No Longer The Flavour Of The Month

If one were to judge by the turnout alone, the visit of the cabinet secretary, T S R Subramaniam, and a delegation of secretaries from the central ministries of power, surface transport, energy and petroleum, to the US was a roaring success. No less than 195 people attended a meeting organised by the US-India Business Council in Washington on June 12, of whom at least two-thirds were senior managers of some of the largest companies in the US. But at the end of a long day, the feeling that most of the potential investors took home with them was one of disappointment. None of them doubted that India was keen to attract foreign investment. But at least in the power, roads and ports sectors, investors went home with the feeling that nothing had changed.

 

Some of the reasons for the let-down were not hard to divise: The mere fact that the prime minister had decided to send another delegation led by the cabinet secretary, the first since 1992, was seen as an attempt to send a message to the investing community. What is more, before the delegation came, the newspapers had reported that it was carrying with it proposals for no less than $12 billion worth of investment. But during the meeting all that the Indian delegation presented was yet another outline of Indias investment requirements, some sketchy data on costs, especially for road projects, and a detailed presentation of the policy changes that the government had made, or was making, to make India more investor-friendly. The information was far better martialled and presented than at any time in the past, but in the end, it left the American investors cold.

The discussions on power provide a good illustration of why this happened. Two issues dominated them: the supply of liquid fuel for power plants, and making sure that consumers paid their bills, thereby ensuring the safety of their investment. On the first, the government reiterated that it had no intention of lifting the ceiling of 12,000 mw for naphtha-based power plants, and allowing investors to make their own arrangements.

On the paying capacity of the consumers, the cabinet secretary reiterated that investment in power plants was now the concern of the state governments, and that the Centre would not offer any counter-guarantees for commitments made by them to the investors. He also made it clear that the investors would not, as a rule, be allowed to sell their power directly to consumers, but would have to sell it to the state electricity boards. By way of reassurance he told the assembled businessmen that the central government was framing new legislation that would bar state governments from giving away power to farmers and other consumers and compel them to recover a minimum of half of the cost of generation from all consumers. The delegation also pointed out that more and more states were improving the collection of power dues by farming it out to private companies.

Instead of reassuring the investors, these statements had the opposite effect, for they showed that no matter what policy changes the government announced, in the end the Indian economy remained wedded to dirigisme, because the bureaucracy had no intention of giving up its power to direct the economy. In private conversations they pointed out that each and every one of the controls the government was insisting on maintaining was not only unnecessary but would have the opposite of the desired effect. For instance, its decision to put a ceiling on the issue of licenses to use naphtha and to award naphtha quotas to the state governments, had immediately brought back the most detestable features of the license and permit raj. Many of them were made not on the basis of need, or capability, but to the advantage of middlemen with political links in the state capitals. One American investor who had been contemplating investment in such plants was approached by no less than three license holders from Tamil Nadu with

offers to sell their quotas.

One result was that the capacity based on naphtha that would actually be created would fall far short of the target. Mr Subramaniam had conceded this and expressed the hope that in the end the about 8,000 mw of naphtha-based power generating capacity would be established. But American investors (all of whom spoke to me on condition that they would not be quoted directly) were unanimously of the view that only about 5,000 mw of the licenses had gone to genuine investors.

The absurdity of the liquid fuel ceiling was that it was not even remotely necessary. If every one had rushed into naphtha-based projects, naphtha prices in both the domestic and international markets would have risen and established a cut-off point beyond which power generation from naphtha would have been uneconomic. In fact, with this possibility in mind everyone who went in for naphtha would have planned his project to switch to gas as soon as possible. All that state governments needed to do was to establish the price they were willing to pay for the power and leave the market to determine at what point naphtha would become uneconomical.

So great is the gap in perceptions that while the government regards its decision to delegate the approval of all projects below 250 mw in size to the state governments as an important step forward, American investors see it as a large step backwards. In a few years, they point out, the country will be littered with scores of small, high cost power plants. How will these be fed with the fuel they will need? Gas-based plants, the only kind that will be economic in the west and south of the country, will be too small to justify the construction of a pipeline and will have to be supplied continuously by tankers. But where are the roads on which the tankers will travel? Coal-based plants will only be economical within a specified distance of the collieries. Even these will pose enormous problems if they are not sited on existing railway lines.

The single common feature in all these decisions, is that they involve a significant increase in the dirigiste powers of bureaucrats at all levels. The cabinet secretarys delegation therefore succeeded in creating precisely the opposite of the impression they had wanted to convey. Far from being rolled back, the command economy is being born once again.