Dr Subhash Chandra Pandey–Aug 11, 2022 

Sri Lanka is facing its worst economic crisis since independence in 1948. It plunged into deep political crisis as protesters stormed Presidential palace after setting ablaze PM’s private home. Months of raging public anger against rising prices and shortages of food, fuel, medicines and other essentials culminated in these scary scenes of anarchy.

After Sri Lanka emerged from a 26-year long civil war in 2009, it showed healthy GDP growth of 8-9% pa till 2012 but then growth rate almost halved after 2013 as global commodity prices fell and trade deficits rose.

The island country of 2.2 crore people is heavily dependent on foreign exchange earnings by way of tourism, remittances from overseas workers and tea /rubber/apparel exports.

Country’s tourism-dependent economy was badly hit after Easter bomb blasts of April 2019 in churches in Colombo and later the Covid led to serious drop in tourist arrivals.

The problem was further compounded by build-up of huge government debt, rising oil prices and a ban on import of chemical fertilisers (due to shortage of foreign exchange to finance imports) last year that devastated agriculture.

President Gotabaya Rajapaksa had promised lower tax rates and subsidies for farmers during 2019 election campaign and quick implementation of these ill-advised promises exacerbated fiscal deficit. Big tax cuts introduced in 2019 led to government losing more than $1.4bn a year.

In 2021, all fertiliser imports were completely banned and it was declared that Sri Lanka would become a 100% organic farming nation overnight. This overnight shift to organic fertilisers heavily impacted food production. In part, the ban was imposed to save dollars needed for fertiliser imports ! and dollars were needed for servicing foreign debt, notably to China!

When Sri Lanka’s foreign currency shortages became a serious problem in early 2021, the government tried to limit them by banning imports of chemical fertiliser. The fertiliser ban (reversed in November 2021) also seriously hurt tea and rubber exports.
The government has incurred huge foreign debts to fund what critics call unviable infrastructure projects.

Sri Lanka’s total external debt is estimated to be about $51bn and annually needs over $6bn for debt servicing. In contrast, Sri Lanka had $7.6bn in foreign currency reserves by end of 2019. By March 2020, reserves fell to $1.93bn. Recently the government said it had just $50m left.

Sri Lanka earned about $4bn from tourism in 2019 which dropped by 90% due to the pandemic! Its foreign exchange reserves dropped to just about $1.6bn by the end of November, only enough to pay for just a few weeks of imports. The government was forced to restrict import of essential commodities including food in a desperate bid to save dollars.

High global oil / food prices and cost of shipping especially after Russia Ukraine conflict tripped Sri Lanka totally off balance.

Debt to GDP ratio rose from 94% in 2019 to 119% in 2021. Over 10% fiscal deficit in 2020-21 in covid-hit, import dependent and heavily indebted economy resulted in over 15% inflation and serious shortages of food and fuel. A few days’ petrol/diesel left, not enough to even run essential services.

Amidst depreciating currency and rapidly depleting forex reserves an economic emergency as declared to contain rising food prices.
After taking a $2.6 billion loan from the IMF in 2009, it again approached the IMF in 2016 for another US$1.5 billion loan.

Some ill-informed, rather irresponsible and politically motivated commentators have been (rather gleefully!) quick to suggest that India may also witness such scenes soon. Such fear mongering is absolutely baseless.

India had indeed landed in a somewhat precarious economic crisis in 1991 when at one point we had less than 1 billion US dollars in our reserves; just enough to pay for 15 days of imports!

We were on verge of default on international loans but we rose to the occasion. We were quick to rise on our feet. We pledged gold to raise emergency loan followed by IMF loans and have since travelled a lot of distance on the path to progress.

India’s foreign exchange reserves stood at $588 billion on July 1. No doubt all emerging economies are under pressure. Our forex reserve dipped by $5 billion in the week ending July 1 prompting RBI to launch fresh remedial measures. However, our granaries are overflowing and we are slowly switching energy mix and decarbonising economy to slowly reduce dependence on imported crude oil and foreign debt is less than 5% of total public debt.

India is trying to help Sri Lanka by extending credit lines, selling food and fuel on credit and also outright aid. India has signalled its willingness to go beyond the $4bn in loans, currency swaps and aid already provided to Sri Lanka when about $5bn are needed in the next six months to cover basic necessities for people struggling with long queues worsening shortages and power cuts.

So any suggestion that India is in the same boat as Sri Lanka is patently mischievous political propaganda. India is indeed part of the rescue team.

Under the Agnipath scheme announced on Tuesday for restructuring the recruitment of soldiers/sailors/airmen into the 3 Defence Forces, about 50,000 persons in the age group of 17.5 to 21 years can expect to be recruited annually as AGNIVEERs initially for a four-years’ tenure with six months’ training. Of these, 25% AGNIVEERs will be retained for longer tenure of 15 years as part of regular service and remaining 75% would be discharged.
Those serving only 4 years initial tenure called TOUR OF DUTY will not be entitled to pensionary benefits but a severance package/contributory fund corpus. However, the government has assured that they will be re-employed in other government jobs, especially preferential absorption in central paramilitary forces.

The scheme will help cut the salary and pension bill of the armed forces and will therefore actually help speed up recruitments that are otherwise getting delayed for want of funds. Annual recruitments are expected to be about 45000-50000.

From the job aspirants’ viewpoint, the move obviously is disappointing. Instead of being assured of a pensionable service from the first day of joining Army/Navy/Air Force, these aspirants have to compete with fellow entrants for first 4 years in the hope of being part of the 25% lot that gets to serve longer. 75% elimination after 4 years training and active service is a tough competition for those seeking long-term jobs with the Defence Services.
However, the alternative to AGNIPATH scheme is status quo ante which means slower recruitment.

The Armed Forces of a country typically comprise of 3 segments; those in ACTIVE MILITARY SERVICE, those forming part of MILITARY RESERVE and those serving the PARAMILITARY FORCES.

According to data accessed from the World Population Review, China’s active military strength (21.85 lakh) is the largest followed by India (14.56 lakhs). However, including reserve forces and paramilitary forces, India has the largest armed force level (51.38 lakh) followed by China (40.15 lakh).
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So India has one of the largest volunteer Army while many countries have to depend on system of conscription – legally mandated obligation of all youth to serve the military for minimum number of years.

We all know that India is a young nation, 65% under age 35 and may be the youngest nation by 2030. That there are unemployed, under-employed and unemployable youth cannot be denied. What do we offer to them? How do we keep them engaged to contain frustration arising out of expectations in the face of overwhelming numbers?
On Tuesday, the Centre also announced plans to recruit 10 lakh persons over the next one-and-a-half years. Both the moves are aimed at increasing public employment.

Livelihoods will come from new investments, revival of businesses and labor reforms that pit organized workers interest against unorganized workers, from skill upgradation, efficiency, quality and productivity. Abusing the job creators and hoping that government will keep doling out freebies will not get jobs – white collar jobs, blue collar jobs and collarless jobs – is not going to help armchair critics or to those who look up to them.

The policy dilemma on State vs youth is not new. We would like to wean away youth from the path of self destruction, from drugs and delinquency and despair. How?

We have several schemes in place to engage the youth in constructive work till they get regular employment and even as a parallel voluntary effort, both for national development in civil arena and as feeder to Armed Forces. We have developed several education-employment bridge systems – mechanisms and institutions – to channelise youth energy for voluntary action and shaping them before they take the plunge. We have Internship, Research Associates and Young Professional type engagements in White collar jobs. We have Apprenticeship Act to prepare them for blue collar work in manufacturing premises. We have Sainik schools, NCC, NSS, BSG, SSC to those inclined for disciplined community service.

National Service Scheme was launched in 1969. Dr. S. Radhakrishnan, our former President, had recommended – as head of UGC – the introduction of voluntary national service in academic institutions Commission. In 1958, Pd Nehru wrote to the chief ministers floating the idea of social service as a prerequisite for graduation. The NSS programme aims to instil the idea of social welfare in students, and to provide service to society without bias. It is purely voluntary effort under Ministry of Youth Affairs.

Nehru Yuva Kendras were established in the year 1972 with the objective of providing rural youth avenues to take part in the process of nation building as well providing opportunities for the development of their personality and skills. In 1987-88, Nehru Yuva Kendra Sangathan(NYKS) was set up under the Ministry of Youth Affairs and Sports.

Scouting for native Indian students was started in 1913 by Justice Vivian Bose, Pandit Madan Mohan Malaviya, Pandit Hridayanath Kunzru, Girija Shankar Bajpai, Annie Besant and George Arundale. Bharat Scouts and Guides was formed in 1950 by merger of the Boy Scouts Association and the Hindustan Scout Association. In 1951, the All India Girl Guides Association joined this new organisation. BSG has over 57 lakh members.

The National Cadet Corps, NCC under Ministry of Defence is world’s largest uniformed youth organization. It was formed the NCC Act of 1948. Its history can be traced back to the ‘University Corps’ created under the Indian Defence Act 1917 to make up for the shortage in the Army. NCC has over 13 lakhs members.

Some countries have mandatory military service (conscription) for youth. We don’t have such a system. Ours is a volunteer Army. The scheme of Short Service Commission gives many an opportunity to serve for minimum 10 years with options to either leave or opt for Permanent Commission or to opt for an extension of four more years of service. The SSC officers neither get pension nor the medical support under the ex-servicemen Contributory Health Scheme and almost all who opt for permanent commission get it.

In general, those with background of Defence Forces have brighter chances of acceptance and success when they join business or any civil arena. Some business houses have said they welcome ex Defence personnel.

Army job aspirants have understandably reacted with frustration. Public anger is palpable at denial of pensionary benefits when they point out that MPs and MLAs get lifetime pension with shorter service period. Some Army officers have also opined that 4 years is too short a period for short-term contract in Defence Services and it will strain the training infrastructure and perhaps the morale and quality of fighting forces.

However, experts also agree that the Defence Forces need rationalisation and modernisation, correction in the teeth and tail ratio. Reforms are not popular precisely because status quo is disturbed and change is resisted.

It is reported that roughly 80% of service personnel in the US retire without a pension. Also, China did much more over the last 8 years, pruning its land-based army by 50% while boosting its Navy and Air Force. PLA retrenched 3 lakh troops. By these metrics, India’s recruitment reform is not radical. India will need more resources than what it saves from rationalised recruitment.

In 2022-23, the total budget of Ministry of Defence is Rs.525,166 crore including about Rs.120,000 crore on defence pensions. The Ministry’s budget is about 1/8th of total Central government budget.

AGNIPATH scheme is a balancing act between the interests of past, present and future defence personnel. If salaries and pension burden for past and present personnel becomes burdensome to exchequer, it will reflect in either slower recruitment or thinned down entitlements for future personnel.

Youth are angry because it is essentially an issue of inter-generational equity: Present generation living at the expense of future generation. There are no easy answers because the action lies with the present generation.

Anybody who is pushing the youth to the alleys of darkness and despair through negative politics needs lot of prayers to regain sanity. Let us be constructive/helpful and stop spreading negativity, especially when dealing with the youth.

Choice is stark: recruitment with lower benefits or no/low recruitment. Details can be quibbled but not the need of such reforms.

Since April last year, WPI has been above 10% every month.

This is not the first year when the country has faced double-digit inflation but sources and duration have been different.

Prices can rise due to multiple reasons. A drought, flood or pandemic affecting production/supply of goods can create demand-supply mismatch. An abundant supply of cheap credit can fuel demand-push inflation –too much money chasing too few goods. Emergence of monopoly producers with pricing power can push up prices. High taxation can push up prices. High cost of imported crude oil can push up prices.

While many of these factors were already at work, the Russia-Ukraine conflict, resultant food shortage and crude oil price hike has resulted in global inflation surge. There are dominant concerns on inflation despite some other short-term gains. Inflation is indeed causing worry now.

As the pandemic ebbs, there has been heavy demand surge while the production and logistics that got stalled during pandemic is yet to pick up fully creating a demand supply gap. Inflation on the inputs side is being passed on by manufacturers to the output prices.

As the margins of the manufacturers have been under pressure due to rising input costs, transportation, and logistics, they are passing on these into their output prices leading to higher inflation in manufactured products. The higher input costs, especially of raw materials, have aggravated due to the Russia-Ukraine conflict.

Who can remedy the situation and how?

The Reserve Bank of India controls the extent of supply of money/credit in the market keeping in mind several factors like the foreign currency exchange rate and inflation.

To some extent, the RBI can control demand push inflation if it is caused by excessive money supply.

However, if the production fails, if the logistics fails or if the monopoly producers dictate prices or if the prices go up due to taxation, there is little that the RBI can do.

This is a short comment on the ‘inflation targeting’ by the RBI.

In 2016, the Reserve Bank of India Act, 1934 was amended and a whole new chapter was added on ‘Monetary Policy’.

One of the newly inserted provision in the Act (Section 45ZA) introduced a system of Inflation target. It mandated that tThe Central Government shall, in consultation with the RBI, determine the inflation target in terms of the Consumer Price Index(CP)I), once in every five years. A Monetary Policy Committee and a mandatory Monetary Policy Report was introduced.

The Act stipulated that if the RBI fails to meet the inflation target, it shall set out in a report to the Central Government— (a) the reasons for failure to achieve the inflation target; (b) remedial actions proposed to be taken by the Bank; and (c) an estimate of the time-period within which the inflation target shall be achieved pursuant to timely implementation of proposed remedial actions.

For the five years 2016-21, the government notified consumer price inflation target of 4 percent with toleration deviation in the range of 2 percent to 6 percent. The same target has been extended for next 5 years.

The CPI has now breached 6%. As per the law, the RBI has to ‘explain’ to the government why it is so?

CPI has a large weight of food and fuel prices which are out of the control of RBI. RBI cannot control either international crude prices nor petrol products’ taxation nor food supply disruption due to bad weather. Food and fuel demand is not much influenced by cost and availability of bank credit! (Does one buy more food and fuel if more low-cost bank credit is available? No)

WPI pertains to only goods, not services. So, the WPI basically captures the average movement of wholesale prices of goods and is used for comparing changes in Gross Domestic Product (GDP) at current market prices.

GST collections have been growing in recent months sowing the success of government in cracking down on tax evasion. One fall out of this crackdown is that prices go up because what was being sold earlier without tax on kutcha bills is now being forced to be sold on pucca bills. So in a way tax evasion and inflation are inversely related.

Let us hope that increased tax collections, increased tax compliances nudges the government to lower tax rates. A beginning has been made by reduction in Central taxes on petroleum products. Rationalisation of GST rates is awaited.

A barrage of news about rising electricity consumption, rising international price of coal and shortage of coal with power plants have raised fears of an impending power crisis. Hundreds of regular passenger trains have been cancelled to fast track movement of coal. Post-pandemic surge in electricity demand, soaring temperature and import disruption all have contributed to a near panic situation.

The first thing to note that there is neither shortage of domestic coal production nor electricity generation. The scenario is result of temporary spike in electricity demand supply gap. Low coal stocks with thermal power plants does not mean shortage of coal in the country.

Here is the big picture; facts that speak for themselves. There is absolutely no shortage of power if people are willing to pay its price, both in terms of cash and health.

At end February 2022, India had 181 coal based power plants with total capacity of 204 GW. Coal & lignite based electricity generation capacity was 210 GW out of the total capacity of 395 GW ( about 53% ) at end March 2022. We plan to reduce the share of coal & lignite based thermal projects to 32% of total capacity by 2030 to reduce carbon emissions.

Energy demand has shot up worldwide as economic activity picks up post-pandemic. As vaccination gathers pace and pandemic restrictions are whittled down, people and nations are playing catch-up.

During April-September 2019, India’s electricity consumption was 68100 crore units (kwh). It fell down 62500 crore in April-Sept 2020, mainly during the lockdown months of April-May 2020.

However, electricity consumption during April-Sept 2021 jumped to 71500 crore units, more than the pre-covid level even though there was a distressing second wave in April-May 2021 and the tour/travel/hospitality industry is not yet back to pre-covid level. Air/rail travel was not by then fully restored. Since then, there has been steady revival and acceleration of travel and other economic activities leading to a surge in electricity demand.

Increase in electricity demand is a positive sign indicating economic recovery. Increased coverage of households with access to electricity connection have brought new electricity consumers in the market. Growing digital economy also contributes to rising demand.

A welcome surge in electricity demand has raised supply concerns especially as all indications are further increase in electricity demand in coming months.

Since 2013, total primary energy consumption in India has been the third highest in the world after China and the United States.

Total power generation installed capacity in India has increased from 243 GW in March 2014 to 320 GW in March 2017 to 395 GW by March 2022. Out of this, 210 GW is coal/lignite fired thermal power (52%), 25 MW Gas-based thermal, 46 GW is from large hydroelectric projects, 45 GW from Solar, 40 GW from Wind power and 6.8 GW Nuclear

Renewable energy capacity is about 37% of total and India will reach 40% renewable energy capacity well before 2030 as per target accepted under 2015 Paris Climate Change agreement.

Although coal-based power plants contribute only about 53% of installed electricity generation capacity, these plants meet almost 75 per cent of total electricity demand.

(Renewable energy generation cannot be sustained on 24×7 basis unless big investments are made in electricity storage technologies. It also has limitations on ability to supply steady-voltage continuous supply required by specialised manufacturing industries.)

So even though we have made impressing gains in expanding solar power, we are still largely dependent on coal for electricity.

Our domestic production of coal is about 730 MMT and we annually import over 300 MMT. Electricity sector accounts for about 2/3rd of total coal consumption.  About 550 MMT domestic and 50 MMT imported coal is used by thermal power plants every year. In 2021-22, coal imports have drastically come down (about 23MMT during April 21-January 22).

India is the second largest coal consumer after China. International prices of coal have risen recently for two reasons. Sharper increase in gas prices mean that countries are increasing dependence on cheaper coal-based thermal plants.

China is facing increased electricity demand in post-pandemic economic recovery and in a trade war with Australia, China stopped coal imports from Australia, one of the major exporters of coal.

Coal makes up nearly 60% of China’s energy consumption. Increased coal/power demand from China has set coal prices soaring high and many coastal power plants depending on (previously cheaper) coal imports are now switching to domestic coal in India.

For import dependent Indian power producers, it is costlier to import longer haul Australian coal than shorter haul Indonesian coal that is increasingly getting diverted to China.

The net result of all this is higher demand for coal, higher price for coal and resultant financial stress on power generating companies.

There have been temporary supply disruptions (monsoon-related) in coal mining and transportation. The coal supply position is steadily improving but there are basic issues to be addressed to ensure long term health of the power sector which is victim to populism. That basic issue is of financial distress on power generating companies.

Coal supply is a temporary problem. There is enough coal and production/transport will increase once monsoon woes are over.

In October 2021, power generating companies owed about Rs.20,000 crore to Coal India Limited alone.

Thermal plants are expected to have stock of 20 days requirement but many power producers don’t have money to stock coal because they have themselves not been paid by discoms for power supplied. Discoms are cash starved because tariffs don’t cover all costs, many consumers don’t pay their bills or delay payment. Power theft and leakage through unmetered supply continues to be rather high.

This is all reflected in discoms inability to pay to power producers.

Power producers give 45 days’ credit to Electricity Distribution companies (discoms). If the dues are not cleared in 45 days, outstanding dues are called ‘overdues’ liable to charge of penal interest.

As per yesterday’s report by the Power Ministry, the power distribution companies owed as much as Rs.102,006  crore at the beginning of April 2022 which increased to Rs. 108,751 crore by yesterday. The outstanding was Rs. 95,717 crore at end December 2021.

So if coal companies have to recover an amount in the range of Rs.20,000 crore from power generating companies, will it make sense for it to produce more coal and supply on credit? If power generating companies have to recover 5 times more amount from power distribution companies, can they continue production? Does it make sense for them to improve plant load factor and produce more electricity to supply on credit?

That is THE REAL problem.

The discom reform scheme UDAY ended in 2019-20 with most of the states failing to meet their stipulated targets.

On 1st July, 2021 Centre has launched a new scheme of ‘Reforms-based and Results-linked, Revamped Distribution Sector Scheme’ to provide conditional financial assistance to discoms for strengthening of supply infrastructure. The scheme with total outlay of Rs.3,03,758 crore will involve Central government budget support of Rs.97,631 crore by 2024-25.

All existing power sector reform schemes namely DDUGJY, IPDS, PM-KUSUM scheme would be subsumed into this new umbrella program.

Among the many contemplated reforms is a measure to create separate feeder for agricultural electricity supply, expansion of network of solar run irrigation systems. Other pending electricity reforms are removal of cross subsidies and open access, introducing competition by allowing consumers choice of electricity supplier.

States are presently administering two types of cross subsidy arrangements. One is between high-end and low-end household consumers and the other is between household consumers on one hand and industrial/commercial consumers on the other.

There are just too many consumer categories and tariff lines – slabs and fixed charges, making electricity pricing quite complex and non-transparent. On top of tariffs fixed by ‘independent regulators’, States levy Electricity Duty (as it is not subsumed in GST) which ranges from 0% to 70% for certain categories of consumers.

Cross-subsidy burden on industry is particularly problematic because it adversely affects cost competitiveness – manufacturing and exports and resultant job creation.

The installed power generation capacity in the country is more than the total demand but power producers are forced to cut production because they are not getting paid in time for power supplied. The action for clearing the consumer dues for electricity supply rests with the State governments.

It is frustrating that these reforms are getting delayed and deferred. Any myopic politics will sap the nation of energy in the long run.