Indian Economy, 5th edition (47 page)

At microeconomic level, underpricing of energy to the consumer not only reduces the incentive for being energyefficient, it also creates fiscal imbalances. Leakages and inappropriate use may be the other implications. Underpricing to the producer reduces both his incentive and ability to invest in the sector and increases reliance on imports. Over the years, India’s energy prices have become misaligned and are now much lower than global prices for many products. The extent of misalignment is substantial, leading to
large untargeted subsidies
. Several initiatives have been taken by the GoI for rationalizing the energy prices in different sectors –

•
The Integrated Energy Policy has outlined the broad contours of the pricing system for coal. The
pricing of coal
is done now on gross calorific value (GCV) basis with effect from 31 January 2012, replacing the earlier system of pricing on the basis of useful heat value (UHV) which takes into account the heat trapped in ash content also, besides the heat value of carbon content. The revision in the GCV is likely to increase the prices of domestic coal to some extent, but this is a desirable adjustment because domestic thermal coal, adjusted for quality differences, continues to be underpriced.

•
In case of petroleum products pricing, the government dismantled the Administered Pricing Mechanism in 2002. This decision, however, was not fully implemented and domestic pass through of global price increases remained low for petrol, diesel, kerosene, and LPG – in June 2010, the government announced that the
price of petrol was fully deregulated
and the oil companies were free to fix it periodically.

•
In
January 2013
, the government announced the new roadmap providing for a gradual price increase for reducing
diesel under-recoveries
.

•
Admissibility of subsidized number of liquefied petroleum gas (LPG) cylinders and prices of LPG have also recently been revised. Pricing of gas is presently done under the New Exploration Licensing Policy (NELP). The government provides the operator freedom to sell the gas produced from the NELP blocks at a market-determined price, subject to the approval of pricing formula. The government is reviewing pricing under the PSC (price sharing contract) to clarify the extent to which producers will have the freedom to market the gas.

DEDICATED FREIGHT CORRIDOR

The Eastern and Western Dedicated Freight Corridors (DFC) are a mega rail transport project being undertaken to increase transportation capacity, reduce unit costs of transportation, and improve service quality –

•
The Eastern DFC (1839 route kilometres [RKM]) extends from Dankuni near Kolkata to Ludhiana in Punjab, while the Western DFC (1499 RKM) extends from the Jawahar Lal Nehru Port (JNPT) in Mumbai to Dadri /Rewari near Delhi.

•
A special purpose vehicle, the
Dedicated Freight Corridor Corporation of India Limited
has been set up to implement the project. Out of 10,703 ha of land to be acquired for the project, 7,768 ha (73 per cent) has already been awarded under the Railway Amendment Act (RAA) 2008.

•
The Eastern and Western DFC projects are being
funded
through a mix of bilateral/multilateral loans, gross budgetary support (GBS), and PPP. The Western DFC is being funded by the Japan International Cooperation Agency (JICA) up to 77 per cent of the total cost.

•
The Ludhiana to Mughalsarai section (1183 km) of the Eastern DFC is being funded by the World Bank up to 66 per cent of the project cost.

•
The Mughalsarai-Sonnagar sector (122 km) will be funded by Indian Railways’ own resources.Civil construction work of this sector is in progress.

•
The Dankuni-Sonnagar section (534 km) of the Eastern DFC to be funded through PPP mode.

•
After commissioning of the Eastern and Western DFCs, it is planned to upgrade the speed of passenger trains to 160-200 kmph on the existing routes. A feasibility study for upgradation of speed of passenger trains to 160-200 kmph on the existing Delhi-Mumbai route has been undertaken with co-operation from the Government of Japan in 2012-13.

Apart from the Eastern and Western DFCs, a feasibility study has also been undertaken on four
future
freight corridors, viz. East-West Corridor (Kolkata-Mumbai), North-South Corridor (Delhi-Chennai), East Coast Corridor (Kharagpur-Vijayawada) and Southern Corridor (Goa-Chennai). A pre-feasibility study of the Chennai-Bangalore Freight Corridor is also being proposed.

PPP: NEW STEPS

The GOI is promoting PPPs as ‘an effective tool for bringing private-sector efficiencies in creation of economic and social infrastructure assets’ and for ‘delivery of quality public services’. India in recent years has emerged as one of the
leading PPP markets in the world
, because of several policy and institutional initiatives. By end
December 2012
there were over 900 PPP projects in the infrastructure sector with total project cost (TPC) of Rs. 5,43,045 crore as compared to over 600 projects with TPC of Rs. 333,083 crore on 31 March 2010. These projects are at different stages of implementation, i.e. bidding, construction, and operational.

Approval of Central-sector PPP Projects:
Since its constitution in January 2006, the Public Private Partnership Appraisal Committee (PPPAC) has approved 307 central project proposals with TPC of Rs. 2,97,856.58 crore. These include NHs (242 proposals), ports (29 proposals), airports (2 proposals), tourism infrastructure (1proposal), railways (1 proposal), housing (27 proposals), and sports stadia (5 proposals).

VGF for PPP Projects:
Under the Scheme for Financial Support to PPPs in Infrastructure (Viability Gap Funding Scheme), 145 projects have been granted approval. Thirteen new sub-sectors have been included in the list of sectors eligible for VGF support under the Scheme which are –

i.
Capital investment in the creation of modern storage capacity including cold chains and post-harvest storage.

ii.
Education, health, and skill development.

iii.
Internal infrastructure in National Investment and Manufacturing Zones.

iv.
Oil/gas/liquefied natural gas (LNG) storage facility [includes City Gas distribution (CGD) network]; oil and gas pipelines (includes CGD network); irrigation (dams, channels, embankments, etc); telecommunication (fixed network) (includes optic fibre/ wire/cable networks which provide broadband /internet); telecommunication towers; terminal markets; common infrastructure in agriculture markets; and soil-testing laboratories.

Support for Project Development of PPP Projects:
The India Infrastructure Project Development Fund (IIPDF) was launched in December 2007 to facilitate quality project development for PPP projects and ensure transparency in procurement consultants and projects. So far, 51 projects have been approved.

Capacity Building and Strengthening of State and Central Institutions:
The National PPP Capacity Building Programme was launched in December 2010, and was rolled out last year in 15 States and two central training institutes, viz. the Indian Maritime University and Lal Bahadur Shastri National Academy of Administration. A comprehensive curriculum has been prepared and 11 training programmes conducted to train the ‘trainers’ who deal with PPPs in their domain.

Online Toolkits for PPP Projects:
The PPP toolkit is a web-based resource that has been designed to help improve decision-making for infrastructure PPPs in India and to improve the quality of the infrastructure PPPs that are implemented in India. In the past one year, 720 national and international users have availed of this ‘one-of-a-kind web-based resource to structure better PPP projects.

PPP Rules and PPP Policy:
Following the recommendations of the ‘Committee on Public Procurement’, the transparency and accountability in procurement, preparation of the Public Procurement Bill, competitive bid process, affordability, and value for money, the draft PPP Rules and PPP Policy have been prepared – and have undergone extensive consultation process at central and state government levels for finalization.

Global experience indicates that PPPs work well when they combine the efficiency and risk assessment of the private sector with the public purpose of the government sector. They work poorly when they rely on the efficiency and risk assessment of the government sector and the public purpose of the private sector. India should be careful not to undertake PPPs that do not apportion risks and responsibilities sensibly. Moreover, flexibility needs to be built into arrangements so that the contract can be withdrawn and put up for rebid when the private party underperforms. The government needs to study the PPP experience and build some central capacity to help ministries, authorities, and states structure contracts and renegotiate troubled ones.

STATE DISCOMS

The government in September 2012 approved the scheme for Financial Restructuring of State Distribution Companies (Discoms). The salient features of the scheme are as follows:

i.
50 per cent of the outstanding short-term liabilities up to 31 March 2012 to be taken over by state governments. This shall be first converted into bonds to be issued by Discoms to participating lenders, duly backed by state government guarantee.

ii.
Takeover of liability by state governments from Discoms in the next two to five years by way of special securities and repayment and interest payment to be done by state governments till the date of takeover.

iii.
Restructuring the balance 50 per cent short-term Loan by rescheduling loans and providing moratorium on principal.

iv.
The restructuring/reschedulement of loan is to be accompanied by concrete and measurable action by the Discoms/ states to improve their operational performance.

vi.
The GoI will provide incentive by way of grant
equal to the value
of the additional energy saved by way of accelerated AT&C loss reduction beyond the loss trajectory specified under the RAPDRP and capital reimbursement support of 25 per cent of principal repayment by the state governments on the liability taken over by the state governments under the scheme.

ECONOMIC SURVEY 2012-13 ON
INFRASTRUCTURE

The government document has provided the following inputs and advice in the area of India’s infrastructure sector –

•
The
12thPlan
lays special emphasis on development of the infrastructure sector including:

-
Energy, as the availability of quality infrastructure is important not only for sustaining high growth but also ensuring that the growth is inclusive.

-
The total investment in the infrastructure sector during the Plan, estimated at Rs. 56.3 lakh crore (approx. US$1trillion), will be nearly double that made during the 11th Plan.

-
This step up in investment will be feasible primarily because of enlarged private-sector participation that is envisaged.

•
Unbundling of infrastructure projects,
public private partnerships
(PPP), and more transparent regulatory mechanisms have induced private investors to increase their participation in infrastructure sectors:

-
Their share in infrastructure investment increased from 22 per cent in the 10th Plan to 38 per cent in the 11th Plan and is expected to be about 48 per cent during the 12th Plan.

-
Yet, more than half of the resources required for infrastructure would need to come from the public sector, from the government, and the parastatals.

-
This would require not only the creation of the fiscal space but also use of a
rational pricing policy
.

-
Scaling up private-sector participation on a sustainable basis will require
redefining the contours of their participation
for the development of infrastructure sector in a transparent and objective manner with a comprehensive regulatory mechanism in place.

-
From a
macroeconomic perspective
, a high level of investment in the infrastructure sector is essential for the overall revival of investment climate which may finally lead to sustainable growth in an economy.

-
However, in the current macroeconomic environment, to achieve this objective, there is need to address sector-specific issues over the mediumto long-term horizon in India.

•
There is an
overall shortage of power
in the country both in terms of energy deficit and peak shortage:

-
At present, overall energy deficit is about 8.6 per cent and peak shortage of power is about 9.0 per cent.

-
The 11th Plan added 55,000 MW of generation capacity which was more than twice the capacity added in the 10th Plan.

-
The 12th Plan aims to add another 88, 000 MW.

-
Delivery of this additional capacity would critically depend on resolving
fuel
availability problems, especially when
about half
the generated capacity is expected to come from the private sector.

-
The private developers may not be able to finance the projects if
coal linkages
are not resolved and there are delays in finalization of fuel supply agreements (FSAs).

-
While some decisions have been taken for restructuring Discoms’ finances, these may need to be monitored and implemented in spirit.

•
Although India has large
coal
reserves, demand for coal is substantially outpacing its domestic availability, with Coal India Ltd. not being able to meet its coal production targets in the 11th Plan: