How to revive India's corrupt and debt-ridden power sector

Hard and unpopular decisions are needed - not just another round of financial repackaging to sort out the discom mess, says Vinayak Chatterjee.

India's electricity distribution sector is a national embarrassment, brought about by decades of turning a blind eye to the misdemeanours of this sector. 

The unholy trinity of the conniving State Electricity Board (SEB) employee, the unethical and self-enriching domestic and industrial consumer and the politician patronising theft, corruption, sloth and freebies has brought the power sector to its knees.

A portrayal of the extent of decay is vividly presented in the Hindi documentary film Katiyabaaz (available on YouTube) that released in India on August 22, 2014.

Minister of State for Power, Coal and New and Renewable Energy Piyush Goyal, after having sorted out the coal and other sundry crises, is now faced with his biggest challenge: sorting out the discom mess.

And what a mess it is!

The thermal power sector is operating at a decadic low of 59 per cent plant load factor because discoms do not have the money to pay for buying more power.

Resorting to load-shedding is therefore the only practical way for discoms to stay operationally afloat.

This means that vast parts of the world's third-largest economic power goes without electricity for more than half the day.

As on March 31, 2014, SEBs had accumulated losses of around Rs 3.5 lakh crore. Experts say roughly 40 per cent of these losses are due to technical and commercial losses and the rest due to tariffs not keeping pace with rising costs of supply. According to the power minister, distribution utilities lose Rs 64,000 crore (Rs 640 billion) every year.

Discoms' collective debt is Rs 3.17 lakh crore as of June 2015 and increasing.

The central government has identified about Rs 1 lakh crore of this debt to be at risk, and ready to become the next tsunami of non-performing assets (NPA) to hit the already beleaguered banking system.

The Reserve Bank of India issued a red alert in June that the risk of discom NPAs was "very high".

It is common knowledge amongst energy sector aficionados that a slew of concurrent measures is needed to attack the cancer eating away the vitals of the energy distribution system.

One is network strengthening and rejuvenation. Thankfully, the central government's schemes of revamping rural networks under the Deen Dayal Upadhyaya Gram Jyoti Yojana and urban area networks under the Integrated Power Development Scheme (IPDS) are steps in the right direction, and are adequately backed by central funding.

Next, a 'smart metering' revolution needs to sweep through the country so that not a single power consumer is left 'unmetered'.

Depoliticising state regulators and associated tariff determination is critical. Further, all subsidies have to be to the account of the state government, and not on the books of the discoms.

Finally, 'carriage and content' needs to be split; where a recent report by the Forum of Regulators has laid out a three-stage implementation plan, which is likely to take five-seven years to implement. Hopefully, the 'Power for All' initiative being presented to various states, will be the platform to press for overhauling the distribution sector in real terms.

To Goyal's credit, he is certainly spending a large portion of his time with the states battling the 'Discom Dilemma'.

However, what is being crafted as a key intervention appears essentially to be another round of financial repackaging.

The discoms' debts are proposed to be transferred to the state governments concerned, which will issue bonds against these.

The Union Cabinet is shortly expected to endorse this. If the state defaults on servicing these bonds, the Centre would step in and commandeer parts of financial grants/devolutions to the state.

It is hoped that this additional pressure on the finances of the states will force them to implement tough distribution sector reforms.

That is indeed a fond hope. Transferring debt from a 100 per cent subsidiary to its parent is at one level financial jugglery masquerading as reform package.

It is evident that the Rs 10,000-crore (Rs 100 billion) 'Montek Bonds' of 2002 and the Rs 2-lakh-crore-plus Financial Restructuring Package for discoms of 2012 were not accompanied by proportionate changes in the efficiencies of the discoms.

Whilst banks and some central power sector lending public sector undertakings are thus being insulated against this potential tidal wave of NPAs, they may be compelled to subscribe to these new 'state power bonds' at an interest subvented rate of eight-nine per cent against typical bank loans at 12-13 per cent.

Clearly, state governments are being lured with this bait to sign up for this round of resetting.

So it is imperative that this latest round of financial 'barking' (at best, a short-term palliative) is accompanied by 'biting'. These bites have to be tough, hard and politically unpopular decisions.

What could these be?

Clearly, a 'sunset goalpost' where specific states are told that in a five to seven-year time frame, they need to achieve some pre-agreed technical, commercial and regulatory parameters, that is, an effective notice today to shut off all central government and banking sector funding for such states in future.

This, they can choose to achieve by revitalising their existing discom organisations or institute appropriate models of private sector involvement, including input franchisee, licensee or operating management.

Further, the central government can immediately consider setting up the much-discussed proposition of a National Power Distribution Company (NPDC) that begins to effectively challenge the hegemony of state-owned discoms.

More importantly, the NPDC can equally well fulfil other pressing objectives of picking up stranded capacity, price-pooling, and open-access.

We do not wish to have the next version of Katiyabaaz to be made at the national level.

The story of India's external debt

Foreign exchange reserves as a percentage of India's total external debt were 73 per cent at the end of December 2015.

 

 

India's external debt profile appears to have improved somewhat, if the data for the period ended December 2015 are taken into account.

The overall external debt stock stood at $480 billion, showing a small one per cent increase over $475 billion as at the end of March 2015.

Compare it with the external debt level at the end of December 2014, and the increase is a little higher at 4.66 per cent.

This is the smallest increase at least in the last five years - when the average annual rise in external debt has ranged between eight and 18 per cent.

Look at it from a longer-term perspective, and the situation will indeed appear relatively stable on this front.

Foreign exchange reserves as a percentage of India's total external debt were 73 per cent at the end of December 2015.

They may be well below the comfortably high levels of over 100 per cent seen between 2003-04 and 2009-10, but at the same time they are also nowhere near the precariously low levels of seven or 11 per cent that India experienced during its worst balance of payments crisis in 1990-91 and 1991-92. 

Similarly, the government's principal and interest payments liability as a percentage of export earnings, or the debt service ratio, has also stayed at a low level of 7.5 per cent in 2014-15.

Compare this with the 30-35 per cent debt service burden from 1990 to 1992 and you will see the reason why there is a reduced level of stress for those who manage the country's balance of payments.

Even the level of external debt as a percentage of India's gross domestic product or GDP is now at less than 24 per cent, while it had reached a high of 38 per cent in 1991-92.

The story of India's external debt, however, changes a little if you take a close look at its changing composition in the last 25 years.

Three clear periods with distinct trends emerge, particularly with regard to the accumulation of India's short-term debt.

From 1990-91 to 2003-04, short-term debt with original maturity of one year or less kept declining, both as a percentage of foreign exchange reserves and of total external debt.

In 1990-91, short-term debt was as much as 146 per cent of India's foreign exchange reserves and it declined to as low as 3.9 per cent by the end of 2003-04.

Similarly, the share of short-term debt in total external debt declined from 10 per cent in 1990-91 to 3.9 per cent in 2003-04. 

The second phase begins from 2004-05 and ends with 2012-13. This is a period when short-term debt sees a spike.

From levels of 12.5 per cent of foreign exchange reserves and 13.2 per cent of total external debt in 2004-05, short-term debt rose to 33.1 per cent and 23.6 per cent, respectively, by the end of 2012-13.

Remember that this is a period in which economic growth had picked up a healthy pace, clocking an annual average rate of eight per cent.

This was much higher than the 5.7 per cent annual average economic growth seen in the 14 years between 1990-91 and 2003-04.

The third phase begins in 2013-14 with short-term debt once again declining.

In this period, the share of short-term debt in foreign exchange reserves as well as total external debt has fallen consistently from 30.1 per cent and 20.5 per cent, respectively, in 2013-14 to 23.3 per cent and 17 per cent by the end of December 2015.

Annual average economic growth in this period (including 2015-16) is estimated at around seven per cent. 

Note that the three periods pertain to three distinct phases of political governance.

In the first period - between 1990-91 and 2003-04, the governments of P V Narasimha Rao, H D Deve Gowda, Inder Kumar Gujral and Atal Bihari Vajpayee rescued the country from an economic crisis and placed it on what turned out to be a broadly irreversible path of economic reforms.

In the second phase, the government of Manmohan Singh rode on the reforms initiated in the previous decade and a half, but used the resultant growth and higher revenues to unveil a series of measures to increase entitlements by way of rural jobs and education among other things.

The third phase began just before the Narendra Modi government was formed and is now focused on the need to usher in greater reforms and revive industrial growth.

It is difficult to establish a correlation between the trends in short-term debt in these three periods and the distinct governance style followed by the governments in those respective periods. But the broad trends cannot be ignored.

Take a shorter time frame of five years and the trends are even more interesting.

If short-term debt is falling as a percentage of total external debt, what has kept the overall debt profile growing is obviously long-term debt. But here also the composition of long-term debt is seeing a slightly disturbing change. Its reliance on multilateral loans is declining - from about 16 per cent in 2010 to about 11 per cent now.

Even the share of export credit in overall debt is falling from over six per cent to barely three per cent - an indication perhaps of how the exports sector has fallen on bad days.

But the big change in India's long-term debt profile is with regard to its commercial borrowings and deposits from non-resident Indians or NRIs.

Commercial borrowings accounted for 27 per cent of India's total external debt in 2010 and they have risen to over 38 per cent by the end of December 2015.

Similarly, NRI deposits accounted for 18 per cent of external debt five years ago. Today, they have a share of 24 per cent.

The growth in short-term debt has slowed, but commercial borrowings and NRI deposits seem to be booming.

Whether that is a healthy shift, only experts and time will tell.

What went wrong with the people's car called Nano

Somebody in the company should have the courage to tell the new boss that it would be a futile exercise as the 'people’s car' has tried to don a 'cool' avatar at least thrice in the past with pretty cold results, notes Shyamal Majumdar

A few months after taking over as the Group chief executive officer of Tata Motors in 2010, Carl-Peter Forster had said the company needs to strengthen its capability to deliver high-quality products and to build its brand reputation.

Two years later, his successor Karl Slym said the perception of Tata Motors in the market as a passenger car maker needs to improve and the brand needs an image makeover.

Cut to March, 2016: Guenter Butschek, the new managing director and CEO who has an onerous task of turning around the fortunes of a company that has seen domestic passenger car sales and market share more than halve in the past two years, said in his maiden interaction with the media, “We really need to consider how we position the brand.”

The statements of the three CEOs in the past six years suggest pretty much the same thing — that customers still don’t know what a Tata car stands for.

This is despite the company’s recent efforts to drop its earlier reluctance to regularly churn out new products to keep the excitement going.

Things may finally be changing on that front. Even though the recent Zest sedan and Bolt hatchback (launched in August 2014 and January 2015, respectively) have done little to help revive demand -- domestic sales of Tata Motors cars fell from 352,000 in 2010-11 to around 140,000 in 2015-16 and the company has a share of only 3.5 per cent in a segment that comprises half the passenger car market in India -- the newly launched compact, Tiago, could be a game changer with its initial disruptive pricing that is expected to shake up the small car market.

On the anvil are a next generation SUV, a premium hatch and a premium sedan.

That’s good news for Mr Butschek who has made all the right noises so far, except one jarring note -- he has hinted at yet another “next generation” Nano which is expected to do away with the “cheap car” tag.

Somebody in the company should have the courage to tell the new boss that it would be a futile exercise as the “people’s car” has tried to don a “cool” avatar at least thrice in the past with pretty cold results.

Three years after its much-hyped launch in 2009, Tata Motors refreshed the Nano, launched Nano Twist in 2014 and then came out with the GenX, which was termed by senior company executives as a make or break moment for the company.

The attempt was to bury the cheapest car tag and also to lure the first-time buyers.

At the end of it all, the Nano remains a cautionary tale of misplaced ambitions and a drag on profit, with sales of 22,138 units in 2015-16 compared to 74,527 in 2011-12.

Despite the relatively better performance of GenX, it now sounds a bit strange that when it was launched in 2009, rating agency Crisil had predicted that the Nano would expand the Indian car market by as much as 65 per cent.

Harvard Business Review was bang on when it said that you have to get a lot of things right to successfully bring a product as novel as the Nano to market.

First, you have to conceive of something people will actually want.

That’s really three steps -- thinking up something that’s wanted, identifying who actually wants it, and working out the details of how and under what circumstances they will use the product.

You have to devise a way to produce it reliably and profitably at the price those people will pay.

And you need to communicate a clear, targeted value proposition, differentiated from competing offerings.

The Nano has had trouble with just about every one of those steps, HBR said.

So, Mr Butschek would do a great favour to Tata Motors (which is otherwise doing fine with the commercial vehicles business and Jaguar Land Rover, and can hope to cash in on the slew of new car launches in the domestic market), if he can go off the beaten track and think in terms of discontinuing the Nano brand.

He could take heart from the fact that even Ratan Tata’s enthusiasm for his creation has dimmed a bit.

Mr Tata had suggested in an interview to CNBC that the Nano be launched in a new avatar in another country like Indonesia, where it doesn’t have the “stigma” of being “'the cheapest car”.

The reason to discontinue the Nano brand is simple: it is seen as a laggard and it is not easy to reposition a laggard with cosmetic changes. And as they say, ego has no place in business

Vardenchi---The Story of Custom bikes in India

The Bike Restoration team of India

The Great Biker of India

HACKED!!

There is a saying that even the best technical marvels failed due to lack of maintenance. Maintenance is a an integral part of an website. You may have the best codes and the highest security but one fine morning you may find that your website has been hacked.

Also like keeping your website updated with the latest Technological developments they say. Today's customer want new and updated technologies. In Bengal they say " You have to be ahead or else you have to be behind"

Choosing the proper guy for your web maintenance is another thing, where you have to decide on the right product, the world is round and there are the cheapest solutionz available but does every cheap solution suit t what you need. A cheaper solution will be HACKED, I told my customer one day as a marketing guy. He told me I am over confident and I could not compete in the market with high prices. I was quiet. A month later he called me, and gave me the order. He once told me my price was high but now he is happy with my service.

To cut the story short.
Without maintenance and updates the competitors will eat your business.


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