Another piece of the puzzle concerning India’s economic slowdown

Could the Indian slowdown be the most important (but still somewhat neglected) story in the world right now?  Vikas Bajaj reports:

…the country cannot get enough fuel — principally coal — to run the plants. Clumsy policies, poor management and environmental concerns have hampered the country’s efforts to dig up fuel fast enough to keep up with its growing need for power.

A complex system of subsidies and price controls has limited investment, particularly in resources like coal and natural gas. It has also created anomalies, like retail electricity prices that are lower than the cost of producing power, which lead to big losses at state-owned utilities. An unsettled debate about how much of its forests India should turn over to mining has also limited coal production.

The power sector’s problems have substantially contributed to a second year of slowing economic growth in India, to an estimated 7 percent this year, from nearly 10 percent in 2010. Businesses report that more frequent blackouts have forced them to lower production and spend significantly more on diesel fuel to run backup generators.

…In the last year, the nation’s power problem has grown acute, with the gap between demand and supply jumping to 10.2 percent last month, from 7.7 percent a year earlier. In some states like Andhra Pradesh, where Nellore is, and in neighboring Tamil Nadu, blackouts have become so common that many factories report getting more electricity from diesel generators than they do from the power grid, at a cost that is roughly three times higher.

Comments

Tyler,

I have believed that it was India going for the big fall and China would have a slowdown analogous to the S&L crisis or the 1907 panic. I have felt China worst investments have centered around smaller second tier cities so the strong central government will clean out the balance sheets and prosecute more notorious local corruption. (China local government and business growth reminds me a lot of Tammy Halls and Huey Longs.)

Also, most people focus on the outsourcing to China manufacturering but in an office environment most of the outsourcing has been to India in form of IT, call centers, simple invoicing audting and internal reporting. With high inflation in wages and raw materials with a depressed US job market for people under 25, the wage difference of India/US is diminishing and there is a lot of firms on the margin on-shoring these tasks back to the youger workforce. I recall articles about law firms doing this t solve for time zone differences but I have seen most offices have significantly slowed down this outsourcing. (I suspect most offices the last 5 years have cut the workforce so much that they have not developed an internal pipeline of experienced talent and with young generation on-shoring that is where they build this pipeline.)

They must be pretty screwed up to have a coal shortage. India has the fourth largest reserves of coal, about 10% of the world supply.

India has a gift for this sort of thing. In the medium term it will get ironed out, but don't ask me what the medium term is.

The root problem is nationalized power plants. Private producers might import if local coal became scarce.

Remember, some of the biggest oil producers regularly face gasoline shortages.

Well, that's almost always because of refinery capacity. You don't refine coal.

You still need to dig it out.

You have to pump out the oil too, but oil producing countries can produce oil yet have a shortage of gas. It sounds like India just can't get the coal out.

Do they really not import? I guess that plus price controls pretty much nails down the problem. Command economics 101.

I have never been a big fan of Gandhi's ideas on poverty (i.e. India would be just fine as a nation of weavers), but surely Nehru's policies and their long legacy have been a severe drag on the economic outcomes in India. Still, better than millions killed for wild reasons as China under Mao, but I expect they can do better.

It has always been clear that in order to sustain their economic growth rates, electricity supplies in China and India would have to expand at nearly the same rate. China has done a better job than India in trying to do that -- if it will produce electricity, China has been building it. Dams, coal plants, nuclear plants, even wind and solar. Wind and solar have recently been somewhat de-emphasized in China; regardless of the public reasons given, the fundamental problem is that the good wind/solar resources are far from the demand centers, and building the requisite transmission facilities is time-consuming. India has not been sufficiently single-minded about increasing their electricity supplies, and has (unsurprisingly) begun to run into limits first.

Instead of focusing on nuclear weapons, India ought to be focusing on nuclear energy.

They're trying, but after Japan the people don't want it. I was just recently in Tamil Nadu, and the theory I kept hearing was that they were purposefully cutting power to 'prove' that they needed more generating capacity and, hence, nuclear power. The leaders want it but the people don't - what to do?

India needs to retroactively have a communist revolution and then reform its way back to capitalism under the benign management of a technocratic dictatorship.

France may be on the verge of doing something similar, namely electing a Socialist who wants a 100% top tax rate. This will result in massive capital flight, a massive talent exodus, and a strike by bond buyers, forcing immediate massive government spending cuts. It is those massive spending cuts that France needs desperately right now, but the public will go ballistic if it is tried right now.

France just may need a Socialist imbecile to do what they should already be doing; indeed what they should have done decades ago.

That was the entire idea of the US-India pact. Now they can import uranium for civilian fuel.

Not that they need to - they should be burning thorium:
http://en.wikipedia.org/wiki/India%27s_three_stage_nuclear_power_programme

My bad - the point of the deal is to accelerate self-sufficiency.

We still burn dinosaurs to heat water. Who are these cads who dispute TGS?

Algae, mostly, but the thought of pouring a Styrackosaur into my SUV does provide a more visceral thrill.

I wonder how much more gas you could sell if it was "Enriched with the essence of Styrackosuar." I mean, they get away with advertising putting nitrogen in my gasoline.

It's easy to forget they're the world's 3rd-largest economy.

India's an odd country economically. They spent decades emulating the Soviet Union, and I still meet well-educated Indians who believe the country's problems could be solved with more central planning.

TallDave,
its a real issue, and an immensely frustrating one (I say this as an Indian here in the US). There's a huge portion of the Indian "intelligentsia" that's very wedded to the idea of the non-aligned path, some myopic third way that will guide us through, and just a very anti-American stance. They're being replaced / dying over time, but its still worth noting.

Thankfully, the strength of the democratic systems / underlying institutions in India allows these grievances to be aired, not suppressed; India's is very similar to a pressure cooker in that way.

Sadly, I meet a lot of well-educated Americans who believe our problems can be solved with more central planning.

many factories report getting more electricity from diesel generators than they do from the power grid, at a cost that is roughly three times higher.

Interestingly, this happened in post-Saddam Iraq as well, as demand skyrocketed with the end of sanctions and the less restrictive economy, while the new Iraqi state was struggling to add capacity to keep up with the tripling of GDP. At one point the State Dept was estimating something like half of Iraq's power was being produced by private generators.

From a pure libertarian perspective isn't there something cute about small private generation sets? No monopolies, no co-operation, no state regulation, no central planning etc.

Only because the bastards muck up the more efficient alternatives.

To Andrew's point, it's mainly interesting in that this sector allows for a very clear cut comparison of the libertarian vs. centrally planned approach (there is no such thing as an unregulated utility power market). The libertarian approach costs astronomically more, largely due to the physics of how turbine efficiency improves with scale.

It is worth pointing out that the real libertarian approach would be to get the government out of the energy business; instead government central planning dominates and the people suffer as a result.

It will never happen. Electricity transmission is the most perfect example of a natural monopoly you will ever find, to the extent that the transmission monopolist can dominate the energy generation market as well by refusing competitors access to the energy grid. At that point, they can charge the highest price that end users will bear, which is astronomically higher than current prices as electricity demand is very close to price insensitive. During the California energy crisis, the price of power increased ten fold and demand only dropped by 20%.

It is possible to decentralize the market to some extent, but the rules must be crafted with extreme caution. Texas has gone as far as anyone in deregulating their energy markets. There is no central planning of power plants, and the end customer can choose between dozens of competing retailers. The consequences? The market is too competitive to warrant adding new supply. The only time prices increase to the point that new investment could be supported is during blackouts, which the sate is seeing increasingly often as their reserve capacity dwindles. Now, is it really worth allowing routine blackouts to support a truly free market? I don't think so, the economic costs are enormous. True libertarians are modern communists: idealists whose dangerous ideas are grounded in a failure to understand how markets actually function in the real world.

Er, the *equivalent* of modern communists.

Is there such a thing as a market being "too competitive"? Or is that just a way of saying prices are low? Also if consumers are price-insensitive can such a market still remain cut-throat, death-spiral pricing competitive?

Your statement is completely false because there is no free market in energy, so in fact it does not allow for any comparison at all, let alone a clear cut one.

No, saying the market is too competitive to warrant new supply is not saying the same thing as saying that prices are too low. In a properly regulated electricity market, there are really two separate products: electricity, and spare capacity. Electricity prices themselves are usually only sufficiently high enough to support building new power plants when you already have a severe shortage/power outages. Obviously, American society does not accept power outages and so does not accept truly free markets in electricity. So, we have central planners create the capacity markets, which exist to enable the existence of power plants that almost never generate any power and whose sole function is to run when something unexpected happens, such as one of the other plants breaking down.

The world must be hurting for important stories, if “a second year of slowing economic growth in India, to an estimated 7 percent this year, from nearly 10 percent in 2010,” is *the most important*.

Wonder how this post fits in with the points made in Tyler's recent post on "Relative to baseline" projections.

Well, we could talk about the media getting EVERYTHING wrong in the George Zimmerman case.

I'll bite. Zimmerman the real man is comically at odds with the stereotype invoked in the first breathless reports, but there's no way for some people to walk back their initial claims or revise their first impressions.

Well, I ask myself, how can the first two forensic voice analysts the media paraded out be wrong? How could that happen? And despite their utter confidence they almost obviously are wrong. And if they are wrong, what does that mean for our trust in institutions?

Btw, you are being too easy on them.

"Hey, 911, yeah, I'm about to stalk and murder a black guy, please hold..."

India's power sector has been in a state of permanent crisis for decades. Look at the Dabhold power plant: the largest project built in India, and it took almost 20 years from the start of construction before the plant could begin operating full time. This is pure governance failure, plain and simple. The interesting thing is how little impetus there is for change. Energy is a very challenging sector to regulate, and plenty of advanced economies get it wrong. See the California energy crisis, massive overpayments for renewable energy in Europe, and the slowly building Texas energy crisis. The difference in India is that the failure of the power sector is accepted as a reasonable status quo, while in places like California similar crises bring down governments.

What do you mean by the term "governance failure"? The root problem for power-plant delays in India is the combination of a high population density and a long history of democracy. There are almost no areas where you can build a large facility any more that are uninhabited. The relocation of thousands of people at a mutually agreed compensation is the bottleneck. I see no easy solutions, governance or otherwise.

Unless India goes the Chinese route and bypasses some democracy.

My point was that India can't even get organized to operate the power plants it has already built. The relocation issue is minor compared to the lack of a properly structured market with secure contracts. My personal contacts who have done business in India (admittedly some time ago) found that their electricity sale contracts with the government would get signed, then torn up every election cycle. This made it extremely difficult to get a project done.

India has had a long tradition of informality, which was worsened by the license-raj, where you would have to bribe an official to get anything done. 13% or something of power was stolen by those who bribed the local inspectors. This continues today, the worst cases being the railways and electricity.
If the actual prices for these services were charged, there would be have to be huge increases, The corollary is that the political party that implements them is toast in the next elections.

The minister for rail who increased some fares, a very small amount, was ostracised by his own party and replaced.

There are serious talks in the national media about India facing another 1991 like crisis and being forced to move to greater reform. But India does have greater capacity than it did in the 1990's hence Indians are destined to suffer for much longer before the next wave of reforms are forced upon the nation.

The current low price of solar panels should be a big help to Indian businesses. They're certainly much cheaper than using diesel generators. However, if they pay low subsidised prices for electricity when the grid's actually working I can see that might slow their adoption.

Oh silly me. The post above says diesel is only about three times more expensive than grid power in Andhra Pradesh, so it appears solar panels can pay for themselves there whether or not the grid is reliable.

The big problem with these articles is that they do not fully engage in the differential analysis that is necessitated by a claim about a change in rates. India's power scenario was a mess yesterday, last year, 5 years ago and 10 years ago as well. India had price controls on coal, imported coal from Indonesia then as well. It's state run unites made losses then as well. All this explains the poor levels of economic development in India. But how does it explain a 'slowdown'.

Second, nowhere in the article is it fully explored what it means to say that a state run electricity company is making 'losses' or what is the 'cost of producing power' when the resource is state owned and the production is state owned.

None of this is meant as a defence of India's rather shoddy energy policies, of course.

It is amazing that India is having this much of a problem getting coal when there is plenty of coal in that region. If there is enough coal what is the problem. I think that the first thing India needs to fix is their policies and management issues. If their policies really are that bad, it is not hard to see why India is going through such a hard time. If there are enough resources such as coal, India is obviously the problem. If there is weak management and policies, it is impossible for India to reach the level of output that they would need to avoid problems such as this one they are experiencing right now with their power sectors. With a supply and demand gap as drastic as this there are serious changes that need to be made and enforced in India. This is a good example of a monoply being able to control the energy being used and the prices that are being set making it hard for other competitors to step in.

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