Power should not be subsidized

I would like to Thank the readers of the blog and specially people from my workplace. Your encouragement means a lot to me.

An artista always needs patrons of his art, a writer needs its readers, a performer its admirers, and an extortionate economic policy its subsidies.

A half page ad in Deccan Chronicle about the recent govt scheme jointly floated by ESSL (Energy Efficiency Services Ltd.) and local Discoms caught my eye in a train journey returning from home.

Since you do not have much to do in a train journey, I floated the idea for discussion to my co-travelers including a govt. employee, techie, businessman, and two MBA lads and a cynic (me).

The Issue: In order to fuel government's plan to boost energy efficiency, ESSL (Energy Efficiency Services Ltd.) and local Discoms are going to offer LED bulbs which cost Rs. 400 as an exchange for 2 incandescent bulbs costing Rs. 10 each to every household under the DELP scheme.

More than the policy what shocked me is the ill-informed and whimsical nature of opinions which we have as citizens to the state of affairs around us. Interestingly, these opinions differ so vastly when you change the strata of their economic and social exposure. That makes for another story some other time.

I am totally supportive of the intent of the policy but am in ardent opposition with the implementation vision of the policy. Let me explain why.

The govt decides to subsidize Rs. 400 per bulb in order to increase the efficiency of energy used per capita by promoting the usage of the LED bulbs, which is by far not a commodity which can be clubbed as a public utility good. So the government is spending the taxpayer’s money to allot a commodity which can be termed as a good of private choice.

This policy is similar to an instance where the government plans to spend money to subsidize the sale of 5 star rated air conditioners and offer it at 90% discount for the public.

I do not doubt the intent and but the benefit transfer to the people who would be the benefactors of this scheme. The policy flaw is in the implementation that should fail as the benefit of the subsidy would be transferred to the wrong class of people.

The question we should be asking is who would be the direct benefactors of the scheme and by subsidizing a public good, is the government not meddling with the market forces which are at play?

Through some statistics of the Discoms, it was estimated that 4 lakhs LED bulbs working at a 100% uptime could transfer a benefit of 191 million units in a year, i.e., roughly translated to a cost benefit of 275 million (as per current Andhra Pradesh rate of 1.45/ unit).

From economic and moralistic standpoint energy efficiency is one golden deer which we must pursue but importantly we should not lose the sight of implications and aftermaths the chase could lead to.

Better energy efficiency is a need of the hour for power undermined country like ours.

We must not forget that whole pandemonium of the show depends upon the uptime usage of the LED and the quantum of discount rate viz-a-viz the market price. The uptime of bulbs in India are hardly more than 6-8 hours which makes the time period for an 100% uptime extend by 3x.

India should be focusing on understanding the interplay of power pricing and the way it impacts its consumers. As long as the consumer feels that power is cheap and doesn’t take real chunk of consumer’s earning. It will be frittered away. This anomaly can be balanced by inducing carbon pricing in energy subsectors of consumption and energy usage, both in commercial as well as residential. Globally, we are slowly approaching the age of annulling all the externalities involved in the energy sector. Its time India should take this up seriously. The moment these factors start kicking in the prices of energy consumption will go up, leading up to the purchases of energy efficient equipment.

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Interestingly, we are only looking for a solution at the user end of the problem. Indian government should start addressing issues at the power generation, transportation and transfer level. We need to invest in upgrading our infrastructure by notches to match the international standards. India’s transmission facilities infrastructures are eons behind in terms of zero loss energy transmission capabilities and the new state of the art smart grid concepts. The 11^th 5 year plan intended to 62,000 MW capacity generation plan, but ended up 34,500 MW now put this in perspective of Duke Energy of US, which alone generates 58,000 MW or an EDF of France, ranked 4^th in utility companies of the world, whose 95.9 percent of the electricity output is CO2-free.

The economy and more importantly, the people should come forward and agree to take the issue head on. They should not be incentivized to use or replace bulbs and feel good about saving power. They should understand that the things in the world which are taken for granted are not meant to be.

The government should realize that the greatest cash cow of reforms is not always with the consumers but also at the generation and transmission level. And O’ boy, I haven’t started to talk about the dismal and appalling natural liquefied gas infrastructure. In the interest of reader’s attention, let’s make it another story. :)

The government should look at a level of parity to understand that the rates of return on its investment on the household sector of incentivizing the bulbs is so stark than the ROI it can experience in overhauling its dilapidated infrastructure. We have aging countries such as Japan who are ready to give out loans at throwaway rates, which can overhaul our infrastructure in 5-7 years. Given the interest which the world is showing in India, we should scoop the advantage of resorting to an FDI policy with a price control mechanisms in the power sector and cap the amount of revenues or investment a company could take out of the country for a period of 20 or 25 years.

A humble request to the government, Please do not give easy (cheap) power to people who do not understand the inherent value of it.

However, I would not like to end the piece without adding some positive facts about LED bulbs, to induce the corporates and the residential users to shift to LED.... So watch out for my next piece.

The manipulation of "The Dollar". A lesson for superpower administration.

One of the well known writers in the world of finance, argued that the recent outbreak of currency wars are the fault of the US. Now in this piece, I will put my best foot forward and try and analyse the situation. I am not brandishing my knife at anyone but am just putting down my 10 years of Global Markets understanding.

Lets talk about the most talked country's one of the most untalked topics.

Financially, the usage of Dollar has been executed with such perfection, so as to create a web where none of the economies can actually be detached from the green currency. Recently, it used one of its old tricks, Fed’s Quantitative Easing and other monetary growth programs create huge amounts of Dollars, and the majority of itto be exported to emerging market countries, like India in the form of loans and investments for development. The excess inflow puts upward pressure on their currencies, and the foreign speculators made speculative profit at the expense of domestic exporters. Obama's India visit would see some more of such plans being announced. Keep Watching...

The majority of newly printed money has indeed been shifted to emerging markets, where it enjoys one of the best returns and the highest potential for appreciation. The current economic and investing climate in the US is not as strong as in India. Indeed, this is why the (first) Quantitative Easing program was not very successful, and why the Fed has proposed a second round. While there is a bit of a chicken-and-egg story in the unvieling (does economic growth drive investing, or do investors drive economic growth?). US is harping these measures to propel growth in US,but if you watch minutely, the current capital flow trends suggest that any additional quantitative easing will also be felt primarily in emerging markets, rather than in the US.

While the ineffective of this measure is well-understood for the US investing community, a strong case is made for investing in emerging markets. Emerging market economies like (BRIC) are individually and collectively more robust, with faster growth and lower-debt than their industrialized counterparts in Europe and America.

The lucrativeness of these countries is driving speculative capital into emerging markets even though a critical currency appreciation of about 30% has already taken place and the asset bubbles that may be forming in their financial markets suggests that their assets and currencies are still undervalued. Please hold your horses, that does not mean the markets are perfect, but instead the speculators think that there is still money to be made in the situation. On the supply side, exchanges for the emerging market currency for Dollars (and Euros and Pounds and Yen) must necessarily accept the exchange rate they are offered. The rationale of the exchange rate is not decided from the fact that it is agreeable to all parties but because of the equilibrium it maintains in the demand and supply equation of world currency exchange.

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This occurrence unfairly penalizes the state of countries like India, whose economy is dependent on the export sector to drive growth. The situation actually proves that economies of the third world have no comparative advantage in the exports, they happen to produce and export. Low costs and loose laws are the only competitive advantage on which the third world countries should be dependent upon to grow their export sectors in spite of the currency appreciation phenomenon. Japan and Germany are an perfect example. They have recorded trade surpluses continuously for decades, in spite of the rising Euro and Yen for decades. But again you would ask me to explain India's Indian Rupee, and the answer is dead political will to deregulate laws and export shackles and too an extent sub-standard image in terms of product quality and marketing. I should do justice and give this subject its due space in form of another post.

The problem is that everyone benefits (in the short term) from the fundamental misalignment's in currency markets. Traders like to mock purchasing power parity, but over the long-term, this is what drives exchange rates. Adjusting for taxes, laws, and other peculiarities which distinguish one economy from another, prices in countries at comparable stages of development should converge over the long-term. You can see from The Economist’s Big Mac Index that this is largely the case. As emerging market economies develop, their prices will gradually rise both absolutely (due to inflation) and relatively (when measured against other currencies).

more to continue...