User will pay for excess coal imported by coal fired power plants!

India’s Coal production (in million short tons) was 611.719 (2011) against world production of 7954 while in the latest year (2012) it had an anticipated production of 639.627. Its consumption during the same period was 662(2012) against world’s 4961 and the corresponding consumption in 2012 being 721.419. There was a nett import to the tune of 58.995 (2011) against 81.792 (2012).

India professed to an installed capacity of 211 gig watts of power in the coal fired plants. There was a huge shortage of coal in the country, as the primary source of power in India was from the coal fired projects. India has the fifth largest coal reserves, but it is not able to augment demand. India has 20 operational nuclear reactors and 7 more under construction at various stages (Source: eia US Energy Source information). 

India’s per capita consumption of power is less than that of the developed countries and 25% of India’s population lack basic access to electricity while urban areas which are electrified has unwanted blackouts. Largest energy source for production of power in India is from coal, and while industry sector consumed 40% of the power produced from the coal sector. Coal powered power plants are the fastest growing area of energy demand as it grew from 23% in 1990 to 42% in 2012. (US Energy Int Administration- Independent Statistics and Administration). In India, for economic purposes, Services industry which provides India’s half of economic output is relatively a non energy intensive source. Hence lack of urgent importance to the power sector which could accelerate India’s growth.

India imports 81.982 mt of Coal, and 75% of this coal is from Indonesia, while 19% is from S Africa and 1% from Australia. Indonesia is one of the biggest suppliers of Palm Crude Oil and RBD Palmoilein, which is used for distribution amongst the Public Distribution system beneficiaries to the extent of 10 million by providing a discount of 25%. India is one of the nations on which the foundations of Indonesia’s economy are built around. Indonesia exports 180 million tones from their production of 239.41 million tones. The prices for 1 MT FoB is around 50-60 dollar/Metric ton.

This is the general picture of sourcing of coal, its imports, its utilization, power produced used by coal fired plants, etc. The story begins now. Yesterday, the Cabinet Committee on Economic Affairs met under the chairmanship of the Hon’ble Prime Minister of India, wherein a contentious decision was taken to the effect that coal which are imported by individual power companies, or by Coal India Ltd, and the difference in prices paid between the import price and the domestic price shall be passed on to the users or consumers. Presently there is an import tax of 10% and the government in its wisdom will bring it under a Tariff Rate, where the exporter country or the importer at the place of holding will pay a lesser customs rate on the import value, while the invoice value will be his cost price. This price and the domestic price, the difference, will be added to the cost of power that is being distributed today or will be distributed tomorrow. This decision, Government sources claim was inevitable as it is expected to ignite 38,000 MW of new power in this power deficit country. For production of 1 MW of electricity, cost of capacity building would be approximately Rs 5 Cr (govt reveals this) .The Government encourages the power producers to go in for importing power; it is their responsibility. But the differential in sourcing and domestic price will be levied by the power company on the end user. This was what Association of Power producers asked for.

The Hon’ble Finance Minister feels, a few higher paise paid for a unit of power would not affect the common man, but it would have a big effect on boosting the power availability in the country. Our am admi government wants to force a price hike on the throat of the common man who is already bearing the brunt of inflation tsunami and high price rise.

Like importing 30,000 MT of Palm Oil every year to raising it to 1, 00,000 MT at a throw away Tariff value, Government would definitely increase the quantum of imports Y-o-Y. Presently, 65% of the coal required for the power plants is procured from the Coal production centres, and Government is hopeful that they would be able to meet 85% of the requirements by the end of the 12 th Plan. Then the mismatch between supply and requirement would be a measly 15%.

                    (Source: eia- US Energy Source Infmn)

But this is just part of the minutes of the Cabinet Committee on Economic Affairs of the government of India. The actual scenario would be, the imports which are in the 35% region may touch 50% or more. But a peculiar matter that need to strike us is that we are at the receving end of the Rupee devaluation which is hovering around Rs 59/dollar. Our Foreign Exchange Reserves is a bare $ 297 billion. The difference between Imports and Exports in the first 2 months was a deficit $ 40 billion (Balance of Payments).(CAD). If manufacturers who have a poor track record of reducing their sale prices, if given the right to fix the rates, will never withdraw. The consumer will have to bear the cost of Rupee fluctuation, cost of road/rail transport from the port to the Power factory, etc. It is not peanuts as our Minister wants us to believe but will be in excess of at least Rs 5-6 per unit.

It is a pity that nobody is scared of this development.

Inaction leads to Economic Paralysis

Economic Wait and Watch policy ruinous

Economy:

Can Indian economy be consistent to hold on to the growth rate of 9.5% it did 5 years ago? Very very doubtful.

       When US announced its qualitative easing, which would deter their bond purchase, Indian markets tumbled, Our markets were sitting on the fence and tumbled by 500 points (2.74%) (BSE) and Nifty shed 166.35 points (2.86%) to send markets reeling. It was an economic tsunami of sorts, waiting to happen, as our financial stalwarts prefer to wait and take no action.

       Our Rupee has slid to nearer to Rs 60/- yesterday and it was a brave effort which saw its devaluation flow to recover to Rs 59.27/dollar. Gold also knocked out the punch and nosedived to Rs 2,550 per gramme to touch Rs 20,400 to a sovereign.

       Our Current a/c deficit is widening due to uneven exports and excessive imports. The entire Foreign Exchange Reserves has nil contribution from exports as it has to consume the import costs, and the surplus in the export-import trade, we have FER which can contain 7 months of import. If there is drawl by FII which is natural, our Reserves get depleted.

       Petroleum costs, add-ons by Oil companies when they have nothing to lose, as the Crude oil is not imported by them, they get it refined at nil taxes, and yet for every paisa increase of the Rupee, they hike the Petroleum prices to compensate what they call under recoveries which fuels inflation in the local market. There is no outstanding increase of oil per barrel, but just because of currency depreciation, oil companies by their monopolies in the market. Of course, the few private players named Reliance would love to hike the prices, because it also considers itself to be a major monopoly.  

       But what is sad is the Economic Advisors to the Government remain bird watchers. Dr Raghuram Rajan, Financial Advisor, is in a state of illusion. He says, we are alert, we have many options. But measured steps will be taken in full measure at the appropriate time. Going further, India’s planning czar, Dr Ahluwaliah, says devaluation of the Rupee is a temporary phenomenon.

       Rupee parity with the dollar was Rs 40/$ (2007), it went steadily up to Rs 60/$(2013), and CAD deficit has been growing alarmingly and FER are depleted.

       Wait and Watch Policy is costing the country dearer; this is no Policy at all. We are inuring the economic growth of the country which will witness a slower growth with Budget deficit going up alarmingly and CAD becoming worse. If we do not leverage advantages now, we will never!

RBI Monetary Policy and fall in Indian Rupee

Mid quarter review of RBI Monetary Policy: Will they prescribe lending or mending monetary Policy

When the RBI wise men release the midterm quarterly Monetary Policy, will they stick to status quo or be ebullient to course a new path?

Will they reduce CRR as demanded by many banks including SBI? Already there are strong arguments that money parked by Banks with the monetary authority is ‘dead money’ and no economic activity results from this. If RBI reduces 25 basis points, the banks will get around Rs 3000 Cr which can be recirculated into the system by way of interest cuts or new loans can be sanctioned. Today, CRR stipulation detests them with tinkering with the base rate. The brazen policy of no CRR cut, and if done will fuel inflation has been the cause for less money for loans, less circulation of money, production cuts, and decrease in consumption, which retards growth rate.

RBI is in the excessive caution mode, which results in stifling of economic growth which is around 5.2%.

The Rupee’s has been gathering reverse momentum. It is set to touch Rs 60 to a dollar and may even climb higher to touch Rs 65-Rs 70 sooner or later. RBI’s intervention of buying dollars may at best be a short term effort; it will not give effect to a permanent solution. It may even back-fire, as contended by RBI Governor.

The easy argument is that all currencies are under pressure. There is a silver lining that American economy is starting to glow. It is a sign of recovery. Even if American economy dazzles, what is the guarantee that there will be trade inflows and capital inflows to India. It may be in the reverse direction.

Importers buy dollars and transact while the exporters hold on to their dollars hoping for an even better exchange rate.

Does market sentiment play a role in the diminishing value of the Rupee? It is unlikely because India has a herd mentality among market participants.

Indian Government encouraged commercial borrowings by companies from external sources. Currency risks and asset liability mismatch proved the blunder of Government Policy.

India has Foreign Exchange Reserves of around $ 290 billion. This did not come from export dealings. Foreign exchange from exports were eaten away by the imports which was $ 150 billion more ($450 billion) against export receipt of ($300 billion).This residue of $ 290 billion, are dollars accumulated by RBI through short term flows. They are in the nature of ‘debt’ assets. A portion of the reserves were spent by the benign Government of India  to fund infrastructure.

We have bad economic advisors who do not have the prodigal wisdom to take the right decisions. Country’s economy suffers in the bargain, both in the short- to medium- to long term.

How to revitalize the Rupee

How to arrest Rupee’s slide?

Rupee slid to an all time low of Rs 58.15(11-6-2013) against the dollar as against Rs 57.32(June 28,2013)/dollar sending shock waves to the worried exporting fraternity, who have put on hold export dealings for the time-being in anticipation of better tidings. It could further erode to touch Rs 60/to $1, if no effective steps are not undertaken. Government’s lax in providing excuses instead of finding a permanent solution to the vexed problem is a result of party paralysis.

The slowdown in exports will irrestibly reverse the momentum of reforms, which is already shaky. It will impact economic growth momentum to the Asia’s 3^rd largest economy which has been beset with sharp deceleration of growth, worsening the public finances; Balance of Payment position (insufficient reserves in FER) (present FER enough to tide over only for 7 months)(the lowest ever in the last 13 years). Export substitution by importing inputs has made exports less glamorous due to pricing difference and thin margins. Fluctuation in the capital inflows has been a cause for Rupee weakening, says PM’s advisor C Rangarajan. Once the inflow eases, the weak Rupee will gain, he says. Experts don’t bite this bullet.

Partially convertible Indian currency’s nose drive has affected Indian exports adversely..

RBI’s inaction cannot be justified. There is a risk that needs to be taken note of in the currency fluctuation territory. There is also management of currency fluctuation for which remedial measures need to be taken. But RBI does nothing but remains passive. RBI needs to herald a realistic Policy by putting place humps which will restrict Rupees bump. A mature exchange risk mechanism should be an addendum to RBI’s annual fiscal Policy to control erosion of the Rupee value against greenback.

RBI’s present practice of piecemeal market intervention must be replaced by Policy intervention to stabilize Indian Rupee.

The problem rose in 2002 when Bimal Jalan was the Governor of RBI. He did nothing to look into the symptoms or the disease to arrive at an equitable policy mechanism. His successor too, did nothing (Dr YV Reddy). Subba Rao, is wild off the mark towards the issue. In 2002, Rupee was Rs 48.7341 to a dollar. Down 7 years, the value came down to Rs 40.82 (2007). The Tirupur Exporters Association (I was its Executive Secretary then) submitted a paper suggesting methodologies to rein in Rupees abrasion. In 2007, India’s exports rose from $ 40 billion in 2002-03 to $ 140 billion, which resulted in our Foreign Exchange Reserves turn around about $ 275.954 billion which was adequate to meet 1 year’s import bill.

Reckless import Policy which saw import of Rs 65 K Cr (edible oil), 100 K Cr (Gold), 40 K Cr (other imports0, burdened the exchequer in addition to import of petroleum products. While the economy suffered against import of petroleum products, and their domestic prices were often raised by the Oil companies which fuelled inflation. India’s higher BoT and the widening gap between BoP and BoT created huge trade deficit which affected economic growth. The price instability caused by high cost of import of inputs for export substitution substantially pushed the cost of production while the export returns were not commensurate with the high costs resulting in trade disadvantage.

RBI’s belief that crisis will blow over time and normalcy will return automatically is an undesirable economic conclusion which does not stand the test of theories. This is a faulty thought, part of policy paralysis, which has affected various growth institutions curtailing its growth. Services sector has borne the brunt of such a fallacy of thought; off shore infrastructure costs override few profits of the on-shore activity. IT industry is for Himalayan trouble.

It is high time, government and RBI take cognizance of the problems manifest in the Rupee devaluation direction. MoF would do well to keep quiet and leave it to RBI to do its job