Sunday, October 4, 2015

The Prime Minister's Homework

When PM Modi concluded the US visit recently it was aptly clear that the businesses and companies in Silicon Valley wanted the government to accelerate ease of doing business if they wish to penetrate their businesses in India. It was not as if the PM did not know about this, but still wanted to go ahead and invite them to invest and get committed support for Digital India. He wanted to showcase the fact that there are several start ups that have done wonders like Ola, Flipkart, Zomato and also get a hands on look at the start up culture in Silicon Valley. He also wanted to show case several changes in the ease of business rules in the first year of office.

The initiative and the reach out to Silicon Valley is really good and commendable. However, there are 2 important parameters on which he can unilaterally ensure India's economic rise. The reasons to choose these 2 parameters are 1) They are the most critical parameters 2) The government is seriously doing work but not that at the pace the world expects 3) These are extremely tough to be meet in a 5 year term.

Electricity Generation:

Unless electricity is generated it cannot be distributed and power cuts be stopped. Last year when the Coal Bill was passed it allowed coal production to happen in the most transparent manner in decades. However, the production is not enough to keep up with the demand. 60% of our electricity needs come from Coal and if this is disrupted it disrupts the electricity generation. Water accounted for 17% of electricity in 2013 and now it is reduced to 15%. The reason for this is the number of projects announced have not event taken off. The dams and reservoir projects are very tough to become reality. The push in the direction of increasing solar energy contribution is picking up pace. As of now renewable energy is accounting to 14% (up from 12% in 2013) (Source).  The cost of solar panels have drasticlly come down and India is flooded with Chinese goods. The cost of solar energy has reached the lowest ever known price in India. It is between Rs.4-Rs.5 per kWh (Coal is Rs.3.50 kWh). This has pushed several projects to be kicked off since the resources and time required to set up is very minimal compared to hydro projects.

However, if the solar energy is not ramped up the goal of achieving 100GW by 2022 will only appear to be a distant dream. This simply implies that every year starting 2015 - 14.28 GW must be produced each year. As of Oct 1st 2015 India has achieved 4.2 GW and that is 10GW short. Next year we hope this substantially increases. However, this pace can only be accelerated if the government comes up with rooftop solar policy so that each house contributes to electricity generation through solar energy.

Rajasthan has now solar parks covering 25,000 acres (Source). Modi has the record of building the largest solar park in Asia as the Chief Minister of Gujarat. We hope that we also build largest cluster of solar parks in Asia. As of date both Gujarat and Rajasthan are accounting more than 60% of electricity due to solar energy.

(Solar parks in Rajasthan and Gujarat)

As of now 18,000 villages are to be electrified yet, cities and villages and cities (including the national capital) that do have electricity have inconsistent power supply and face huge power cuts. So, the challenge before the PM is that while the generation of electricity is picking up pace how do you solve the issue of transmission losses? How will you also solve the state electricity boards' mounting losses which amount to Rs.2,00,000 crore? Various states have various policies and some are more rampant in giving power subsidies than others. These ad hoc policies have led to losses in almost every state barring Gujarat.

Will the PM through the recently launched Deen Dayal Upadhyay Gram Jyoti Yojana be able to achieve what he did in Gujarat? These are questions whose answers are the most essential part of any success today. Our future hinges on these solutions. If anyone can do it it is him and there are several people who voted him solely because of this character he has exhibited.

This is an area that doesn't require legislations or the support of other parties. This is purely achieved through execution. In the 2015 Independence Day Speech he stated he gave officials 1000 days to ensure electricity reaches the missing 18,000 villages. However, the goal to be measured is not just that but also the extent to which our capacity addition has taken place (to meet the demand). 

Every firm that wants to do business in India requires electricity and it is not smooth sailing unless this goal is met.

Ease of Business Ranking:

The World Bank uses 10 parameters to decide which country is easiest to do business in. These parameters and the ranking of India is below (Source).

The good points where India is in top 20 is "protection of minority investor" and "getting credit for a project". Apart from this it scores very bad in all other 8 parameters taking it to the position of 142 out of 189 countries.

Each parameter can be explained in depth and be analyzed directly from World Bank Analysis document (Source). In short it takes anywhere from 26 to 28 days to start a business with number of procedures to get it started being very high. The time to get land and required permits is so high that people don't tend to use straight and honest procedures, but use shortcuts to do the same. In addition to this on an average 33 tax payments, 243 hours of tax filing is spent by firms. These cumbersome, complicated procedures have irked the foreign businesses. It is common sense as to why the various companies in Silicon Valley like to invest but want the PM to ease the rules.

From the track record of one year in office it is appearing that the government has initiated several measures in ease of business. They removed Minimum Alternate Tax that was imposed on firms that were investing in India having no base in India. The fact that the new Companies Act allowed a company to borrow money from its directors is helping companies to pump in money. However, it is no where close to what is expected from the PM (based on his experience in Gujarat). Hence, it is very challenging for the government to achieve the task of being in the top 50 of ease of doing business.

Here are some interesting changes in the past 1 year (as published in Times of India - Source)

Now, it is paramount that the PM does a serious turnaround in these 2 parameters. He is the only hope and the man with a proven track record of these two. I hope that 3 years down the lane there is obiturary to these complex processes. 

No comments: