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Of Free Power and Red Tape

June 14th, 2004 · No Comments

There were two interesting articles in the Sunday Times of India.

Swaminathan Anklesaria Aiyar wrote:

Free power for farmers is not free at all: it is paid for through greater illiteracy, ill-health, unemployment and lack of road connectivity for the poorest, remotest areas. Free power is a cancer that spreads and has many other ill-effects. Consider these in turn.

First, because power is free but intermittent, many farmers do not bother to switch off their pump-sets. So they end up consuming power that they do not need, at the cost of those that do.

Second, many farmers have obsolete, power-guzzling pump-sets, but do not replace them with energy-efficient ones because power is free. If power is priced correctly, farmers will have an incentive to replace energy-guzzlers with energy-conserving equipment.

Third, free power encourages water-guzzling crops, and so can be environmentally disastrous. Low-rainfall areas like Punjab and Haryana simply should not be growing water-intensive crops like rice. Pumping water for such crops causes the water table to fall inexorably. These states urgently need to revert in the kharif season to crops like maize, which need much less water.

But as long as water is free, farmers will opt for rice. The high price of rice reflects the huge amount of water it requires, yet the cost of water is not felt at all by the farmer, only by the environment. In effect, the farmer is being subsidised to ruin the environment. Not just Punjab and Haryana, even other low-rainfall states like Maharashtra grow water-guzzling crops like sugar-cane that should only be grown in heavy-rainfall regions.

Fourth, free power deprives the poor of drinking water and small farmers of irrigation. When the water table falls because of over-pumping, no water is left in shallow dug wells supplying drinking water and small-scale irrigation for small farms. Millions of those that can least afford it have been deprived of water this way.

Fifth, as the water table falls further, shallow tubewells run dry. So medium-sized farmers are also hit. Ultimately the deepest tubewells, affordable only by the rich, are the only ones that can still tap the water table. A recent World Bank analysis of power subsidies in Andhra Pradesh showed that large farmers got an implicit subsidy of over Rs 50,000 per year, small farmers got around Rs 8,000 a year, and landless labourers got nothing at all.

Sixth, shallow tubewells are fitted with inexpensive centrifugal pumps, affordable by small farmers. But such pumps can lift water only from a depth of 30 feet or so. When the water table falls further, lakhs of centrifugal pumps are render unusable. They have to be replaced by expensive submersi-ble pumps. This constitutes a huge waste of existing equipment and an enormous, avoidable cost in new submersible pumps.

Gurcharan Das wrote about his experiences giving a presentation on India to 15 members of the Billionaires Club in Chicago:

I got up and unabashedly sold India for 45 minutes. Before concluding, I asked these worthies why they preferred to invest in China . One of them gently corrected me, Forget China , we have much greater investments than India in smaller countries like Thailand , Malaysia , Vietnam . I asked, Why? Dont you like us?

We love India , but we hate your red tape. Over the next thirty sobering minutes I bit the dust, as I heard one horror story after another about India s officialdom. The owner of one of the worlds largest hotel chains described how it took 5 years to get land access to his hotel in Mumbai. Another spoke about his humiliation by the Reserve Bank. In other countries we deal with banks, but why are we forced to deal with the central bank in India ?

Someone described how his factory was delayed by two months because he refused to bribe the engineer from the SEB. Another complained about our central excise and customs officials. The owner of an FII said, Portfolio investors dont take the Mauritius route to evade Indian taxes we do it to avoid dealing with your tax officials. To drive the point home, the group contrasted the welcoming behaviour of Chinese officials, who they said were also corrupt, but had created a business friendly environment.

A second reason for India s weak FDI performance, they pointed out, was our infrastructure, a point that Jeff Immelt, G.E.s boss, also made in Bombay recently. In the nineties, China s energy sector grew 20 times that of India , and transport market 8 times, he said. On the other hand, the billionaires were hugely impressed with Indias human capital, and one of them recounted how Indians had upgraded Russian planes brilliantly with Indian avionics, and this has impressed the hell out the American defence establishment.

Face it, Mr Das, Indians are a great people, but your red tape is the killer, was the conclusion. I had tried to put up a brave front in the meeting, but as I trudged back to my hotel I had a sickening feeling in my stomach. I consoled myself thinking, why does it matter to India s poor what 15 rich Americans think? But I knew in my heart that it did matter if these men invested, others would follow. And this would create jobs, bring technology, make India competitive, bring revenues to the government, and this in turn would make it possible to invest in village primary schools and health centres. This is how China has been lifting its poor, and this is why P. Chidambaram so desperately wants foreign investment.

In their own way, the two columns illustrate what’s wrong with India and what we need to do to really get to Shining.

Tags: Emerging Markets

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