Energy can play a spoilsport in increasing manufacturing share
V. Raghuraman July 22, 2011Manufacturing constitutes 30 per cent of China's GDP, as opposed to India's 16 per cent. The aspiration is to increase the share of manufacturing in India to 25 per cent of GDP by 2025. Energy, as a significant input, could play the party pooper.
Asian economies, including China, have incentivised industry with lower electricity tariffs and energy costs to boost exports. Thus the Chinese industry accounts for 74 per cent of the country's electricity consumption, while in India it is 45 per cent, 30 per cent of which is met by captive generation, predominately diesel generator sets. Industrial tariffs are the highest and captive diesel generation is three times more expensive.
The high cost of electricity is dissuading investors from energy intensive projects like silicon fabrication - a vital input for the success of the National Solar Mission. The power sector has continuously underperformed in the past two decades, with capacity additions less than 40 per cent of the planned targets. Even with such low power capacity addition, there are coal shortages. It is reported that 17,000 MW capacity is not utilised due to non-availability of coal. In successive plans, Coal India and independent power producers have not been able to get mining projects allotted in time and there are inordinate delays in environment and forest clearances. While coal production needs to be increased eight to 10 per cent every year, the achievement is less than five to six per cent. The country is investing more in exploration of oil and gas than in the coal sector.
It is easier to acquire and develop mines in Australia and Indonesia with predictable timeframes along with the required port and rail infrastructure. But getting coal from outside is expensive and has implications on energy security. Indonesia has recently tightened the conditions on exports and pricing. Long-term coal contracts are not possible. Thus imported coal is likely to be 50 per cent more expensive, with additional challenges of port capacity and rail linkages.
Natural gas availability, allocation and pricing issues continue to fester. Natural gas grid and terminals need to be operationalised at the earliest and industries encouraged to set up co-generation, tri-generation plants for captive power generation to relieve the pressure on diesel. This will smoothen power load and help utilities avoid putting up redundant capacities.
States are reluctant to follow central guidelines to operationalise the 'Open Access' provisions of the Electricity Act. Captive power and renewable power are not allowed to move freely between states. States are resorting to "load-shedding" even when power is available from the power exchanges due to high costs; in fact, last year 10,000 MW capacity was not utilised. Transmission bottlenecks to uplink renewable power, especially wind power, exist in several areas.
Industries which set up captive plants due to power shortages and are already incurring high costs of self-generation are further subject to self-generation tax, parallel operating charges, etc. Added to this, unreasonable wheeling and banking charges stymie industry. States need to rethink and remove these irritants to encourage manufacturing investments.
The dream of India turning into a low-cost manufacturing hub will be realised only if energy availability and pricing reflect the international market conditions. Rational energy pricing with reasonable taxes brought under a GST regime is imperative if Indian manufacturing is to acquire a level playing field vis-a-vis competing economies.
The writer is Former Principal Adviser, Confederation of Indian Industry. The views are personal