"For want of a nail the shoe was lost.
For want of a shoe the horse was lost.
For want of a horse the rider was lost.
For want of a rider the message was lost.
For want of a message the battle was lost.
For want of a battle the kingdom was lost.
And all for the want of a horseshoe nail"
-Benjamin Franklin
This adage speaks about how due to lack of attention to little things, disasters happen. This is also the story of Indian Reforms 2.0, the ones which were undertaken by a PM who as FM executed the opening up of Indian economy.
Let us look at how it all began in the 2nd innings. NDA before moving out enacted a bill to restructure the collapsing power sector of India called The Electricity Act 2003. When UPA got elected in 2004, the new PM understood that Indian Power sector needs a massive restructuring and in turn huge investments. This was made a priority in 11th five year plan and a target of 78000 MW of additional capacity was targeted. In a country where 8 hours load shedding is a norm even in mega cities like Gurgaon and Noida, power sector reform indeed is the need of the hour and the targeted capacity addition was estimated to take $164 billion of investment, $78 billion in generation and remaining in transmission. For a government with $194 billion revenues in 2011, it was obvious that the mega target cannot be achieved without the help of the private sector. So government opened up the electricity generation to private sector and the media chorused the "reform" as one which will change the country for good. The move also captured the fancy of the private sector which invested in a big way. Tata Power, Essar Group, Reliance Power bid and won contracts for establishing Ultra Mega Power Projects (UMPP) in various states. The plan looked simple. The private sector will generate power using the coal and gas provided by state owned monopolies like Coal India, GAIL, ONGC etc. The private companies will be given land by the state government to set up the plant and they will also be allowed to hold captive mines for fuel to generate electricity. The pvt players will then sell the power to the utility companies owned by the respective state government at the cost for which they won the bids. For instance, Tata Power won the bid to establish a UMPP at Mundra at Gujarat where it will generate power from coal (in this case, coal was imported from Tata's captive mines in Indonesia) and sell it to state government at Rs 2.20. The plan looked flawless and everyone seemed to be happy. But once tried to execute it, all hell broke loose. To start with, state governments took forever to do land acquisition and give the clearances for the project. Clearly, the state governments did not share the enthusiasm of the center to reform power. Next was the environmental ministry, which initially delayed the clearance for mining especially near the ecologically fragile zones. The usually subdued ministry suddenly became belligerent under Jairam Ramesh who in one instance blocked the approval of a project which he had pushed hard as the minister of state for power a few months ago. Again, ministries under the government failed to see the bigger picture and kept squabbling.
Next came the bigger problem, getting the fuel. While generation was simplified, the process of getting fuel was still under the monopoly of few players who were caught napping when ambitious plans were laid. For generating, 78000 MW, Coal India, ONGC and GAIL will have to tap the resources at a comparable rate. Something they were never able to do. The government attempted to speed up this part by allowing private players to do tap natural gas and Reliance won the KG basin contract. Unfortunately, Reliance ended up doing everything else other than tapping the gas from the basin and the output was pretty much like public sector. Government also allocated coal mines to these power generation companies and private players to work around the lethargy of public sector players. But this allocation went grievously wrong and supreme court stepped in to get the mines de-allocated as most of them were allocated to relatives of politicians. The scandal which became famous as Coalgate dried up the fuel lines of power plants in India. There were many more issues and players which came into play like the supreme court putting a full ban on coal mining in many areas due to illegal mining and encroachment into ecologically fragile zones. For the time being, let's ignore it and just understand that as a result, the power generation companies ended up with little fuel or no fuel and ended up running their plants at a capacities as low as 20%. This "precious power" which they generated after everything was "sold" to state electricity boards. Now SEB (electricity boards of state governments) which is responsible for transmission of power are treated like their personal possession by politicians. As electricity is a highly subsidized and politicized utility in India, the burden of all the free power doled out by state government is taken by the utterly loss making P&Ls of these companies. The companies were never used to paying for the power they got and hence in most cases did not pay the private companies for the power they "bought".
Basically what happened was, a piece meal reform. The reform which was undertaken to clean the power sector was executed badly with no support from state governments or its machinery. The Electricity Act 2003 clearly asks the state governments to convert the state electricity boards as individual transmission companies responsible for their revenue and expenses and hence reform the transmission part of the system. Even with multiple deadlines, this was ignored by the state governments and the so called reforms only happened in the power generation sector.
The story of piece meal reform continued on to FDI in retail this week when Indian parliaments opened up FDI in retail in 18 cities of India (if we take the number of cities which satisfy the conditions required to be satisfied to set up stores in the states which are going to allow FDI). We allowed FDI after seeing the experience of our neighbor. China allowed FDI in retail in 1992 and saw huge investment coming to the country, mostly in the form of MNCs setting up manufacturing facilities or giving contracts to Chinese manufacturers to make products for them. It helped a lot that China had a developing manufacturing sector which could seamlessly take these orders and in a few years develop into a global hub for all such orders. China's and later Indonesia's experience with FDI in retail also showed that Asian habits creates an Eco system where both large and small retailers can co-exist. The essence of this phenomenon is our eating habits. We like to eat fresh and hot food as against canned food. As a result, we generally shop at 2 levels- first in the beginning of the month for all basic supplies at a big retail center in the city and second daily for perishable items like milk, vegetables etc at a small retail shop in our neighborhood. Data shows the number of small shop owners have actually increased in China and Indonesia in last 10 years. So I don't buy the argument of Walmart killing all the Mom & Pop stores but like the Electricity Act, it is also a piece meal reform due to 2 key areas which are still not reformed. First one is our manufacturing structure which is in a bad shape thanks to our RBI governor's obsession with inflation and our poor power sector (yes its all bloody connected). The second one, something which even Mr Arun Jaitley carefully side stepped (I liked his "Indian sales boy and girls of US stores selling Chinese goods" which majorly touches the manufacturing problem) is that of Indian agricultural produce marketing laws. A vast majority of states governments in India don't allow retailers to buy directly from farmers. Instead they have to buy the produce from designated mandis or village wholesale markets from middle men who get the produce from farmers at very low rates due to their monopoly in the field. With these laws prevailing, middle men will continue to thrive. With Walmart and Tesco in, they will make more money with increased number of buyers. So the fundamental problem of farmers not getting enough compensation is not going to change. FDI in retail is just another case of piece meal reform and I don't expect anything to change with this so called reform.
That leaves you to think, then why did the government work so hard to get it passed. FDI in retail is a signal to the stagnant investors to kick start the investments because now the government has undergone a metamorphosis. It has got rid of a belligerent TMC and it's random leader and have got a duo of opponents from UP supporting it with the same old reasoning - protect secularism (read keep BJP out). It was the same trick for which the top corporate houses of India fell for when the government parted ways with the Left on atomic deal. Seeing the "commitment" of the government for getting country's power problem solved, private sector put forth bids in large number and won contracts for power plants expecting the government to show the same commitment in getting the entire power supply chain reformed. We have already seen how the hope got bellied against partisan interests of petty politicians all over the country. Will the investors, both domestic and foreign fall for the signal again this time, only time will show?
For want of a shoe the horse was lost.
For want of a horse the rider was lost.
For want of a rider the message was lost.
For want of a message the battle was lost.
For want of a battle the kingdom was lost.
And all for the want of a horseshoe nail"
-Benjamin Franklin
This adage speaks about how due to lack of attention to little things, disasters happen. This is also the story of Indian Reforms 2.0, the ones which were undertaken by a PM who as FM executed the opening up of Indian economy.
Let us look at how it all began in the 2nd innings. NDA before moving out enacted a bill to restructure the collapsing power sector of India called The Electricity Act 2003. When UPA got elected in 2004, the new PM understood that Indian Power sector needs a massive restructuring and in turn huge investments. This was made a priority in 11th five year plan and a target of 78000 MW of additional capacity was targeted. In a country where 8 hours load shedding is a norm even in mega cities like Gurgaon and Noida, power sector reform indeed is the need of the hour and the targeted capacity addition was estimated to take $164 billion of investment, $78 billion in generation and remaining in transmission. For a government with $194 billion revenues in 2011, it was obvious that the mega target cannot be achieved without the help of the private sector. So government opened up the electricity generation to private sector and the media chorused the "reform" as one which will change the country for good. The move also captured the fancy of the private sector which invested in a big way. Tata Power, Essar Group, Reliance Power bid and won contracts for establishing Ultra Mega Power Projects (UMPP) in various states. The plan looked simple. The private sector will generate power using the coal and gas provided by state owned monopolies like Coal India, GAIL, ONGC etc. The private companies will be given land by the state government to set up the plant and they will also be allowed to hold captive mines for fuel to generate electricity. The pvt players will then sell the power to the utility companies owned by the respective state government at the cost for which they won the bids. For instance, Tata Power won the bid to establish a UMPP at Mundra at Gujarat where it will generate power from coal (in this case, coal was imported from Tata's captive mines in Indonesia) and sell it to state government at Rs 2.20. The plan looked flawless and everyone seemed to be happy. But once tried to execute it, all hell broke loose. To start with, state governments took forever to do land acquisition and give the clearances for the project. Clearly, the state governments did not share the enthusiasm of the center to reform power. Next was the environmental ministry, which initially delayed the clearance for mining especially near the ecologically fragile zones. The usually subdued ministry suddenly became belligerent under Jairam Ramesh who in one instance blocked the approval of a project which he had pushed hard as the minister of state for power a few months ago. Again, ministries under the government failed to see the bigger picture and kept squabbling.
Next came the bigger problem, getting the fuel. While generation was simplified, the process of getting fuel was still under the monopoly of few players who were caught napping when ambitious plans were laid. For generating, 78000 MW, Coal India, ONGC and GAIL will have to tap the resources at a comparable rate. Something they were never able to do. The government attempted to speed up this part by allowing private players to do tap natural gas and Reliance won the KG basin contract. Unfortunately, Reliance ended up doing everything else other than tapping the gas from the basin and the output was pretty much like public sector. Government also allocated coal mines to these power generation companies and private players to work around the lethargy of public sector players. But this allocation went grievously wrong and supreme court stepped in to get the mines de-allocated as most of them were allocated to relatives of politicians. The scandal which became famous as Coalgate dried up the fuel lines of power plants in India. There were many more issues and players which came into play like the supreme court putting a full ban on coal mining in many areas due to illegal mining and encroachment into ecologically fragile zones. For the time being, let's ignore it and just understand that as a result, the power generation companies ended up with little fuel or no fuel and ended up running their plants at a capacities as low as 20%. This "precious power" which they generated after everything was "sold" to state electricity boards. Now SEB (electricity boards of state governments) which is responsible for transmission of power are treated like their personal possession by politicians. As electricity is a highly subsidized and politicized utility in India, the burden of all the free power doled out by state government is taken by the utterly loss making P&Ls of these companies. The companies were never used to paying for the power they got and hence in most cases did not pay the private companies for the power they "bought".
Basically what happened was, a piece meal reform. The reform which was undertaken to clean the power sector was executed badly with no support from state governments or its machinery. The Electricity Act 2003 clearly asks the state governments to convert the state electricity boards as individual transmission companies responsible for their revenue and expenses and hence reform the transmission part of the system. Even with multiple deadlines, this was ignored by the state governments and the so called reforms only happened in the power generation sector.
The story of piece meal reform continued on to FDI in retail this week when Indian parliaments opened up FDI in retail in 18 cities of India (if we take the number of cities which satisfy the conditions required to be satisfied to set up stores in the states which are going to allow FDI). We allowed FDI after seeing the experience of our neighbor. China allowed FDI in retail in 1992 and saw huge investment coming to the country, mostly in the form of MNCs setting up manufacturing facilities or giving contracts to Chinese manufacturers to make products for them. It helped a lot that China had a developing manufacturing sector which could seamlessly take these orders and in a few years develop into a global hub for all such orders. China's and later Indonesia's experience with FDI in retail also showed that Asian habits creates an Eco system where both large and small retailers can co-exist. The essence of this phenomenon is our eating habits. We like to eat fresh and hot food as against canned food. As a result, we generally shop at 2 levels- first in the beginning of the month for all basic supplies at a big retail center in the city and second daily for perishable items like milk, vegetables etc at a small retail shop in our neighborhood. Data shows the number of small shop owners have actually increased in China and Indonesia in last 10 years. So I don't buy the argument of Walmart killing all the Mom & Pop stores but like the Electricity Act, it is also a piece meal reform due to 2 key areas which are still not reformed. First one is our manufacturing structure which is in a bad shape thanks to our RBI governor's obsession with inflation and our poor power sector (yes its all bloody connected). The second one, something which even Mr Arun Jaitley carefully side stepped (I liked his "Indian sales boy and girls of US stores selling Chinese goods" which majorly touches the manufacturing problem) is that of Indian agricultural produce marketing laws. A vast majority of states governments in India don't allow retailers to buy directly from farmers. Instead they have to buy the produce from designated mandis or village wholesale markets from middle men who get the produce from farmers at very low rates due to their monopoly in the field. With these laws prevailing, middle men will continue to thrive. With Walmart and Tesco in, they will make more money with increased number of buyers. So the fundamental problem of farmers not getting enough compensation is not going to change. FDI in retail is just another case of piece meal reform and I don't expect anything to change with this so called reform.
That leaves you to think, then why did the government work so hard to get it passed. FDI in retail is a signal to the stagnant investors to kick start the investments because now the government has undergone a metamorphosis. It has got rid of a belligerent TMC and it's random leader and have got a duo of opponents from UP supporting it with the same old reasoning - protect secularism (read keep BJP out). It was the same trick for which the top corporate houses of India fell for when the government parted ways with the Left on atomic deal. Seeing the "commitment" of the government for getting country's power problem solved, private sector put forth bids in large number and won contracts for power plants expecting the government to show the same commitment in getting the entire power supply chain reformed. We have already seen how the hope got bellied against partisan interests of petty politicians all over the country. Will the investors, both domestic and foreign fall for the signal again this time, only time will show?
