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Subject: Economics

  • Ocean Thermal Energy Conversion Plant in Lakshadweep

    The National Institute of Ocean Technology is establishing an Ocean Thermal Energy Conversion (OTEC) plant with a capacity of 65 kilowatts (kW) in Kavaratti, the capital of Lakshadweep.

    What is OTEC Plant?

    • Ocean thermal energy conversion (OTEC) is a process or technology for producing energy by harnessing the temperature differences (thermal gradients) between ocean surface waters and deep ocean waters.
    • Energy from the sun heats the surface water of the ocean.
    • In tropical regions, surface water can be much warmer than deep water.
    • This temperature difference can be used to produce electricity and to desalinate ocean water.

    How do they work?

    • The OTEC technology uses the temperature difference between the cold water in the deep sea (5°C) and the warm surface seawater (25°C) to generate clean, renewable electricity.
    • The technology requires a minimum of 20°C difference between the surface and deep ocean temperatures.
    • Warm surface water is pumped through an evaporator containing a working fluid. The vaporized fluid drives a turbine/generator.
    • The vaporized fluid is turned back to a liquid in a condenser cooled with cold ocean water pumped from deeper in the ocean.
    • OTEC systems using seawater as the working fluid can use the condensed water to produce desalinated water.

     

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  • Demographic dividend

    Context

    The UN report, World Population Prospects 2022, forecasts that the world’s population will touch eight billion this year and rise to 9.8 billion in 2050. What is of immediate interest to India is that its population will surpass China’s by 2023 and continue to surge.

    India’s potential workforce and growth as projected by consulting firms

    •  Deloitte’s Deloitte Insights (September 2017) expects “India’s potential workforce to rise from 885 million to “1.08 billion people over the next two decades from today”, and “remain above a billion people for half a century,” betting that “these new workers will be much better trained and educated,” than their existing counterparts.
    • McKinsey & Company’s report, ‘India at Turning Point’ (August 2020), believes the “trends such as digitisation and automation, shifting supply chains, urbanisation, rising incomes and demographic shifts, and a greater focus on sustainability, health, and safety are accelerating” to “create $2.5 trillion of economic value in 2030 and support 112 million jobs, or about 30% of the non-farm workforce in 2030.”
    • Four pillarsIn its May 14, 2022 issue, The Economist had this to say about India, “As the pandemic recedes, four pillars are clearly visible that will support growth in the next decade. The four pillars are:
    • 1) The forging of a single national market.
    • 2) An expansion of industry owing to the renewable-energy shift and a move in supply chains away from China,
    • 3) Continued pre-eminence in IT.
    •  4) High-tech welfare safety-net for the hundreds of millions left behind by all this.
    • The Financial Times in an article, ‘Demographics: Indian workers are not ready to seize the baton’, believes that India’s bad infrastructure and poorly skilled workforce will impede its growth.

    Comparing India’s preparedness with China’s in 1970s

    • China is enduring an ongoing population implosion, which by 2050, will leave it with only 1.3 billion people, of whom 500 million will be past the age of 60.
    • India’s population, by contrast, would have peaked at 1.7 billion, of whom only 330 million will be 60 years or older.
    • Simply put, India is getting a demographic dividend that will last nearly 30 years.
    • There is so much going on for India today compared to China, the only country it can be reasonably compared to.
    • It is still a young country and in a much better position to transform itself compared to China of the 1970s.
    • It is still an open society where mass protest matters and produces results.
    • Indians have not been traumatised as Chinese were at the time of Mao Zedong’s death.
    • IT backbone: The IT technologies now available in India, and most importantly the Internet they run on have matured exponentially.
    • Many things right from video conferencing to instantaneous payments and satellite imaging are getting better and cheaper by the day.
    • Better administrative system: Creaky and inadequate as they are, India’s administrative systems manage to deliver and its infrastructure is in far better shape today than it was for China at the start of its reforms.
    • No rural urban divide: India does not have a Hukou system which in China tethers rural folk to rural parts creating a deep divide between a small and prosperous urban China and a much larger, very deprived rural China.

    Way forward for India

    • To wring the best out of its demographic dividend, India needs to invest massively in quality school and higher education as well as healthcare across India on an unprecedented scale, literally in trillions of rupees between now and 2050 when it would have reached the apogee of its population growth.

    Conclusion

    India must seize the moment and not be incremental in its approach. Given the will it can initiate and see through a transformation that will stun the world, even more than China’s has so far.

  • Centre raises Fair Prices for Sugarcane Harvest

    The Cabinet Committee on Economic Affairs has approved Fair and Remunerative Price (FRP) of sugarcane for sugar season 2022-23 (October – September) at ₹305 per quintal.

    What is FRP?

    • FRP is fixed under a sugarcane control order, 1966.
    • It is the minimum price that sugar mills are supposed to pay to the farmers.
    • However, states determine their own State Agreed Price (SAP) which is generally higher than the FRP.

    Factors considered for FRP:

    • The amended provisions of the Sugarcane (Control) Order, 1966 provides for fixation of FRP of sugarcane having regard to the following factors:
    1. a) cost of production of sugarcane;
    2. b) return to the growers from alternative crops and the general trend of prices of agricultural commodities;
    3. c) availability of sugar to consumers at a fair price;
    4. d) price at which sugar produced from sugarcane is sold by sugar producers;
    5. e) recovery of sugar from sugarcane;
    6. f) the realization made from the sale of by-products viz. molasses, bagasse, and press mud or their imputed value;
    7. g) reasonable margins for the growers of sugarcane on account of risk and profits.

    Who determines Sugarcane prices?

    Sugarcane prices are determined by the Centre as well as States.

    1. The Centre announces Fair and Remunerative Prices which are determined on the recommendation of the Commission for Agricultural Costs and Prices (CACP) and are announced by the Cabinet Committee on Economic Affairs, which is chaired by Prime Minister.
    2. The State Advised Prices (SAP) are announced by key sugarcane producing states which are generally higher than FRP.

    Minimum Selling Price (MSP) for Sugar

    • The price of sugar is market-driven & depends on the demand & supply of sugar.
    • However, with a view to protecting the interests of farmers, the concept of MSP of sugar has been introduced since 2018.
    • MSP of sugar has been fixed taking into account the components of Fair & Remunerative Price (FRP) of sugarcane and minimum conversion cost of the most efficient mills.

    Basis of price determination

    • With the amendment of the Sugarcane (Control) Order, 1966, the concept of Statutory Minimum Price (SMP) of sugarcane was replaced with the Fair and Remunerative Price (FRP)’ of sugarcane in 2009-10.
    • The cane price announced by the Central Government is decided on the basis of the recommendations of the Commission for Agricultural Costs and Prices (CACP).
    • This is done in consultation with the State Governments and after taking feedback from associations of the sugar industry.

    Try this PYQ:

     

    Q.The Fair and Remunerative Price (FRP) of sugarcane is approved by the:

    (a) Cabinet Committee on Economic Affairs

    (b) Commission for Agricultural Costs and Prices

    (c) Directorate of Marketing and Inspection, Ministry of Agriculture

    (d) Agricultural Produce Market Committee

     

    [wpdiscuz-feedback id=”uwa0gzukwy” question=”Please leave a feedback on this” opened=”1″]Post your answers here.[/wpdiscuz-feedback]

     

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  • World Dairy Summit 2022 to be held in India after 48 years

    At a time when several milk-producing centers are battling Lumpy Skin Disease (LSD), India will host the International Dairy Federation’s World Dairy Summit 2022 in Greater Noida.

    World Dairy Summit

    • The World Dairy Summit is an annual meeting of the global dairy sector, bringing together approximately 1500 participants from all over the world.
    • The participant profile includes CEOs and employees of dairy processing companies, dairy farmers, suppliers to the dairy industry, academicians, government representatives, etc.
    • The summit is composed of a series of scientific and technical conferences and social events including a welcome reception, farmers’ dinner, gala dinner as well as technical and social tours.
    • The last World Dairy Summit was organised in 1974 in New Delhi.

    Significance of the event

    • It is a prestigious event for us as India is now the largest milk producer in the world and we have the highest number of cattle.
    • The last time this event was held, India was import-dependent and now we are self-sufficient.

    Back2Basics: India’s dairy sector

    • Initiated in 1970, Operation Floodtransformed India into one of the largest milk producers.
    • The per capita availability of milk in 2018-19 was 394 grams per day as against the world average of 302 grams.
    • Today with an annual production of 187.75 million tonnes India accounts for about 22% of the world’s milk production.
    • However, India is yet to join the ranks of major milk exporting nations, as much of what we produce is directed towards meeting domestic demands.

     

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  • Drugs, Medical Devices and Cosmetics Bill 2022

    Context

    A draft law to replace the 1940 Drugs and Cosmetics Act with a Drugs, Medical Devices and Cosmetics Bill 2022 was uploaded by the Union health ministry in early July, seeking public comments and objections.

    Major provisions of the Bill

     1] E-commerce for medical drugs

    • Presently, online sales of medicines account for a fraction of the total pharma sales in India but are forecast to grow exponentially.
    • The first major feature in the new Bill that affects consumers relates to e-commerce.
    • Like all online shopping, the consumer gets the advantage of discounts and the comfort of shopping from home.
    • In normal times, e-commerce can surmount three uniquely Indian disadvantages.
    • Storage condition: The first relates to climatic conditions, which require medicines to be stored at below 30 degrees Celsius and 70 per cent relative humidity — unattainable in most of India.
    •  It can mandate establishing a back-end brick and mortar store for drug supply having good storage conditions.
    • Compliance with regal provision: The second advantage of e-commerce could be fulfilling a legal requirement — providing a bill to the consumer and retaining one copy bearing the batch numbers and expiry dates of the drugs.
    • In addition, the practice of accessing prescription drugs over-the-counter would reduce.
    • In the case of e-commerce, registration of a pharmacy can require enrollment with the central and state drug control organisations and the practice of uploading a prescription from a registered medical practitioner can be enforced.
    • Concern: Shopping for medical drugs on the internet could encourage overuse or incomplete use of drugs, increase dependency on habit-forming medicine — for example, sleep-inducing drugs or self-medication with products for weight loss, male enhancement, even treating mental illness — which is fraught with dangerous consequences.
    •  A greater focus on medical devices: The draft law also proposes according a greater focus on medical devices, which include thousands of engineered apparatuses like stents, joint implants, pacemakers, catheters, etc, which require quality regulation.
    • Provision for advisory board: Rules for medical devices were notified in 2017 but now it is proposed to establish a statutory Medical Device Technical Advisory Board, with experts from the fields of atomic energy, science and technology, electronics, and related fields like biomedical technology to guide the process.
    • This is a welcome move that will bring in the required expertise.

    Issues not addressed in the Bill

    • Mismanagement of trade: What the Bill does not address is the need to stop the continued mismanagement of the wholesale and retail drugs trade in India.
    • Requirements for drug license not changed: Rule 64 (2) of the Drugs and Cosmetics Rules 1945 lays down that a wholesale drug licence can be given to a qualified pharmacist or one who has passed the matriculation examination or its equivalent or a graduate with one year’s experience in dealing with drug sale.
    • This is a relic from 80 years ago.
    • When the country is reported to have over 7,00,000 pharmacists, this anachronism must be discarded.
    •  It is essential to introduce a binding and enabling provision to only licence qualified pharmacists and put the safety of millions of citizens before the self-preservation of a few thousand wholesalers and stockists.

    Way forward

    • There is need for ensuring digitisation of procurement, inventory control and accountability for dispensing drugs into a digital trail.

    Conclusion

    The debate should not be between e-commerce and retail sale. It should be between being compliant and non-compliant.

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  • MC12 over, it’s ‘gains’ for the developed world

    Context

    The 12th Ministerial Conference (MC12) of the World Trade Organization (WTO) was concluded recently. A cursory examination of the outcomes of the meeting leaves us in no doubt that the European Union (EU) and some other developed countries are the overwhelming winners, while India finds itself on the losing side.

    Background of TRIPS waiver for Covid related  treatment

    • On October 2020, India and South Africa put forth a proposal seeking to temporarily suspend the protection of intellectual property rights such as patents, copyrights, industrial designs and trade secrets, so that the production of vaccines, therapeutics and diagnostics could be ramped up to help overcome the crisis and fight the COVID-19 pandemic.
    • The opponents of the proposal, i.e,. Germany, the United Kingdom, Japan, Switzerland and the United States, found themselves on the wrong side of the global opinion on this issue.
    • In June-July 2021, the U.S. gave its support to the proposal, but limited it to vaccines.
    • Pushed into a corner, the European Union (EU) made a counter-proposal to undermine the proposal made by India and South Africa.
    • This counter proposal provided a cosmetic simplification in certain procedural aspects of compulsory licensing in patent rules.
    • By March 2022, India and South Africa were corralled into accepting the EU’s proposal.
    • This formed the basis of the final outcome at the MC12.

    Gain for EU at MC12

    • The ministerial outcome on the so-called TRIPS waiver represents the biggest gain for the EU.
    • The ministerial outcome adds very little to what already exists in the WTO rulebook.
    • The final outcome is almost unworkable; a big public relations victory for the EU.
    • Change in institutional architecture: In the name of WTO reform, the EU sought to make fundamental changes to the institutional architecture of the WTO.
    • It also sought to give a formal role to the private sector in WTO.
    • Environmental issues: The EU has also managed to create a window to pursue negotiations on issues related to trade and environment at the WTO, an issue of concern for many developing countries.

    Disappointments for India

    • No solution to public stockholding issue: India, the issue of a permanent solution to public stockholding was identified by the Indian Minister of Commerce and Industry as being its top most priority.
    • Despite having the support of more than 80 developing countries, this issue has not found mention anywhere in the ministerial outcome.
    •  Instead, the WTO members have succeeded in diverting attention from India’s interest by agreeing that food security is multi-dimensional, requiring a comprehensive solution.
    • No taxing electronic transmission: India has also failed in many of its other objectives, such as securing the right to raise revenues by taxing electronic transmissions.
    • In the area of fisheries subsidies, it gets two years to have suitable regulatory mechanisms in place to monitor fish catch and reporting.
    •  Although it has secured a temporary reprieve to provide subsidies for enhancing its fishing fleets, it will have to fight an uphill battle on this issue in future negotiations.

    Conclusion

    Overall, the path ahead for India at the WTO is difficult. India’s negotiators need to undertake soul searching to learn lessons from the dynamics at the MC12, and make course corrections.

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    Back2Basics: Public stockholding issue

    • Under the WTO’s Agreement on Agriculture, government procurement for public stockholding programs is exempt from discipline if stocks are procured at current market prices.
    • If procured at pre-announced administered prices, however, those outlays would potentially be counted toward a country’s overall limits on trade-distorting support.
    • Some developing countries are concerned that their procurement of food at fixed prices under these programs may push outlays to exceed allowed limits, thus depriving them of the necessary policy space to meet domestic food security requirements.
    • In this context, India and other members of the G33 developing country coalition have called for WTO members to agree to a “permanent solution,” following the 2013 Bali decision to exempt these programs from legal challenge under certain conditions.

  • Kuznets Hypothesis and India’s unique Jobs Crisis

    In India, there are fewer people employed in agriculture today, but the transformation has been weak. Those moving out of farms are working more in construction sites and the informal economy than in factories.

    What is the news?

    • India has too many people in agriculture and the inability to move surplus labour from farms constitutes a major policy failure of successive governments.
    • In 1993-94, agriculture accounted for close to 62% of the country’s employed labour force.
    • Overall, between 1993-94 and 2018-19, agriculture’s share in India’s workforce came down from 61.9% to 41.4%.
    • In other words, roughly a third in 25 years. That isn’t insignificant.
    • The declining trend continued, albeit at a slower pace, in the subsequent seven as well.

    What is our point of analysis?

    • Even the movement of workforce from agriculture that India has witnessed over the past three decades or more does not qualify as what economists call “structural transformation”.
    • Such transformation would involve the transfer of labour from farming to others sectors – particularly manufacturing and modern services – where productivity, value-addition and average incomes are higher.
    • The surplus labour pulled out from the farms is being largely absorbed in construction and services.
    • The bulk of the jobs are in petty sectors such as retailing, small eateries, domestic help, sanitation, security staffing, transport and similar other informal economic activities.
    • This is also evident from the low, if not declining, share of employment in organised enterprises, defined as those engaging 10 or more workers.

    What is the crux of the story?

    • Simply put, the structural transformation process in India has been weak and deficient.
    • Yes, there is movement of labour taking place away from farms – even if stalled, possibly temporarily.
    • But that surplus labour isn’t moving to higher value-added non-farm activities, specifically manufacturing and modern services.
    • This is familiar to the ‘Kuznets Process’ named after the American economist and 1971 Nobel Memorial Prize winner, Simon Kuznets.

    What is Kuznets’ Hypothesis?

    • In the 1950s and 1960s, Simon Kuznets hypothesized that as an economy develops, market forces first increase and then decrease the overall economic inequality of the society.
    • This is illustrated by the inverted U-shape of the Kuznets curve.
    • For instance, the hypothesis holds that in the early development of an economy, new investment opportunities increase for those who already have the capital to invest.
    • These new investment opportunities mean that those who already hold the wealth have the opportunity to increase that wealth.
    • Conversely, the influx of inexpensive rural labor to the cities keeps wages down for the working class thus widening the income gap and escalating economic inequality.

    Basis of this hypothesis

    • The Kuznets curve implies that as a society industrializes, the center of the economy shifts from rural areas to the cities as rural laborers, such as farmers, begin to migrate seeking better-paying jobs.
    • This migration, however, results in a large rural-urban income gap and rural populations decrease as urban populations increase.
    • But according to Kuznets’ hypothesis, that same economic inequality is expected to decrease when a certain level of average income is reached.
    • This process is triggered by the processes associated with industrialization, such as democratization and the development of a welfare state, take hold.
    • It is at this point in economic development that society is meant to benefit from trickle-down effect and an increase in per-capita income that effectively decreases economic inequality.

    What does the inverted Kuznets Curve mean?

    • The inverted U-shape of the Kuznets curve illustrates the basic elements of the Kuznets’ hypothesis with income per capita graphed on the horizontal x-axis and economic inequality on the vertical y-axis.
    • The graph shows income inequality following the curve, first increasing before decreasing after hitting a peak as per-capita income increases over the course of economic development.

    Criticism of the theory

    • Critics say that the Kuznets curve does not reflect an average progression of economic development for an individual country.
    • Rather it is a representation of historical differences in economic development and inequality between countries in the dataset.
    • It suits to the countries that have had histories of high levels of economic inequality as compared to their counterparts in terms of similar economic development.
    • The critics hold that when controlling for this variable, the inverted U-shape of the Kuznets curve begins to diminish.

     

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  • RBI and the rupee: To break a free fall or not to

    Context

    The Indian rupee has been in free fall. Some commentators have pointed out that it has fallen less against the US dollar than a lot of other currencies.

    Significance of foreign exchange reserves

    • Decline by 10 per cent: A large part of the current relative strength of the rupee vis-à-vis other currencies is due to the sale of dollars by the RBI — it has lost more than 10 per cent of its foreign reserves in the space of about nine months.
    • Why country needs foreign exchange: A developing economy needs foreign exchange to finance its international transactions for both the current account (goods and services) and capital account (assets) transactions.
    • Cost involved: The benefits of this stock are obvious, but there are also costs associated with the holding of these.
    •  The larger the stock, the more its reassuring value.
    • Typically, because of their “liquid” nature, the returns on these are low.

    How RBI manages the foreign exchange reserves?

    • How country accumulates foreign exchange reserves? A country can accumulate reserves by running current account surpluses that is, keeping its total expenditure below its gross national product, and/or by interventions in the foreign exchange markets.
    • India (usually) runs a current account deficit.
    • Its reserves are then accumulated solely through “sterilised” interventions.
    • When foreign entities want to invest in Indian assets (stocks and debt), the RBI gives them rupees in exchange for foreign exchange.
    • Mindful of the fact that this may cause a surge in inflation, the RBI then sells government bonds, sucking out the additional rupees.
    • The foreign exchange reserves rise, and are matched by an increase in government bonds outstanding.

    How outflow of foreign financial capital affects foreign exchange reserves?

    • When capital inflows were taking place, the RBI accumulated foreign exchange and allowed some currency appreciation.
    • As long as capital flows were strong, foreign reserves kept piling up and the currency (in real terms) was strong.
    • Depreciation of rupee: In recent months, we have witnessed an outflow of foreign financial capital, with reserves falling and the rupee depreciating.
    • International capital flows tend to be pro-cyclical, that is, they move with the world economic activity.
    • Unlikely to increase export: A depreciation of our currency is unlikely to see our exports rise very much because the world income levels are down.
    • Inflation: What this depreciation will cause is imported inflation and bankruptcies.

    Analysing the RBI’s role

    • Allowed outward remittances: The RBI threw caution to the winds and allowed outward remittances in foreign currency by Indian residents, with almost no questions asked (up to $2,50,000 annually). 
    • The RBI could have had a much larger supply of foreign exchange had they not generously handed out foreign currency to be frittered away.
    • While they have not restricted outward remittances, they are trying to shore up reserves by making FCNR (B) and FRE deposits more attractive.
    • It is not in any individual’s interest to bail out the RBI.
    • The RBI has also committed to using reserves to ensure an orderly depreciation.
    • Futility of RBI’s intervention: If the world financial markets want a depreciated rupee, the RBI’s intervention would not be able to prevent it.
    • But in spite of this, the RBI, with its commitment to inflation targeting, would try to prevent a depreciation (because it causes the price of imported goods to rise).
    • Possible impact on the poor: Having too open a capital account policy was always fraught with risks.
    • When countries are confronted with a crisis, the IMF is asked to provide assistance.
    • But assistance from IMF would involve a “structural adjustment”, including cutting back on subsidies for the poor and vulnerable.

    Conclusion

    We are standing at the edge of a precipice, but, hopefully, the world will pull back in the nick of time. If not, it would be the chronicle of a death foretold.

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    Back2Basics: FCNR(B) Account

    • An FCNR ( Foreign Currency Non-resident) account is a type of term deposit that NRIs can hold in India in a foreign currency.
    • FCNR (A) was introduced in 1975 to encourage NRI deposits.
    • The Reserve Bank of India (RBI) guaranteed the exchange rate prevalent at the time of a deposit to eliminate risk to depositors.
    • In 1993, the apex bank introduced FCNR (B), without exchange rate guarantee, to replace FCNR (A).

  • Manufacturing PMI hits 8-month high

    India’s manufacturing sector rebounded in July, with sales and output growing at the fastest pace since November. The PMI quickened last month to 56.4, from June’s 9-month low of 53.9.

    Purchasing Managers’ Index (PMI)

    • PMI is an indicator of business activity — both in the manufacturing and services sectors.
    • It is a survey-based measure that asks the respondents about changes in their perception of some key business variables from the month before.
    • It is calculated separately for the manufacturing and services sectors and then a composite index is constructed.
    • The PMI is compiled by IHS Markit based on responses to questionnaires sent to purchasing managers in a panel of around 400 manufacturers.

    How is the PMI derived?

    • The PMI is derived from a series of qualitative questions.
    • Executives from a reasonably big sample, running into hundreds of firms, are asked whether key indicators such as output, new orders, business expectations and employment were stronger than the month before and are asked to rate them.

    How does one read the PMI?

    • A figure above 50 denotes expansion in business activity. Anything below 50 denotes contraction.
    • Higher the difference from this mid-point greater the expansion or contraction. The rate of expansion can also be judged by comparing the PMI with that of the previous month data.
    • If the figure is higher than the previous month’s then the economy is expanding at a faster rate.
    • If it is lower than the previous month then it is growing at a lower rate.

    What are its implications for the economy?

    • The PMI is usually released at the start of the month, much before most of the official data on industrial output, manufacturing and GDP growth becomes available.
    • It is, therefore, considered a good leading indicator of economic activity.
    • Economists consider the manufacturing growth measured by the PMI as a good indicator of industrial output, for which official statistics are released later.
    • Central banks of many countries also use the index to help make decisions on interest rates.

     

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  • Government bailouts are not the answer to India’s energy sector woes

    Context

    Across several states, the fiscal situation is becoming increasingly challenging. Yet, the common thread that runs through these deficits — state ownership and control — remains unaddressed.

    State ownership: structural cause of India’s deficit

    • Coal India’s inability to raise production to meet growing demand contributed to the recent power crisis.
    • The state-owned power distribution companies have failed to bring down losses despite many schemes and packages.
    • The state control of these critical aspects of India’s power chain is central to a higher current account deficit and growing fiscal risks at the state level.

    Coal output fails to meet the demand

    • From 2013-14, the Indian economy has grown by around 50 per cent (in real terms).
    • But Coal India, which accounts for around 80 per cent of India’s total coal production, was able to raise its output by just 34 per cent over the same period.
    • Increased reliance on imported coal: India’s coal imports (thermal and cooking) rose to a staggering 230.3 million tonnes in 2020-21, up 37 per cent from 168.5 million tonnes in 2013-14.
    • Coal imports for thermal power alone have more than doubled in the first quarter, compared to the same period last year.
    • To put this in perspective — the value of coal imports in just the first three months of this year is likely to be around half of what was imported in all of last year.
    • Increase in current account deficit: This growing reliance on coal imports (along with crude and gold) is at the root of the country’s widening current account deficit.
    • An inability to ramp up production, to forecast demand accurately, as every episode of coal shortage over the years has exposed, is the hallmark of the coal sector that is still largely the preserve of a public sector monopoly.

    Problem of DISCOMS

    • No improvement in financial and operational issues: Despite repeated attempts to turn around their financial and operational positions, on key metrics, the divide between the public and private sector discoms is deepening.
    • In 2019-20, public sector discoms lost Rs 0.72 per unit of power sold, while private discoms made Rs 0.20 per unit.
    • High AT&C losses: Similarly, in 2019-20, the AT&C losses (due to operational inefficiencies) for state discoms were pegged at 21.7 per cent, while for the private sector, losses were at 8 per cent.
    • With deteriorating finances, the net worth of all public sector discoms put together stands at a negative Rs 61,757 crore, while for the private sector, it is a positive Rs 24,965 crore.
    • There have been several attempts to rescue state discoms.
    • In the early 2000s, the scheme for repayment of SEB dues amounted to Rs 41,473 crore.
    • In 2012, the financial restructuring plan added up to Rs 1.19 lakh crore.
    • In 2015, UDAY involved a transfer of Rs 2.01 lakh crore to state government balance sheets.
    • Notwithstanding various schemes to turn around their finances, the total debt of all discoms put together stood at Rs 5.14 lakh crore at the end of 2019-20.
    • Of this, Rs 4.87 lakh crore is owed by state discoms.
    • Impact on entire power chain: A deterioration in the financial position of discoms means that their dues to power generating companies start mounting, which in turn delay payments to coal miners, affecting the financial stability of the entire power chain.

    Declining cross-subsidisation

    • As tariffs charged by discoms are much higher than the cost of alternatives, a sizeable part of non-agricultural sales of discoms (industrial and commercial consumers) have already shifted towards captive and solar.
    •  And with the ministry of power recently reducing the threshold for green energy open access, more and more consumers will increasingly opt out.
    • This would mean that discom losses will rise as cross subsidisation from commercial and industrial consumers will decline, increasing their dependence on state subsidies.
    • In 2019-20, the total state subsidy claimed and released was around Rs 1.1 lakh crore or 17 per cent of total discom revenue.
    • This will only increase down the line, making future bailouts even more fiscally challenging.

    Conclusion

    Tackling these deficits requires addressing the issue of government control over critical aspects of India’s energy sector. Without shifting to market-determined prices — reforms are ultimately about price — little headway is likely to be made.

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