Global economy not out of the woods
Dr Bharat Jhunjhunwala
The IMF has forecast that the global economy is likely to grow at 3.7 per cent in 2014. This is a big increase over the 3.0 per cent in 2013. The forecast is anchored mainly on the rebound in the US economy. Indeed there are good forebodings here. Growth is picking up, unemployment rate has declined and the share market is booming.
The question is whether this is real. Consider a loss-making company. It can take a loan; it can give discounts and sell its goods in the market; it can hire more workers to produce these goods even though they are sold at a loss. Vendors of the company would also be happy at the increased demand for their products. But such growth is unlikely to sustain. The losses will mount and the company will not be able to repay its debt. Soon the banks will come calling and the company will go bankrupt as it happened with Kingfisher Airlines. An altogether different scenario may emerge if the same loss-making company invests the borrowed money to install new high-tech machines and to buy frontline technologies. It will soon be able to produce goods cheaper and bounce back in the market. Its earnings will increase and it will be able to repay the debt.
It is beyond question that the upswing in the US economy has its root in the massive borrowing programme. The US Federal Reserve Board has pumped in huge amounts of money since 2008. The key question is where has the stimulus money been deployed? If it has been deployed in covering up the structural weaknesses of the US economy then it will go under as the loss making company selling goods at discounts. On the other hand, if the money has been invested in building infrastructure and undertaking frontline research then the US will bounce back like the loss making company that makes productive investments. So let us examine how the stimulus money has been deployed.
Within the US, the main lending has been to the housing sector. People have borrowed to buy houses. This has generated demand for construction materials. Some of these are imported. That has led to the growth effect spreading throughout the world economy. But housing does not generate a new stream of income. It is like a loss-making company taking a loan to build a multi-storey office in a prime commercial locality. The office is comfortable but, by itself, it does not generate income. So housing-led growth in the US economy will not enable it to repay the debt.
The second venue of deployment of borrowed money has been Government expenditures. The size and shape of US Government remains bloated. The military excursion in Afghanistan continues. Welfare expenditures such as in food stamp programme also continue to grow. There has been very little, if any, investment in improving infrastructure that would help US companies face global competition. Grants for research are also being whittles. Many major technological advances made by the US such as nuclear energy and internet have been financed by the US Government in the past. Reductions in such investment will not provide the competitive edge to US companies which they have enjoyed in the past. There is little investment in infrastructure. Airports in the US today bear a dilapidated look in comparison with those in Delhi, Dubai or Hong Kong. The military and consumption expenditures of the Government do not generate a new stream of income.
The third place of deployment of borrowed money has been overseas investments by US companies. Funds have been borrowed in US at near zero rates of interest and the money has been invested abroad. These companies have repatriated their profits and this has brought a new stream of income to the US. There is fear in India that tapering of the stimulus will lead to exit of FIIs from the country. This indicates that FII investments in India are financed substantially from the stimulus money. This is ‘productive’ from a global standpoint because the FII inflows into India ultimately find their way into investments by Indian Companies. But this investment is unlikely to help the US repay its debt. The interest rates will rise as soon as the stimulus is withdrawn; US companies will exit from overseas investments and this stream of income will come to an end. Part of this money has been invested by US companies in new technologies. This investment will truly help the US generate a new stream of income and repay the debt.
Whether the US and the global economy grows in 2014 or it collapses will depend upon whether the productive deployment of borrowed money will generate a long term stream of income which will continue in an high interest rate regime. I am bearish on this. Only a fraction of the stimulus money has been utilised productively. It is quite likely that the US economy will come under pressure as soon as the stimulus is withdrawn and it is likely to collapse as soon as the repayment of debt starts.
(The author was formerly Professor of Economics at IIM Bengaluru)
The Government of India recently announced relaxations to developers of large thermal power projects of capacity 1,000 MW and above in India, allowing 65 per cent of power to be sold under competitive bidding instead of the existing 75 per cent requirement. It has also extended the maximum time period for capital equipment import documentation to 60 months from the existing 36 months to enable many more developers to avail of the applicable fiscal benefits.
Close on the heels of this announcement came another news item conveying that a Central Co-ordination Committee of Coal Ministry would meet to remove the various bottlenecks including environmental clearance hurdles which had left 42 coal projects stranded.
As per the International Energy Agency’s (IEA’s) World Energy Outlook (WEO-2012) published in November 2012, the global energy demand is slated to grow by more than one third over the period to 2035, with China, India and the Middle East contributing to 60 per cent of the increase.
Coal is the mainstay of India’s energy primary resources and accounts for more than 50 per cent of them. As much as 69 per cent of the total power generated in the country comes from coal based thermal power stations. The coal sector has been facing huge challenges both in regard to domestic and imported supplies. The domestic production is stagnating in the coal sector as India’s coal demand increased at a CAGR of 8.5 per cent while Coal India Limited (CIL)’s domestic production increased at a CAGR of 4.6 per cent only in the 11th Five Year Plan (2007-2012). Coal requirement for new power plants would be met only partially through FSAs (Fuel Supply Agreements) with CIL. Hence dependence on imports is inevitable.
Coal as a sector is monopolistic in India and virtually remains closed to private sector participation except in retail selling. With slower growth rate of coal production at CIL and its subsidiary companies and issues around import of coal, Indian power sector is facing capacity utilisation problems with most of the power plants running at suboptimal capacity.
The next big share of energy portfolio in India is dominated by hydrocarbons and less than 10 per cent of energy of it is accounted for by other sources like hydro, renewable and nuclear. Approximately, 35 per cent of the total area of India’s sedimentary basins is either poorly explored or completely unexplored and India has seen diminishing interest from investors in exploration and production in the recent bidding rounds.
The volume of crude oil import has been increasing consistently to more than 75 per cent of India’s total crude requirement in 2011. Similarly, gas imports are increasing steadily with lower than expected production from KG-D6. During the 12th Five Year Plan, import dependence on crude oil is expected to increase from 70 per cent in 2012 to 80 per cent in 2017 and import dependence on natural gas is expected to increase from 21 per cent to 35 per cent. As a result of this, GDP growth rate becomes dependent on external factors like oil prices. Also it adds to concerns regarding continuously increasing fiscal deficit and depleting foreign exchange reserves.
Nuclear energy could play an important role in addressing India’s energy challenges.
Pricing continues to be the key concern in the India energy sector both in hydrocarbon sector and coal sector. There is a pressing need to bring independent regulator in the coal sector and develop working regulations around coal mining. Similarly, the investment environment in the oil and gas sector is getting vitiated due to regulatory uncertainties.
India is the fourth largest primary energy consumer in the world, after China, USA and Russia. As per the World Energy Outlook (WEO) 2011, the total primary energy consumption in India in 2009 was 488 million tonnes of oil equivalent (mtoe) or 4.6 per cent of total global primary energy consumption. In keeping with the economic growth, fast changeover to an energy sector based on market economy is the need of the hour. In particular, the following important steps are recommended:
*Privatisation of power distribution utilities in an across the board manner for bringing down the huge, unsustainable ATC (Aggregate Transmission and Commercial losses) . *Making clearance mechanism in MoP (Ministry of Power), CERC (Central Electricity Regulatory Commission), State Electricity Regulatory Commissions, MOEF (Ministry of Environment and Forests) simple, time bound and less bureaucratic.*Establish immediately an independent regulatory body in coal mining and distribution. *Enable private sector to enter coal mining. *Create a strong regulatory agency in the oil and gas sector and free oil & gas production and sale from the stranglehold of Central Government. *Harness on a much bigger scale solar and wind power. *Remove the red tape and bureaucratic delays that have affected the forest clearance of hydro and other power projects.* Explore and harness the oil and gas resources of the country in a bigger and better way. *Undertake R&D to tap the non conventional and environment friendly sources of energy on a wider scale.
In general, government’s role in energy generation and sale should be minimised and limited to regulation.