in cities and metropolis. To put in this practice the government should invest heavily in public infrastructure quickly. The other initiative is on natural gas and coal gasification process. Having identified huge reserves of gas we need to ensure that these are brought to market at the earliest possible dates and sold devoid of any subsidy from start. The deceleration of demand on foreign exchange which such locally available sources of energy can bring in, will have transformative impact on foreign exchange management of our currency and fuel the Indian growth engine to newer highs.

With oil prices zooming past US $ 130 and now retreating from life time highs, policy makers have an opportunity to correct the policy stance. Having relied heavily on prolific spending of the resources raised through indirect taxation of Petroleum products, the government was compelled to reduce the taxation to ensure that the recent spurt in the international prices did not hurt the economy and the poor alike.

This would mean that the government should look at alternate sources of revenue to bridge the shortfall in revenue generation as one can not expect the government in election mode to cut down on freebies / cutdown on salaries etc. The main options are Direct taxes from services and new segments. With large scale retail formatting taking off, it is necessary that the taxman look at ways of cornering the piece of the action. as after all large scale retailing does use more of the public resources.

Export of petroleum products should also be taxed and influential corporate houses can not be allowed to have their say on avoiding the taxation. If refining margins have risen up to US $15 from US $ 6 a few years ago, such company's can well afford to share some of the largesse. I am sure with the capacities available in India, international buyers cannot ignore us.

Two more initiatives need to be put in place simultaneously.

The first and foremost is to discourage the growth of private transport in cities and metropolis. To put in this practice the government should invest heavily in public infrastructure quickly. The other initiative is on natural gas and coal gasification process. Having identified huge reserves of gas we need to ensure that these are brought to market at the earliest possible dates and sold devoid of any subsidy from start. The deceleration of demand on foreign exchange which such locally available sources of energy can bring in, will have transformative impact on foreign exchange management of our currency and fuel the Indian growth engine to newer highs.

Clearing the muddle of Rising Food Prices

Many column centimeters in leading newspapers, including your paper combined with interesting sound bites in all TV channels have put before us multiple reasons responsible for the spiraling price rise. Out of these a few stand out which has to be tackled by policy makers on a war footing.

The planned increase in agricultural production shall meet the increasing population, the additional demand created by new generations aspirations and affordability. This is best achieved by careful planning and timely implementation of irrigation projects, making available at the retail level advanced improved seeds, tested soil enriching techniques to improve the yield and above all easy rural credit with minimal collateral to the rural agriculturist. In the absence of such a coordinated approach there will be gaps which will leave us exasperating at the slow agricultural growth rate.

On the other hand diversion of land from wheat to Bio fuels in developed economies is one more self centered approach of the developed economy which we need to understand to live with. Financial centers have established and put in place procedures & mechanisms that make it easy for the non informed to bring in their savings in to commodities and make a fast buck on scarcities. We should have sufficient negotiating clout to bring them around to stop such a move which we sadly lack (as proved in various WTO forums).

Further, given the depth of scientific community available with in the country and the financial resources available with us (we have invested hundreds of billions of dollars in other country's instruments for a rainy day!) it is really surprising that a concerted approach is not being taken to solve this fundamental problem.

Politicians should take note that their continued neglect of this fundamental issue will shake them up and even dislodge them from their exalted positions.