Skip to content
economy current affairs

JUNE22nd to 30th 2020

Different response to a different economic crisis

Pattern followed by economic crises:

  • There is a well-established pattern to economic crises in emerging markets (EMs).

  • First, because of loose fiscal and monetary policies, the economy goes into a demand overdrive.

  • Demand overdrive spikes inflation and widens the current account deficit (CAD).

  • Then, CAD is financed by foreign capital chasing the promise of even higher growth and asset prices.

  • At some point, the overdrive is perceived as unsustainable, which triggers a reassessment of growth, inflation, and financial stability.

  • Domestic and foreign investors stop new investments, large capital outflows ensue.

  • Banks stop giving new loans and rolling over old ones on fears of worsening credit quality.

  • Growth collapses and a full-blown economic crisis follows.

  • The 1995 Mexican, the 1997 Asian, the 1999 Russian, the 2008 sub-prime, and the 2013 Taper Tantrum are all examples of such crises.

  • In the case of India, the 1981-82, the 1991-92, and the 2013 crises all had the same characteristics.

 

Pattern in response to such crises:

  • The first response is to restore confidence in policymaking.

  • It means large increases in interest rates, massive withdrawal of liquidity, and deep cuts in fiscal deficit.

  • Just before the crisis assets [which reflects in bank’s balance sheets] are severely overvalued on inflated views of growth, profits, and income prior to the crisis.

  • So, the second step is to restart the economy by restructuring the tattered balance sheets of banks, firms, and households.

  • This means debt restructuring and bank recapitalisation aided by privatisation, closures, and mergers.

  • These measures often need to be bolstered by structural reforms.

  • The economic crisis makes it easier to forge the political consensus for the reforms.

 

But the economic crisis caused by pandemic is different

Why is it different?

  • Because, before the COVID-19 outbreak far from overheating, Indian economy was slowing down.

  • The financial system had virtually shut off the flow of credit as it wrestled with its bad debt burden.

  • This is not an instance of a financial crisis turning into an economic shock weighed down by damaged balance sheets.

  • Instead, this is an instance of an economic shock that could turn into a financial crisis if the damaged balance sheets are not repaired.

 

So, should the response also be different?

  • Yes.

  • Do the opposite of what is done in a typical EM crisis: Cut interest rates, increase liquidity support, and allow the fiscal deficit to widen.

  • The RBI has done the first two generously, although with the coming disinflation, it needs to cut interest rates much more.

  • But, what about the fiscal policy of the government?

 

Fiscal policy of the government: Doing not enough:

  • The government’s approach to fiscal policy, however, seems ambivalent.

  • The overall fiscal support from the government will be limited to 2 per cent of the GDP.

  • So all the revenue shortfall and the pandemic-related budgetary support must add up to 2 per cent of the GDP.

  • If the revenue shortfall is more than 2 per cent of GDP, then total spending will need to be cut.

 

Why fiscal policy matters for balance sheets:

  • In this crisis, the causality of damage to balance sheets runs opposite.

  • Balance sheets will be damaged not because of prior excesses but because of the collapse in incomes during the lockdown.

  • Consequently, debt doesn’t need to be restructured to resume the flow of credit and get the recovery going.

  • Instead, what is needed is adequate income support to households and firms.

  • Such support will provide the needed time and space for the recovery to take hold.

  • Which, in turn, would repair much of the damage to the balance sheets.

  • But the fiscal response so far has been inexplicably restrained.

 

What should the government focus on:

  •  What matters today is the assurance of medium-term growth and not a few higher or lower points in this year’s fiscal deficit.

  • To do that, the government needs to allow the deficit to rise.

  • This extra deficit should help accommodate the decline in revenue and also provide adequate income support.

  • Some have argued that the government, instead, needs to offset the decline on private demand by increasing public spending.

  • This is an odd argument.

  • It would mean letting demand collapse and then compensating it with higher government spending.

  • Instead, using the same resources to ensure that private demand did not decline was the more natural and efficient response.

 

What should be the RBI’s response:

  • The RBI, too, has a very large role to play.

  • As elsewhere, it is now the only entity that has a strong enough balance sheet to provide any meaningful support.

  • The RBI is keeping markets flush with liquidity and low interest rates.

  • However, the RBI also needs to undertake extensive quantitative easing to keep bond yields from spiking given the likely large increase in deficit.

  • Because of the depth of the growth shock, bad debt will rise.

  • The natural instinct of banks is to cut back credit because of worsening credit quality.

  • To prevent this from happening, the RBI will need to extend substantial regulatory forbearance on accounting norms, provisioning rules, and, if needed, even capital requirements.

  • In addition, like the US Fed and the ECB, the RBI might also need to provide liquidity directly to corporates.

  • As of now, banks are providing liquidity to corporates supported by government guarantees as proposed now.

Excessive Grain Stock

Screenshot 12

  • There is one area which the government can tap to raise more than Rs 1,00,000 crore.

  • As on June 1, FCI had unprecedented grain stocks of 97 million metric tonnes (MMT) in the Central Pool (see Figure).

  • Even on July 1, when the procurement of rabi ends, FCI is likely to have grain stocks of about 91-92 MMT.

  • This will be against a buffer stock norm of 41.12 MMT that are required for the Public Distribution system (PDS), and some strategic reserves.

  • So, compared to this norm, on July 1, FCI will have “excess stocks” of at least 50 MMT.

  • Even if one takes a conservative and lower ballpark figure of Rs 30,000/tonne  as the combined economic cost of rice and wheat, the value of this “excessive stock”, beyond the buffer norm, is Rs 1,50,000 crore.

  • This is unproductive capital locked-up in the Central pool of FCI.

  • Unlock this by liquidating “excess stocks” through open market operations.

  • It will not recover its full economic cost, as they are much higher than the prevailing market prices, but by not liquidating it.

  • But FCI will keep incurring unnecessary interest costs of about Rs 8,000-10,000 crore per annum.

  • This is simply not a good food policy.

 

How will amendment to ECA 1955 will help?

  •  Amendment of the Essential Commodities Act, via the ordinance route, can instil confidence in the private sector for building large scale storage.

  • Now, stocking limits will not be imposed on the private sector, except under exceptional circumstances.

  • The government, however, delete the clause of “extraordinary price rise”.

  • Removing it will lead to private sector building large and modern storage facilities (silos).

  • It will propel investments in building more efficient food supply lines.

  • The only condition could be to register large storage facilities under the Warehousing Development and Regulatory Authority (WDRA) to know how much stock is there with the private sector, and where.

 

How will amendment to APMC Act will help?

  • The ordinance on APMC creates multiple channels for farmers to sell their produce outside the APMC mandi system.

  • It also helps towards an unrestricted all India market for agri-produce.

  • Of course, it will be resisted by many states that are taking undue advantage of the APMC mandis’ virtual monopoly power.

  • But if the central ordinance is implemented in its true spirit, it will be a game-changer.

 

How will the ordinance on contract farming will help?

  • It aims to encourage contract farming.

  • The basic idea behind this is that farmers’ sowing decisions should be made in view of the expected prices of those crops at the time of harvest.

  • It is forward looking and more aligned to the likely demand and supply situation.

  • The current practice, where farmers’ sowing decisions are more influenced by last year’s price, often leads to the problem of boom and bust.

  • Although honouring an assured price remains a challenge when actual market conditions differ widely at the time of the harvest.

 

Relook at food subsidy is needed:

  •  In the Union budget of 2020-21, a sum of Rs 1,15,570 crore has been provisioned for food subsidy.

  • This number is highly misleading as FCI has been asked to borrow from the National Small Savings Fund (NSSF).

  • As on March 31, 2020, borrowings from the NSSF were Rs 2,54,600 crore, on which FCI pays an interest rate of 8.4 to 8.8 per cent per annum.

  • So, the real food subsidy bill for 2020-21 amounts to Rs 3,70,170 crore.

  • The Economic Survey has suggested- 1) reducing the coverage under PDS; 2) linking issue price to at least half of the procurement price; 3) move gradually towards cash transfers.

  • These steps will save a minimum of Rs 50,000 crore annually.

JUNE15th to 21st 2020

Open Access Power User

What open access power user mean?

  • Open access allows large users of power – typically those who consume more than 1 MW – to buy power from the open market.

  • These open access buyers don’t have to depend on a more expensive grid.

  • Through incentives given by state governments, these non-grid avenues of power purchase have been encouraged in renewable energy projects.

Now, state governments increased standard charges on open access renewable energy projects or are cutting back on incentives.

Reason given by state: Tariff competitiveness of wind and solar power has shown a significant improvement.

 

Implications:

  • Credit rating agency ICRA said that with the changes in policy, the viability of open access – against grid-connected energy – is no longer as attractive.

  • The open-access charges applicable in case of third party sale of power have also increased highlights the rising regulatory risk for such independent power producers (IPPs).

  • Earlier,  concessions were available from levy of cross-subsidy surcharge, transmission and wheeling charges as well as favourable banking facilities to promote the renewable sector.

  • Now, the power policies in many states have either completely withdrawn or reduced incentives given to open access  customers.

 

Issues for group captive projects:

  • A group captive scheme is where someone develops a power plant for collective usage of many commercial consumers.

  •  At present, a power project is considered ‘captive’ if consuming entity or entities consume at least 51% of the power generated and owns at least 26% of the equity.

  • The State Electricity Regulatory Commission (SERC) in Maharashtra has recently approved the levy of additional surcharge on group captive projects in renewable sector.

  • Group captive consumers were earlier exempt from such levy in Maharashtra.

  • Risk of other state following holds.

 

Challenges:

  • The viability of power procured under the open access route depends on discount offered by the power producer as compared to the grid tariffs.

  • The applicable open access charges across the key states are estimated to vary quite widely from Rs.2.5 per unit to Rs. 5 per unit.

  • Open access projects have tenure (5-10 years) of the power purchase agreements (PPAs) under the third-party sale route as against the 25 year-tenure for PPA in case of utility scale projects.

  • Net tariff realised for such projects remains exposed to regulatory risk given the likelihood of revision in open access charges by the regulators.

  • It is also subject to tightening of energy banking norms being observed by SERCs across the states.

gig Economy

  • The word “gig” includes in its current state, all freelancers, disconnected from the workplace.

  • Example: drivers of Uber, delivery boys of Zomato, plumbers and electricians of Urban Clap.

  • The gig economy is not confined to low-skilled jobs. Skilled professionals are also part of it.

 

How Covid pandemic is reshaping the gig economy?

  • Aviation, hospitality, automobile entertainment and retail are some of the hardest hit sectors.

  • The classic gig anchors – Uber and AirBnB, have laid off thousands of people.

  • In contrast to this, highly skilled professionals —laid off by employers — are joining the gig bandwagon.

  • Surely, job demand will far outstrip supply, at least in the short-term.

 

What does the future hold?

  • A Deloitte report from April notes that Indian organisations are considering to expand the share of gig workers.

  • Declining full-time jobs will lead to increased assignment-based hiring.

  • For instance, a graphic designer working from home could be in demand with a media house or Netflix may hire AI designer paid by an hour to personalize streaming.

  • But, what is missing in picture? The national database is missing.

 

4 important focus areas of gig economy:

1. National database: A missing link –

  • National database of job seekers and job creators can connect firms with qualified candidates.

  • A prospective employee would need access to a job database, sorted by skill, geography, duration and emoluments.

  • Companies should be able to dip into the data pool of talent, experience, location, qualification and expectation.

  • Currently, both data sets are fragmented and stored in silos.

  • The government could play the role of a facilitator, in partnership with the private sector.

 

2. Regulatory protection to gig workforce –

  • The gig economy increases employee vulnerability.

  • This segment of the economy so far has been outside the ambit of regulatory labour policies.

  • Social protection like wage protection, health benefits and safety assurance should be made available to gig workers.

  • The Karnataka government has considered introducing a new labour legislation focused on the gig economy.

 

3. Prepare college students for freelancing –

  • Apart from regular campus placements, the placement cells need to reorient and focus on preparing students for freelancing opportunities.

  • For the educated youth, this could be the first step towards entrepreneurship.

 

4. Gender equality –

  • Gender is another crucial dimension of the digital labour markets.

  • The low enrolment of girls for higher education in science, technology, engineering and math would constrict their opportunity in the gig world.

  • Going ahead, this would need greater policy attention to ensure gender parity.

What’s so special about this assistance?

  • The Government of India and the Asian Infrastructure Investment Bank (AIIB) has signed a $750 million agreement for “COVID-19 Active Response and Expenditure Support Programme”.

  • This is the first-ever budgetary support programme from the AIIB to India.

  • The project is being financed by the AIIB and Asian Development Bank (ADB) in the amount of $2.250 billion, of which $750 million will be provided by AIIB and $1.5 billion will be provided by ADB.

  • The package aims to assist India to strengthen its response to the adverse impacts of the COVID-19 pandemic on poor and vulnerable households.

  • The current loan will be the second to India from AIIB under its COVID-19 crisis recovery facility apart from the earlier approved $500 million loans.

  • The primary beneficiaries would be families below the poverty line, farmers, healthcare workers, women, women’s SHGs, widows, PWDs, senior citizens, low wage earners etc.

 

About AIIB

  • The Asian Infrastructure Investment Bank (AIIB) is a multilateral development bank with a mission to improve social and economic outcomes in Asia, began operations in January 2016.

  • AIIB has now grown to 102 approved members worldwide.

  • AIIB is a brainchild of China. The prime aim of the AIIB is infrastructure development.

  • By establishing interconnectivity across Asia through advancement in the construction of infrastructure and other productive services, the AIIB can stimulate growth and economic development in the Asian Region.

Ordinance for amendment of APMC Act:

  • ‘Farming Produce Trade and Commerce (Promotion & Facilitation) Ordinance 2020.’ seek to address the problems farmers face in selling their produce.

  • Due to the unionisation of middlemen (arhatias) and their financial clout, politicians in the states have been reluctant to amend agriculture marketing laws which are exploitative and don’t allow farmers to receive a fair price.

  • Rather than coax the states financially to correct the markets, an unregulated marketplace has been created where 15 crore farmers will be exposed to the skulduggery of traders.

  • Imagine the mayhem in stock markets if ROC and SEBI were similarly made redundant.

 

Issues and benefits:

  • Rather than replicate Punjab’s successful agriculture mandi model, now states will lose vital revenue to even upgrade and repair rural infrastructure.

  • The ordinance may be challenged by the states for its constitutional overreach.

  •  But, on the flip side, over time, the largest informal sector in the country will begin to get formalised and new business models will develop.

  • A different breed of aggregators will create the much-needed competition to the existing monopoly of local traders.

  • Additionally, henceforth, when farmers sell agricultural produce outside of APMC market yards, they cannot legally be charged commission on the sale of farm produce.

  • To survive, the APMCs across the nation will have to radically standardise and rationalise their mandi fee structure and limit the commission charged by traders on sale of farmers’ produce.

 

ECA 1955: Not enough has been done:

  • Here, the amendment was supposed to allay the genuine fears of traders emitting from the bureaucracy’s draconian powers to arbitrarily evoke stockholding limits etc.

  • Rather than forego its own powers for the larger good, the amendment’s fine print makes it ambiguous and leaves space for whimsical interpretations as before.

  • The trader’s uncertainty is compounded by the arbitrary import-export policy decisions which dilute the purpose of the amendment itself.

 

Ordinance on Contract farming:

  •  “The Farmers (Empowerment and Protection) Agreement on Price Assurance and Farm Services Ordinance 2020” tries to placate the fears of both the farmer and the contractor when they sign an agreement.

  • For the farmer, the legal recourse is never a practical choice as the persuasive powers of the aggregators’ deep pockets cast a dark shadow over the redressal process.

  • Likewise, the tediously stretched legal proceedings are dissuasion enough to either not seek redressal or settle for unfavourable terms.

  • That produce derived from contract farming operations will not be subject to any obstructionist laws is a very good step.

  • Farmer-producer organisations and new aggregators will get a boost with these laws, and become harbingers of prosperity in some small corners of the countryside.

  • There are green shoots in the ordinances, but the downside dwarfs the upside.

 

So, what are the implications of these 3 reforms?

  • The union of the three ordinances appears to be a precursor to implementing the Shanta Kumar Committee recommendations to dilute and dismantle FCI, MSP & PDS which will push farmers from the frying into the fire.

  • It may also be interpreted to mean that now the sugar industry needn’t pay farmers the central government FRP or the state government SAP price for sugarcane.

Rise of Forex Reserves

1. Decreased oil imports –

  • Usually, we import a lot of oil.

  • But the payment here is dollar-denominated since very few countries are going to accept our currency (Rupee) as is.

  • So, you have to expend dollars i.e. the foreign exchange reserves to keep the flow of crude oil intact.

  • However, with the nationwide lockdown in place, our import bill has reduced drastically.

  • We simply don’t need as much oil anymore.

  • And considering oil prices have also taken a beating simultaneously, our Forex Reserves have been piling up.

  • Less oil import. More Forex reserves.

 

2. Dollars coming with foreign investors –

  • Contrary to popular opinion, foreign investors have been pouring money into India of late.

  • You could attribute a bulk of these inflows to Reliance Jio.

  • They’ve been enticing investors all over the world and they’ve been doing it at a pace that belies all rational expectations.

  • They’ve raised close to $15 Bn over the course of a few months and it doesn’t look like they’re stopping anytime soon.

  • So technically, dollar inflows have spiked and therefore, Forex reserves get a boost once again.

 

3. RBI preparing itself for a bad time –

  • Another popular explanation is that the RBI is preparing a war chest to stave off future uncertainties.

  • At a time when the world economy is reeling from an unprecedented crisis, it’s perhaps prudent to build up reserves for a rainy day.

  • So the RBI buys gold and dollar-denominated assets using our national currency and builds up the foreign exchange reserves.

  • Inadvertently, this increases the money supply within the economy.

  • There will be more “Rupees” floating around.

  • As more Indian currency keeps entering the ecosystem, the value of the rupee depreciates.

  • And yes, the value of rupee has tumbled recently, but we are not in dire straits yet.

  • But if India’s economy takes a turn for the worse, it becomes incumbent on the RBI to ensure price stability.

  • Imagine the value of the rupee starts fluctuating wildly because of economic uncertainties.

  • The RBI has to intervene.

  • It has to exchange the foreign reserves for the Indian currency.

  • If they keep mopping up the excess Rupees floating in the system, they could ensure the value of the rupee remains stable.

  • So long as the value of the rupee remains stable, prices of commodities will follow the same cue, all things remaining equal that is.

  • Now, there’s still no clear consensus on what kind of reserves we might need if things do go south.

  • Although there have been recommendations made in the past about hoarding too much, it’s still the RBI’s call at the end of the day.

 

4. The RBI is doing it for the government –

  • The RBI can turn a profit if it wants to.

  • And once it does turn a profit, it can transfer a part of the surplus to the government — as dividends.

  • Now if the RBI wanted to offer the government a higher dividend, it has to simply turn a higher profit.

  • One way to accomplish this is to simply let the value of the rupee depreciate. Do not intervene.

  • Do not forego the reserves. Let the rupee tumble.

  • And so long as you don’t intervene, all the dollar-denominated assets you own will be worth more in rupee terms.

  • Consider the hypothetical example-suppose the exchange rate was 1$= Rs. 71 in March 2020, then the rupee loses value and you see the same line item once again in June 2020 will be 1$=Rs. 76.

  • The extra ₹ 5 is treated as a profit. And this profit could be ploughed back to the government.

GST on processed food items

What is the Case?

  • Bengaluru-based food products company involved in preparation and supply of ready-to-cook items had approached the AAR regarding whether preparation of whole wheat parotta and Malabar parotta attracting 5 per cent GST.

  • The products khakhra, plain chapatti and roti are completely cooked preparations, do not require any processing for human consumption and hence are ready to eat food preparations.

  • The impugned product (whole wheat Parottas and Malabar Parottas) are not only different from the said khakhras, plain chapatti or roti but also are not like products in common parlance as well as in the respect of essential nature of the product.

 

Classification of food items for GST:

  • Most food items, especially those of essential and unprocessed nature, are charged nil GST.

  • But processed foods attract higher rates of 5%, 12%, or 18% depending on the food product.

  • For instance, pappad, Bread (branded or otherwise), are charged zero GST, but pizza bread is charged 5% GST.

  • Heading 1905 under the Harmonised Commodity Description and Coding System classifies pizza bread, khakhra, plain chapati or roti, rusks, toasted bread in one category, for which a 5% GST rate is levied.

  • Similarly, in the ready for consumption category, unbranded namkeens, bhujia, mixture and similar edible preparation attract 5% GST, while such branded namkeen, bhujia, mixture attract 12% GST.

Utility of Skill Education in India

3 issues with our university education

  •  The differential lockdown outcomes for skilled and unskilled workers highlight our university system’s pre-existing conditions. These are-

  • 1) Broken employability promises.

  • 2) Poor employer connectivity.

  • 3) Poor return on private investment that frustrate parents and students.

 

4 ways in which skill university differs from traditional university

  • A skill university differs from a traditional university in four ways.

  • 1) It prays to the one god of employers; for governance, faculty, curriculum, and pedagogy.

  • 2) It has four classrooms; on-campus, on-line, on-site, and on-the-job.

  • 3) It offers modularity between four qualifications; certificates, diplomas, advanced diplomas, and degrees.

  • 4) And it has four sources of financing — employers, students, CSR, and loans though employers contribute more than 95 per cent of the costs.

  • Fro example,  in the case of Gujrat government’s skill university, 97 per cent of the university’s budget comes from employers.

 

5 ways in which the global universities are broken

  • First is broken promises.

  • The world produced more graduates in the last 35 years than 700 years before.

  • Second is broken financing.

  • More than 50 per cent of $1.5 trillion in student debt was expected to default even before the COVID pandemic.

  • Indian bank education loans have high NPAs.

  • The third is broken inclusiveness.

  • The system works for privileged urban males studying full-time, but today’s students are likely to be female, poor, older, rural, or studying part-time.

  • Fourth is broken flexibility.

  • Employed learners will cross traditional learners in three years, but they need on-demand, on-the-go, always-on, rolling admissions, continuous assessment, and qualification modularity.

  • And finally is broken openness. 

  • Google knowing everything makes learning how to learn a key 21st-century skill.

  • Yet too many universities are stuck in knowing.

 

Let’s look into the regulatory changes needed for the Skill University:

  • Skill universities are a scalable, sustainable, and affordable vehicle to massify higher education by innovations in finance.

  • But they need regulatory change.

 

Following are the 3 types of regulatory changes needed:

1. Changes needed in the  UGC Act of 1956

  •  Clause 8.2.6 needs to be rewritten to equalise four classrooms -online, on-site, on-campus, and on-job-and section 22 (3) to recognise apprenticeship linked degree programmes.

  • The UGC Teacher Regulations of 2018 need rewriting: Clause 3.3.(I),(II) to redefine the qualifications, roles and numbers of teachers required, and clause 4 to recognise industry experience as a teaching qualification.

  • The UGC Online Regulations 2018 need to be rewritten: Clause 4(2) and 7(2)(3) to allow innovation, flexibility, credit frameworks, and relevance in online curriculums.

  • Clause 7(2)(2) to allow universities to work with any technology platforms.

 

2. Changes needed in NAAC IQAC regulations:

  • Criteria 1 and 1.2.2 to include work-based learning and work integrated learning.

  • Criteria 1.1.3 to include life skills and proctored/evaluated internships.

  • Criteria 2 and 2.3.1 to integrate online learning with university programmes.

  • Criteria 2 and 2.4.1, 3 and 6 need to be modified to recognise teachers with industry experience, and include industry-based research.

  • Criteria 4 and 4.1.2 to include industry workplaces and online classrooms as campus extensions.

  • Criteria 5 and 5.2.1 needs to be rewritten to incorporate apprenticeships.

 

3. Changes needed in Apprenticeship Act of 1961:

  • Clause 2, 8, 9, 21 and 23 of The Apprenticeship Act of 1961 also needs to be modified to allow and lift the licence raj for degree-linked apprentices and recognise skills universities.

Indian Gas Exchange (IGX): the first nationwide online delivery-based gas trading platform

What is IGX?

  • The IGX is a digital trading platform that will allow buyers and sellers of natural gas to trade both in the spot market and in the forward market for imported natural gas.

  • It will allow trading across three hubs —Dahej and Hazira in Gujarat, and Kakinada in Andhra Pradesh.

  • Imported Liquefied Natural Gas (LNG) will be regassified and sold to buyers through the exchange, removing the requirement for buyers and sellers to find each other.

  • The exchange also allows much shorter contracts – for delivery on the next day, and up to a month – while ordinarily contracts for natural gas supply are as long as six months to a year.

  • This will mean that buyers do not have to contact multiple dealers to ensure they find a fair price.

 

Will domestically produced natural gas also be bought and sold on the exchange?

  • The price of domestically produced natural gas is decided by the government. It will not be sold on the gas exchange.

  • However, following appeals by domestic producers that the prices set by the government are not viable given the cost of exploration and production in India.

  • A new gas policy will include reforms in domestic gas pricing and will move towards more market-oriented pricing.

 

Will this make India more import-dependent?

  • Domestic production of gas has been falling over the past two fiscals as current sources of natural gas have become less productive.

  • Domestically produced natural gas currently accounts for less than half the country’s natural gas consumption; imported LNG accounts for the other half.

  • LNG imports are set to become a larger proportion of domestic gas consumption as India moves to increase the proportion of natural gas in the energy basket from 6.2% in 2018 to 15% by 2030.

 

What regulatory change is required?

  • Currently, the pipeline infrastructure necessary for the transportation of natural gas is controlled by the companies that own the network.

  • State-owned GAIL owns and operates India’s largest gas pipeline network, spanning over 12,000 km.

  • An independent system operator for natural gas pipelines would help ensure transparent allocation of pipeline usage, and build confidence in the minds of buyers and sellers about neutrality in the allocation of pipeline capacity.

  • Experts have also called for natural gas to be included in the Goods and Services Tax (GST) regime to avoid buyers having to deal with different levies such as VAT across states when purchasing natural gas from the exchange.

JUNE8th to 14th 2020

Open Access Power User

What open access power user mean?

  • Open access allows large users of power – typically those who consume more than 1 MW – to buy power from the open market.

  • These open access buyers don’t have to depend on a more expensive grid.

  • Through incentives given by state governments, these non-grid avenues of power purchase have been encouraged in renewable energy projects.

Now, state governments increased standard charges on open access renewable energy projects or are cutting back on incentives.

Reason given by state: Tariff competitiveness of wind and solar power has shown a significant improvement.

 

Implications:

  • Credit rating agency ICRA said that with the changes in policy, the viability of open access – against grid-connected energy – is no longer as attractive.

  • The open-access charges applicable in case of third party sale of power have also increased highlights the rising regulatory risk for such independent power producers (IPPs).

  • Earlier,  concessions were available from levy of cross-subsidy surcharge, transmission and wheeling charges as well as favourable banking facilities to promote the renewable sector.

  • Now, the power policies in many states have either completely withdrawn or reduced incentives given to open access  customers.

 

Issues for group captive projects:

  • A group captive scheme is where someone develops a power plant for collective usage of many commercial consumers.

  •  At present, a power project is considered ‘captive’ if consuming entity or entities consume at least 51% of the power generated and owns at least 26% of the equity.

  • The State Electricity Regulatory Commission (SERC) in Maharashtra has recently approved the levy of additional surcharge on group captive projects in renewable sector.

  • Group captive consumers were earlier exempt from such levy in Maharashtra.

  • Risk of other state following holds.

 

Challenges:

  • The viability of power procured under the open access route depends on discount offered by the power producer as compared to the grid tariffs.

  • The applicable open access charges across the key states are estimated to vary quite widely from Rs.2.5 per unit to Rs. 5 per unit.

  • Open access projects have tenure (5-10 years) of the power purchase agreements (PPAs) under the third-party sale route as against the 25 year-tenure for PPA in case of utility scale projects.

  • Net tariff realised for such projects remains exposed to regulatory risk given the likelihood of revision in open access charges by the regulators.

  • It is also subject to tightening of energy banking norms being observed by SERCs across the states.

Economy Syllabus

Economy