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No haven for coal miners

In its latest review of the Indian economy, the Prime Minister’s Economic Advisory Council headed by C Rangarajan has pointed out two main structural aspects of the Indian economy and has asked for corrective actions.

Referring to the large oil and gas imports bill, the Council has specially emphasised improving energy availability in the country as energy shortages, leading to imports of oil and gas, are directly contributing to a burgeoning trade deficit.

The Council observed there is a close link between our dependence on imports of oil and natural gas and our external payments situation. Hence, steps should be taken to improve the energy economy in all aspects-production, transformation and final use. The conditions for exploration and production of hydrocarbons must be improved to increase domestic supply.

Facilitating an increase in domestic coal production will make a substantial difference. It is an irony that despite having the world’s fourth largest coal reserves, the country is obliged to import coal. Not only that, the Planning Commission in its draft Twelfth Five year Plan document envisages coal imports of 200 million tonnes by the terminal year of the Plan.

It is therefore fitting that the Council should emphasise development of the domestic energy sector for raising energy availability. What is important for development of the energy sector, however, is free market pricing of energy resources which alone can provide adequate incentive for investment in exploration and development of energy resources.  Currently, energy prices are controlled through subterfuges, while the government promises to free up the prices of petroleum and natural gas. The domestic gas producers for example get a price of $4.20 per mmbtu, while imported LNG costs anything between $14 and $22 per mmbtu depending on the country from which it is being imported.

The second aspect highlighted by the Council in its report is that productivity of capital has declined sharply. Overall economic growth is expected to rise to 6.4 per cent in 2013-2014 from five per cent in the previous year. Investment and savings rates have come down. ‘But economic growth has declined more steeply than what is warranted by the decline in investment’ the council pointed out.

The main reason for this is that while capital assets have been formed, counterpart output has not flowed into the economy. Capital accumulated in projects is not yielding commensurate output, as the implementation of projects has slowed.

The incremental capital-output ratio (ICOR) is variously computed to be between 2011-2012 and 2012-2013 5.6 per cent to 11 per cent, rising from the historical four per cent. This will mean that more investment will be required to get the same level of growth than previously.

It appears that investment capital accumulated in projects is not yielding commensurate output as many of large projects are stuck in clearances even though initial investments have been made.

The Council has suggested that implementing key infrastructure projects in railways, ports, coal mining, roads projects should help in reviving investment and growth. Pursuing such projects through the public private partnership mode should contribute to speedy implementation of projects. The constitution of the Cabinet committee on project investments was a move in the right direction. Controlling the rising current account deficit is the main concern for the external sector, with deficit touching historical levels.

Current Account Deficit is estimated to be $94 billion (5.1 per cent of GDP) in 2012-2013 and is projected to be $100 billion (4.7 per cent of GDP) in 2013-2014. Merchandise trade deficit is estimated to be $200 billion (10.9 per cent of the GDP) in 2012-2013 and is projected to be $213 billion (9.9 per cent of GDP) in 2013-2014. The council has urged raising exports to bring down the CAD.

However, it relies on two more action agenda for achieving sustainable external deficit. Firstly, the Council has urged completion of the fuel subsidy reforms so that fuel prices reflect true landed costs. Secondly, it has called for steps to curb demand for gold imports.  In this context, the Council feels that once inflation is contained within tolerable limits, the demand for gold should come down and thus offer immediate relief for trade deficit.

Needless to say, PMEAC has examined the trends in fiscal deficit. But it is hopefully that the budget has laid out a roadmap for fiscal correction. ‘The budget has laid firm foundations for the process of fiscal consolidation which should help in achieving high growth in a sustained way.’

Of course, what the PMEAC is articulating in its report is well known. The million dollar question is how will implement these. It is clear that to control CAD the difficult route would be to substantially increase exports. The more reasonable option should be to what the Council has said about raising domestic production of energy. Nevertheless, timely project clearance appears to be the biggest hindrance. It is the government which needs to brace up if the economy is to go full steam. (IPA)
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