ECONOMIC HIGHLIGHTS

New Delhi, 5 December 2007

Reduce Reliance On Fossil Fuels

NEW ENERGY POLICY NEEDED

By Dr. Vinod Mehta

(Former Research Director, ICSSR)

A year-and-half ago, the Finance Minister had said that the huge surge in the global price of crude was a matter of concern.  Since then the price of crude has been rising steadily and is currently hovering around US $100 a barrel. And, even as the rupee is getting stronger vis-à-vis the US dollar, meaning that we pay less for the crude in terms of dollars, the import of oil continues to cause concern.  

It is common knowledge that India does not produce enough of crude to meet its requirements and that 70 per cent our oil requirements are met by imports.  A large part of our export earnings go to meet our import requirements of crude and natural gas.  This means that we have less foreign exchange for import of other products and services. In addition, it needs to be constantly monitored. Thus, our major effort should be to reduce this dependence on imported crude for strategic reasons.

This can be tackled at various fronts. At the first level, we need to increase the domestic output of crude oil by improving the recoveries from existing oil fields and by exploring new oil wells. At the second level, we need to reduce the consumption of fossil fuel in a planned manner.

For the past few years, the Ministry of Petroleum has been actively pursuing a strategy not only to increase the recovery of oil from the Bombay High wells but allowing the Oil and Natural Gas Corp (ONGC)  to enter into deals with foreign companies for oil exploration outside India on production-sharing basis. 

The first such venture was 20 per cent participation in a Russian oil firm Roseneft.  The ONGC has invested about Rs 8,000 crore here along with oil companies from the US and Japan and is expected to get about 2 to 4 million metric tonnes of oil and 5 to 8 millions metric tonnes of gas. 

In fact, the ONGC is giving out places for oil exploration. The private sector company, Reliance, too is exploring oil in the country and has met with some success. This strategy is likely to go a long way in enhancing the oil security for the country.

At the same time, the Government has not yet completely written off the Iran-Pakistan-India gas pipeline deal and other gas sources in Central Asia and Myanmar (Burma) too are being tapped.  But all this will take time.

The previous NDA Government had taken up the development of ethanol, which could be blended with petrol and diesel to reduce the consumption of imported oil. Brazil is way ahead in the research in ethanol. Three projects on Gasohol (blend of petrol and ethanol) have been launched in Maharashtra and in Uttar Pradesh. 

Ethanol which is extracted from sugarcane bagasse can be successfully blended with petrol. It is estimated that a 5 per cent addition of ethanol would help save petrol to the tune of 3.3 lakh tonnes per annum.  If we could succeed in blending 10 per cent ethanol the savings in the use of petrol would be much more. 

Interestingly, the researches that have been done in Brazil show that the blend of petrol and ethanol was good for the environment.  However, it will take a few years before a reliable blend of petrol and ethanol and diesel and ethanol is devised for commercial use.

Moreover, the Central Government is also conscious of the bad effect of fossil fuel on our environment.  To fight the menace of pollution in metropolitan cities, unleaded petrol has been introduced. Apart from this, extra low-grade sulphur and low sulphur diesel have also been introduced in major cities. 

At the same time, effective steps are being taken to check the adulteration of diesel which is playing havoc not only on the environment but also reducing the effective life of diesel engines.  To top it all, the vehicle manufacturers have been asked to switch over to the production of vehicles which conform to Euro III emission norms. 

There is no gainsaying, that all this is going to have a salutary effect on our environment.  Most of the pollution-related diseases like asthma etc., which have increased in the past few years, will go down substantially.

It must be understood that India does not have large reserves of crude oil and that it would always be dependant upon imports to meet its requirements of petroleum products.  It must also be understood that whatever refinements are introduced in fossil fuels like petrol and diesel, they would continue to spread pollution and harm the environment. 

Therefore, one has to think of an energy policy that takes into account these two facts.  It then leads us to think that India should reduce its dependence on fossil fuel and switch over to the use of other sources of energy.  

Why we have not been able to think in these terms is because of the fact that the country has no integrated approach to energy requirements. We have separate Ministries and departments which deal with different kinds of sources of energy like coal, renewable sources of energy, nuclear energy and so on.

The users of these various sources of energy are also treated as separate identities with very little coordination among them. It is for this reason that instead of a coordinated energy policy we have separate policies for each of these sub-sectors which are contradictory at any point of time.

It is here that the Government needs to bring a strong coordination among the Ministries which are dealing with various kinds of fuels and the Ministries which oversee sectors which use those fuels.

If we look at it in an impartial manner, we should, in the next 10 to 20 years reduce our consumption of petroleum products and gas and switch over to use of other sources of energy. 

For instance India has large deposits of coal and water resources which are used for generation of electricity.  If we switch our public transport system from the use of fossil fuel to the use of electricity then in one stroke we would not only be reducing our consumption of petroleum products but also contributing to a cleaner environment and saving our import bill. The Metro rail in Delhi is the finest example of a clean fuel transport system leading to saving in the use of fossil fuel.

But, the Metro rail system may not be cost-effective in middle-level and small towns and cities. The answer could lie in a mono-rail, tram and trolley buses. Many developed countries use tram cars and trolley buses, which run on electric power for their urban transport system. 

This is the mode of transport which should be encouraged in small and middle-sized towns and to the extent possible in the large metropolitan areas, especially in the new districts which come up in these mega cities. 

However, to take a decision to run trams and trolley buses would require coordination among many Ministries. Clearly, it is high time the Government moves fast to develop a coordinated strategy to reduce the consumption of fossil fuels. ---- INFA

(Copyright India News & Feature Alliance)

ECONOMIC HIGHLIGHTS                                          

New Delhi, 29 November 2007

Creating More Jobs

URGENT NEED FOR STRATEGY

By Dr. Vinod Mehta

(Former Research Director ICSSR

The UPA Government after assuming power four years ago had promised to create more jobs under the Common Minimum Programme (CMP). It is a year and a half to go for the general elections but the UPA Government has yet to redeem this promise. 

Specially against the backdrop that the jobs and the job opportunities have not grown in the past four years other than in ICT and to some extent in the manufacturing sector. There has also not been much job creation in the rural sector.

Generally speaking, the increase in the level of investment generates more jobs in the country, but it does not guarantee generation of more jobs on its own.  Moreover, in a vast country like India, job opportunities need to be created evenly all over especially in the rural areas with a view to check undesirable migration to cities. 

The time, however, is ripe to devise strategies, both at the local level as well as the national level, which lead to creation of more jobs without resulting in mass migration of population from the village/towns to large cities. The manufacturing sector is growing and the rate of growth is around 11 per cent. Many economists are of the view that we can sustain this growth rate in the coming years.

It is common knowledge that 74 per cent of the population lives in rural areas and 26 per cent in the urban areas. In urban areas the problem of unemployment is not acute but it is serious mainly in rural areas. 

The sheer size of the urban population in metropolitan cities like Delhi, Mumbai, Kolkata and Chennai provide many job opportunities, especially in the unorganized sector. There is so much demand for various kinds of labour and services that anyone looking for a job can find some work even if it may not be to one’s liking. The labour that migrates to these areas is bound to find some work. It is a different matter that the unregulated migrations leads to many problems in the urban areas like the emergence of slums, increase in the crime rate etc.

Therefore, the real challenge of generating employment is in smaller towns and villages where the size of the population is so small that there are hardly any opportunities for generating remunerative employment. Setting up of factories or small businesses does not make any economic sense.

Since there are no factories or workshops in these areas the demand for labour is almost nil. Again, the total population of the area is so small that it does also not make any economic sense to provide services or generate some kind of a work in these areas.

According to the census figures out of a total number of 5,88,781 villages, 2,90,093 villages i.e. about 50 per cent have a population less than 1,000. The number of villages having a population between 1,000-2,000 is 1,14,395; the number of villages with a population between 2,000-5,000 is 62,915; for villages with a population between 5,000-10,000, the number is 10,597 and the number of villages with over 10,000 population is 2,779. It means that for 70 per cent of the villages the size of the population is less than 2,000.

What impact can it have on employment generation?  For one, you cannot make massive investments as it would not be able to reap any economies of scale. It will not be able to supply the required skilled or semi-skilled labour. The demand for services from the villagers will not be enough to provide job opportunities. This means that the demand factor will also not work. Thus, there will be almost nil opportunities for the young people of these villages to find jobs even in the unorganized sector. This problem is acute in the North East.

In other countries of the world the rural population is small while the urban population is very large; less than 25 per cent of the population is in rural areas. A large number of jobs are being created in these countries in the service sector followed by the manufacturing sector. (Even though some of the services are being outsourced by these countries, it has also been noticed that some of the affected employees are also migrating to the developing countries.)

Therefore, the employment opportunities are relatively more in these countries than in a country like India where the population is overwhelmingly rural. It is a sheer challenge how to generate employment in areas where the population is less than 2000.

Clearly, the Government will have to have some kind of a strategy to generate employment in these villages in the coming years. One of the ways to overcome this situation would be to club these villages into viable economic zones on the basis of some economic criteria before making investment in these areas. Most of the activities may be centred around food processing of various agricultural products including milk and milk products and smaller workshops, production units etc.

For instance, the Government can help these villages to start food processing and marketing cooperatives, small repair and maintenance workshops to attend to repair of mechanical equipments, set up cold storages etc., which in turn will raise employment opportunities for the local people both in the organized as well as the unorganized sector.

The second equally important point is to link all these villages with towns and metropolitan cities with all-weather good quality roads. This will help the rural people from these villages to take their products to nearby towns and metropolitan cities where there is a market for them.

Good roads can facilitate the to and fro movement of labour on a daily basis to nearby towns where they are bound to find some work.  Once these villages are linked by good roads many of the companies in the private sector may find it economical to procure their raw materials or outsource their work from these places. They may even come forward to set up small units.

Besides, large scale investment does not mean that one puts big money and sets up bigger projects. Large scale investment also means that one spreads out investment all over and help people to engage in meaningful economic activity.

The food-for-work programme is not just enough. What is needed is gainful employment on a sustained basis. This requires the Government to ensure easy movement of agricultural and other products from one place to another and easy to-and-fro movement of labour from the village to nearby towns.

In the long run, however, the emphasis will have to shift from the creation of jobs in the agricultural sector to creation of jobs in the service and the manufacturing sectors. The experience of developed countries shows that more jobs are created in the non-agricultural sector. 

It has been noticed by the Indian economists that the country’s service sector is expanding very fast. This defies the experience of other developed countries. Be that as it may, the creation of jobs in the rural sector can at best be a medium term solution to the unemployment problem; the emphasis will have to be on the creation of jobs in the manufacturing sector in the long run. ---- INFA

(Copyright India News & Feature Alliance)

Economic Highlights

New Delhi, 21 November 2007

Rethinking Agriculture

STATES NEED COMMON FOCUS  

By Dr. Vinod Mehta

(Former Director, Research, ICSSR)

The development of the agricultural sector has become critical for sustaining an overall growth rate of about 9 per cent. While discussing the Draft Eleventh Plan the Prime Minister underlined the need for a central focus on agriculture given the importance of rural population and the need for food security in the coming decades.

There is an urgent need to reinvigorate a sector on which two-thirds of the billion-plus population depends, but which is growing at less than one third of the pace of the overall economy. Assuming a 7-8 per cent GDP growth rate, by 2020 we would require 340 million tonnes of food-grains.

According to the World Bank, India's agricultural growth rate in the past decade (1995/96-2004/05) slowed down to less than 2 per cent per year, compared to about 3.5 per cent per annum in the preceding decade.  It further notes that in the poorest states, such as Madhya Pradesh, Orissa, and Rajasthan, growth in the last decade was below one per cent per year. 

It has also been observed that the yields of major crops (food grains, oilseeds, other cash crops) in India are lower than in many other countries. For example, rice yields in India are one-third of China’s and about half of those in Vietnam and Indonesia.

Last year, a poor wheat crop led to 5.5 million tonnes of expensive grain imports, the first in six years, pushing up food prices and adding to inflationary pressures. With international wheat prices very high import of wheat has become a political issue.  It would be economically suicidal for any government to import grain or for that matter any agricultural commodity like pulses, edible oil at the ruling higher international prices and sell it at subsidised prices in the domestic market for a considerable period of time. 

It is in this context that the development of the agricultural sector becomes critical not only from the point of view of overall growth but also from the point of view of feeding the billion plus population.

The Eleventh Plan aims to raise the agricultural growth rate to four per cent per year. Importantly, to achieve this, the Plan aims to: (a) accelerate the expansion of irrigated area and improve water management in rain-fed areas, (b) bridge the knowledge gap through effective research and extension, (c) foster diversification to higher value horticulture, fisheries, and animal husbandry, (d) increase food grain productivity for food security, (e) facilitate farmers' access to credit at affordable rates and (f) improve farmer access to markets.

Besides, numerous researches on the agricultural sector in the past five decades have made these points, the important point, however, is to implement them in letter and spirit.  Take for instance point (b) relating to research and extension; may one ask what our agricultural research institutes have been doing for the past 50 years? 

Why are the foreign private seed firms able to offer high quality seeds than our agricultural research institutes? Why has the role of extension workers in helping the farmers to adopt new seeds and technologies been reduced over the years? What is credit to farmers at affordable rates? 

Astonishingly, instead of codifying and implementing the recommendations of various reports/studies on tackling these issues we have been paying only lip service to them all these years. Otherwise the agricultural sector would not have come to such a pass.

True, the provision of irrigation water, timely credit at affordable rates etc., are all very important measures, but the time has also come to think of institutional and organizational changes in the agricultural sector.  If the organizational structures in the past have not been able to deliver shouldn’t we change them to make them more effective?

The economists are talking about contract farming.  Are our farmers ready for contract farming?  Do they stand to gain from contract farming? How does one ensure that the companies entering into contract with farmers will not take them for a ride for the reason that these contracts are cleverly drawn in a language which the farmers may not understand. 

No doubt a few farmers in certain states have gone in for contract farming and many others are willing to go for it. However, the idea is to put more money in the hands of the farmers through this mechanism. Therefore, to safeguard the interests of the farmers the Government must first have a policy on contract farming and then model contracts in a language which the farmers understand.

Take our archaic agricultural marketing laws. Everyone is talking about putting more money in the hands of the farmers.  But in reality the farmer is forced to sell at lower prices because of our archaic agricultural marketing laws. The farmers are supposed to bring their perishable produce of fruit and vegetables to the designated mandis where the middlemen would help find a buyer for their produce.

Look at the absurdity. First the farmer has to spend money on transporting his produce to the mandi, then wait for a suitable “buyer” for a day or two. In the meantime the middleman pockets his commission and ultimately the farmer gets less than what he should have. 

Recall, when some of the business houses in the organised sector tried to venture into the retail of fruit and vegetables by directly procuring their supplies from the farmers, the middlemen and vendors were up in arms. Thus, forcing the State Governments either to shut down the organised outlets or seek refuge under the marketing act. 

There is no gainsaying that the ultimate loser has been the farmer. The farmer will always be the loser in such an institutional set up. Therefore, the Government will have to rethink the institutional changes in the marketing of fruit and vegetables.

Then there is the problem of wastage of farm produce, both grain and fruit and vegetable, either on the farm itself, or in transit from one place to another or in the godowns.  It is estimated that around 20 to 30 per cent of the farm produce is wasted in this manner which ultimately reduces their availability to the nation. We have done nothing to check this wastage but can we afford such wastage now?

Further, like the management of scarce water, the management of scarce grain and fruit and vegetables are equally important.  Perhaps the farmers are helped to process a part of the fruit and vegetables on the farm itself?  How do we ensure that pests don’t eat the stored grain? 

Significantly, agriculture is a State subject.  But the time has come for the States to come together to think over the common problems facing the agricultural sector and to the extent possible develop a common response to marketing of agricultural produce, contract farming, water sharing, checking of wastage and institutional and organizational changes so as to help the farmers get their legitimate dues as well as assure the nation adequate supply of food grain and other agricultural produce like pulses, oilseeds, fruit and vegetables, milk, poultry, meat and fisheries.

Our aim should be to be self sufficient in the agricultural sector with surplus for export.  We are heavily dependent on imported fuel spending almost half of our export earnings on it.  This kind of situation we should avoid as far as agricultural produce is concerned.  Hopefully the Eleventh plan will help change the face of the agricultural sector. --- INFA

(Copyright, India News & Feature Alliance)

Economic Highlights

New Delhi, 14 November

Mounting Subsidies

NEED FOR STREAMLINING

By Dr. Vinod Mehta

(Former Research Director, ICSSR)

Exactly a year ago the National Development Council (NDC) at its 52^nd meeting approved the Approach Paper to the Eleventh Five Year Plan (2007-2012).  The Government has now approved the Draft Eleventh Plan and a month later the NDC is likely to give its final approval to the Eleventh Plan.

The Plan’s focus remains on development of agriculture, infrastructure and spending on social sectors like education, healthcare etc. However, while approving the Draft Plan at the meeting the Prime Minister expressed his concern over mounting subsidies on 3 Fs – food, fertilizer and fuel. 

The PM observed that the Government was providing subsidy to the tune of Rs.1,00,000 crore which essentially meant a cutback in essential spending on education, healthcare, agriculture, healthcare etc.  He was of the view that these subsidies need a fresh look and need to be streamlined.

In fact the subsidies (as well as the administered prices which go along with subsidises) appear to be getting out of control and could harm the growth in the long run. No Government has ever told the public as to what is the purpose of administered prices and subsidies as of now. 

These short term palliatives, which were introduced in the early years of our economic development, have been allowed to continue for more than five decades without any rational explanation. So much so that interest groups have emerged around administered prices and subsidies that will not let them go under any circumstance.  Since everything is hidden from the public view nobody knows what is happening in this area. 

Besides, the subsidy paid out on food rarely percolates down to the consumer but gets absorbed in the costs of handling and storing foodgrains. The main purpose of food subsidy is to provide food security to citizens, particularly the poor, as well as   incentives to farmers to keep foodgrain production at a comfortable level.

However, there are distortions in the way the food subsidy is paid.  It has been estimated that the cost of transferring a rupee to the poor through the PDS (Public Distribution System) is Rs.6.68 and the administrative costs account for 85 per cent of the total expenditure.

Shockingly, only about 12 paise of every rupee spent on the PDS actually reaches the poor in the form of food. The rest goes to wastage and bureaucratic expenses, according to Dr Kirit Parikh, former Director of the Indira Gandhi Institute for Development Research, and now Member, Planning Commission.

Again, the so-called subsidy on fertilizer is not a subsidy; the difference between the sale price and the production costs is being funded to the fertilizer industry. It is misnomer to call it a subsidy. It is reported that the fertilizer subsidy for 2007-08 is estimated at Rs 22,532 crore, which is stated to be less than half of the requirement.  In other words, the fertilizer industry wants more subsidy. 

But are the benefits really commensurate? Studies have shown that (a) almost half of the fertilizer subsidy goes to the fertilizer industry rather than to farmers and (b) the returns on government spending, are higher in the case of agriculture R&D, rural roads, rural education or irrigation; for every additional rupee spent on fertilizer subsidy, the returns are very low – at only 0.53 compared to returns from other sectors: agriculture R&D (6.9), rural roads (3.2), rural education (1.5) and irrigation (1.4),

So is the case of petroleum products.  It is common knowledge that we are a net importer of petroleum products as the domestic production is not enough to meet our current demand.  We have to pay for these products at the international prices.  When the Approach Paper was approved the international price of crude was US $80 a barrel and today it is US $98 a barrel. Logically speaking, there is no case for providing any subsidy or cross subsidy to any section of the society on these products.

These products could have been sold at commercial prices -- falling when the international prices are falling and rising when the international prices are rising.  What have we done?  The price of petrol in the domestic market have been kept at almost three times the price of petrol in other countries while the prices of cooking gas, diesel and kerosene have been kept lower than the international prices. 

Clearly showing that there is no rational economic explanation for this kind of pricing policy.  The opposition to hike in the oil prices would not have arisen if we had kept the prices of all the petroleum products in line with international prices all these years.

Moreover, unnecessary subsidies are leading to wastage of scarce resources.  For instance the extremely low recovery rates in sectors like irrigation, water, electricity and diesel lead to their wasteful use as these have been withdrawn from some other sectors in which these could have been very useful. 

Besides, the provision of free electricity to the farmers is a big drain on resources. It may be mentioned that except for petrol all other petroleum products like diesel, domestic gas, wax, naphtha, etc. are being subsidized in a big way.  Of the total subsidies paid on the petroleum products nearly half of it goes to diesel, kerosene and domestic gas in that order.  As per the Rangarajan Committee Report on petroleum prices, the current subsidy on cooking gas is still whopping Rs.171 per cylinder.

One could go on and on but it is sufficient to say that the nation cannot afford to go on paying subsidies on every conceivable product and service. Subsidies beyond a certain level are harmful to the economy in various ways.  Firstly it leads to wasteful use of resources. If a farmer is getting diesel or electricity at a very cheap rate he would not bother about economizing on the use of these two inputs. 

Additionally, who knows whether the electricity and diesel is also being used by farmers for non-agricultural purposes? The wasteful use of electricity and diesel by the agricultural sector implies that some other important sector of the economy like industry is being denied the optimum use of these inputs. 

Secondly, subsidies lead to distortion of relative prices in the country and send wrong signals to business units. For instance, the railways are known to be the cheapest mode of transport as far as bulk commodities are concerned. But by subsidizing diesel we are artificially propping up the motor transport sector and at the same time forcing the railways also to keep their freight rates relatively lower from those of the motor transport etc. None of these two sub sectors have any incentives to economize on the use of diesel, coal and electricity or to improve their efficiency by reducing their operational expenses. 

Thirdly, subsidies beyond a certain level also imply that either the country resorts to deficit financing or imposes higher taxes on the people. Subsidies are not produced out of thin air; somebody has to pay for it. Subsidies are essentially, what economists call transfer incomes.  Subsidies are in fact, a modern version of the old saying "Robbing Peter to pay Paul". Therefore, at one level the choice boils down to either having more subsidies and more taxes or fewer subsidies and fewer taxes. 

Fourthly, the subsidies are also inimical to the export sector. They make the cost of exports lower to the foreign buyers; to that extent the domestic population is aiding the consumption of foreign buyers.  One cannot afford to support the export sector on the basis of subsidized inputs for all times to come. Subsidies only reflect the uncompetitiveness of the domestic production and hence there is no incentive for the exporters to improve their efficiency by reducing production costs. 

Therefore, what the country needs is to have a dispassionate look at all kinds of subsidies and decide as to which subsidies need to be continued, which subsidies need to be reduced and which subsidies need to be discarded.  This cannot be a one-time affair but a continuous process in the sense that the effects of subsidies need to be reviewed every three to four years to see if they are fulfilling their role and a decision taken as to whether it needs to be continued, reduced or discarded. ---- INFA

(Copyright India News & Feature Alliance)