Can Modi dramatically change the fortunes of this sector? - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster
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Can Modi dramatically change the fortunes of this sector? 

A  A  A
In this issue:
» Strategic oil reserves have increased savings
» US economy is not out of the woods yet
» Losses to Indian firms due to poor power supply
» Can generation companies supply power 24 hours?
» ...and more!


00:00
 
The World Bank recently published a report on the sorry state of India's power sector. Some of the statistics published are quite telling. For instance, in 2013, 300 m people lacked electricity. Then there are various other statistics that essentially highlight how the sector is plagued by debt, accumulated losses, loss and theft of power, and subsidies among others.

It would be wrong to say that there is no progress in the sector at all. The power sector today has made considerable strides compared to what the scenario was in 1991. Conventional general capacity has tripled, private sector participation has been encouraged and the market structure has been transformed.

And yet the sector still has a long way to go. With India harbouring ambitions to grow its GDP at more than 8% on a sustainable basis, the power sector has not been able to provide the much needed support. As mentioned earlier, 300 m people still lack electricity, annual per capita consumption is low by global standards and the peak deficit is more than 10%.

Indeed, the fortunes of the entire sector depend upon the distribution segment because it is the link between the sector and the consumers. But the continuing underperformance of distribution has not been able to provide adequate and reliable supply to consumers. Further, inefficiencies and lack of coordination in the upstream segments have raised the cost of power purchased by distribution companies and this is then passed on to the consumers. The distribution side in particular has been bogged down by mounting debt and accumulated losses. This in turn has made their credit worthiness questionable. The accumulated losses have largely been attributed to underpricing, undercollection and physical losses on account of technical reasons and non technical reasons such as theft.

State utilities in particular paint a sorry picture as they have resorted to debt to finance operations. And this then has wider implications for the financial sector and the broader economy in general. Because state utilities are struggling to stay afloat they have been going with a begging bowl to the government, which has so far been willing to oblige. But this has proven to be costly because subsidies and bailouts typically exert pressure on government finances. And once that happens, other development spending gets impacted.

Given that there are so many ills plaguing the sector and we have only touched upon some of the broader themes, the solutions offered by the World Bank report are also many. For one, it has stated that distribution can be improved by exploring different models. So the sector can start with management contracts or franchises that help in determining the true value of the assets according to which investment requirements can be addressed. The other is to separate rural and urban areas and have different approaches for both. The private-public partnership models can initially begin in the urban areas and then be extended to rural areas. The report has also called for greater emphasis on data reliability and transparency. The corporate governance of state utilities need to improve and lending to this sector has to be done in a responsible manner.

Clearly a lot of work still needs to be done for a complete overhaul of the Indian power sector and it is apparent that the fortunes of the sector will not change dramatically in the short term. But it will be interesting to see whether the Modi government has the capability to address this issue in a manner which is completely revolutionary from what the other governments have done or not done in the past.

Do you think the Modi government will be able to bring about a dramatic improvement in the Indian power sector? Let us know in the Equitymaster Club or share your comments below.

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01:26  Chart of the day
 
Besides India's population getting hampered by an erratic power supply, firms and industries also have to bear the brunt of the ills plaguing India's power sector. As per the chart, electrical outages have resulted in a loss of around 7% for firms in India, which is quite high when one compares it to the world. What more, 32% of the Indian firms surveyed by the World Bank stated that electricity was a major constraint to their businesses, while around 61% claimed that they were willing to shell out more for power provided the supply is assured and uninterrupted.

Losses for firms due to electrical outages


02:01
 
The power deficit scenario in India has been pitiable over the past 5 years. In recent years the situation has worsened. More recently, the crisis in Delhi brought the magnitude of the problem to the fore. There is therefore intense pressure on the new government to sort out problems in the power generation sector at the earliest. The new minister Piyush Goyal handles both power and coal portfolios. Hence, it is expected that the standoff between power and coal sectors will get resolved amicably. Without sufficient supply of coal and their inability to raise tariffs, power generators have claimed that supply power round the clock is impossible. However, as per Economic Times, Mr Goyal does not quite agree with the power companies. He has assured them of sufficient coal supplies. However, he has also contended that by following the Gujarat model, generation companies can supply power 24 hours. This too can happen without raising tariffs according to him, if the loss due to theft and pilferage is checked. Thus it seems that the Power Minister is hoping for improved efficiency in both power generation and distribution. If the same can indeed be achieved, the power sector would be able to salvage some investor interest in the years ahead.

02:35
 
There is one thing about crisis. They help you prepare better for future shocks. In this regard, the oil crisis in 1974 was an eye opener for global economies to put systems in place to avoid oil shocks. This led to the creation of IEA - International Energy Agency. The member and non member states since then have been maintaining emergency oil stocks. This has led them save costs on crude oil expenses whenever supply disruptions have happened, especially on account of disturbances from OPEC region. Now that Iraq crisis seems to be looming large sending oil prices to nine months high, these strategic reserves may come to the rescue to offset the shock to some extent. As per the report, at the end of March 2014, the member states held stocks worth 44 days of global demand. Over last 30 years, such reserves are estimated to have saved US$ 3.5 trillion. We believe there are some important lessons India should be learning from this. Unlike other nations that seem to be so concerned and well prepared for energy security, our country cuts a sorry figure. Needless to say, if we continue to be so indifferent to energy security, it will be nowhere in the race to become global superpower.

03:06
 
The GDP growth data for the US economy was announced recently. And with a 2.9% drop, one of the worst ever in last 5 years, it seems that the US economy is not completely out of the woods as yet. There were quite a few reasons for such a massive fall in growth rate. Slowdown in healthcare & consumer spending obstructed growth. It may be noted that consumer spending which forms about 70% of GDP increased by just 1% in first quarter. Bad weather coupled with high interest rate environment that prevailed at the beginning of the year did not help either.

For the second quarter, the median estimate for growth is 3.5%. Considering how the performance has shaped in quarter one the estimate seems to be optimistic. Even external doses of liquidity may not help. Thus, it would be interesting to see how Fed tries to revive the economy. If the labor market shows signs of improvement or household spending increases amidst rising confidence growth can bounce back. Else the US economy will continue to sail in the negative to low single digit growth trajectory.

03:37
 
Given their nature, can stocks and bonds both be attractive investments at the same time? May be not because they are meant to flourish in different economic environments. Bonds are suited for a high inflation environment while stocks tend to do well when the inflation is on the lower side. However, if one tracks Asian equities and bonds closely, there seemed to be some kind of a parallel rally over the last few years. In other words both bonds and stocks did well. The reason is not difficult to find though. With yields pushed to extremely low levels in the developed markets, investors piled into both Asian bonds as well as equities.

However, if an article in ET is to be believed, this parallel rally seems to have outlived its usefulness. Investors will thus have to decide between the two asset classes going forward. While we can't talk about other countries, in India at least we would like to lean toward equities from a long term perspective. Simply because once inflation comes down, the RBI will start taking measures to lower interest rates and this could then bolster economic growth. Besides, the valuations too aren't that expensive right now. Therefore shifting some money from bond into good quality stocks may not be a bad idea according to us.

04:08
 
The volatile nature of stock markets does keep a good chunk of the market participants away. The many scams and various crises would be other reasons for the same as well. However, the fact of the matter remains, that over the long term, equities do tend to provide good returns. More than enough to beat the high inflation levels in India. While physical assets and safe instruments have found a larger share of one's savings portfolio over the last few years, it seems that retail investors are making a comeback to capital markets. May be it's the sharp run up in markets that has led to the same; or maybe it's their faith in the new government. Nevertheless, we would like to remind our readers that equities, when bought during times of uncertainty i.e. when valuations are low, tend to provide much stronger returns over long periods.

As reported by Business Standard, the assets under management of Indian mutual funds touched Rs 10 trillion last month; with equity forming about 25% of the same. The many awareness initiatives by market watchdog SEBI and the various mutual funds seem to be key drivers for the increase in participants; we however cannot help but think that a lot of this is also driven by the way stocks have performed in the recent past. With the broader markets trading at valuations that are not very cheap at current levels and in a market that is seemingly driven by sentiments, investors are advised to take cautious measures which include investing in good schemes and avoiding sector specific funds.

04:45
 
In the meanwhile, the Indian stock markets continued to slip further. At the time of writing, BSE-Sensex was trading lower by 192 points (down 0.8%). Majority of the sectoral indices were trading lower led by oil & gas and realty stocks. However, capital goods and consumer durable stocks were trading in the green. Most of the Asian stock markets were trading strong with indices in Hong Kong and China being the major gainers. But majority of the European markets opened the day on a negative note.

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15 Responses to "Can Modi dramatically change the fortunes of this sector?"

Shashi

Jul 7, 2014

Powerfully entrenched Vested interest Syndicate, who facilitated power thefts by hiding behind there respective States mismanaged power distribution companies, to fill their pocket with huge bribes paid by power thieves! Will do their utmost to stop the new ruling party, from carrying out meaningful & effective steps to bring down losses of distribution Co's.

There is no justified explanation to the huge proportion of T&D losses of power distribution Co's. Undoubtedly the bulk of this so called Distribution losses is already under-paid for, by the illegal beneficiaries as bribes, to the facilitators of this theft.
So any improvement in collections based on actual consumption by the Distribution Co's will mean a severe blow to these syndicates bribe income. These syndicates consisting of Politicians and corrupt officers exist in almost every States power distribution Co.


It's these syndicates that the present Govt. should identify and deal with sternly if possible forfeit these parasite's ill gotten assets and use the proceeds for improving the power distribution infrastructure.

Like 

S.P.Sharma

Jul 4, 2014

Mr.Modi has a record of generation of power and it's proper supply management in Gujrat and he with the use of latest technology can change the deficit power status in to a surplus power in the country.He will make the proper use of technology to generate power from non-conventional areas ,may it be Solar, Wind, Nuclear and also Hydro and thermal power generation. We should have full faith in his capabilities. God bless him.

Like 

N. R. Murali

Jul 3, 2014

Yes. I believe Mr Modi can dramatically change the way power sector is managed today.

Firstly, he has achieved great strides in Gujarat and has first hand knowledge of how to handle this problem. Secondly, he appears to be a man of great determination and will fulfill this promise made during his election campaign to a large extent. Thirdly, some of the problems are political such as electricity theft, misuse of power for uneconomic uses etc, which requires only sincerity to resolve. Fourthly, a knowledgeable and forthright minister has been put in charge. Fifthly, the government recognizes that while the short-term actions should be completed, long-term solutions should not be ignored. Sixth, improvements in generation and distribution can be achieved by greater discipline at the electricity boards, which is quite possible in the current dispensation as the PM himself shows the way as regards punctuality and discipline. Lastly, we have finally a Government that has the guts to say that there will be no free lunches.

Best Regards,

N R Murali

Like 

D. K.Sharma

Jul 1, 2014

Mr. Modi has a will to do improvement in power sector @ he is continously making efforts in this direction. Further he has successfuly managed power sector in Gujrat against all odds . He believes in implementing most modern technology @ management to achieve the target. As such he will definitely change the fortune of this sector.

Like 

V K Jain

Jun 28, 2014

Modi has shown in Gujarat that it can be done and at national level, he has the will and commitment to improve the performance of not only the power sector but the entire economy.

Like 

K.Ramasamy

Jun 28, 2014

Modi Govt., can follow the theory of Mr. Abdul Kalam for establishing the Automic power plants across the country by using Thorium in the place of Uranium. He can make use of the knowledge of people like Abdul Kalam in making the Country from the shortfall of the Electricity supply.

Like 

K.Ramasamy

Jun 28, 2014

The Modi government can plan for erecting more Automic power plants throughout the country where ever it is possible. Unless they go for this type of plants the crises will not be solved as the Coal and water generations are not sufficient for the need of our country and the speed of the population growth.They must take immediate action in this regard.

Like 

krishna ghosh

Jun 27, 2014

Narendra Modi will not change anything.The same old policies would be followed. Recent price hike has made it clear. Worse still he will sell the PSU Companies & might even target even PSU BANKS. No faith on this govt. but people don't have choices.

Like 

Alphones

Jun 26, 2014

I don't think so; Mr. Modi or any others can be able to bring any changes. Please note that for any change; you need money and time. Say, a power project is implemented, it need to at least 4 to 5 years needed. By that time, the population is increased more as well. So, just imagine?

Like 

virendra bapna

Jun 26, 2014

one thing can solve electricity distribution problems in india.install prepaid meters too all electric consumers.

Like (1)
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