Sunday, December 4, 2011

Unraveling India's oil subsidies

India Together carried this piece with the title 'Oil subsidy is all gas'. It is reproduced below with pointers to sources for all the data used and references to claims made.

The government periodically puts out data on the quantum of ‘under-recoveries’ by the public sector refiners and distributors of petroleum products – Indian Oil (IOCL), Bharat Petroleum (BPCL) and Hindustan Petroleum (HPCL) – on the sale of diesel, kerosene, and LPG. The exercise is calculated to prepare public opinion to accept higher prices. Mainstream media often uncritically reports the ‘under-recoveries’ as the 'loss' (see this ET report, for example) suffered by these oil marketing companies (OMC) or as the ‘subsidy’ that must be provided by the government to make up the loss. Such an interpretation, though natural, turns out to be quite off the mark.

'Under-recovery' is not the loss

The government measures ‘under-recovery’ as the loss an OMC would make if it imported a petroleum product, say diesel, from the international market and after paying ocean freight, import charges and customs duty and incurring inland transport and marketing costs, sold the product to a dealer at the government specified price. (Government note explaining under-recovery calculation)

It is a notional loss, for it is unrelated to the actual process by which oil companies make diesel available in the Indian market - by refining imported and domestic crude in Indian refineries. It is also an exaggerated loss.( The use of the 'under-recovery' concept to determine petroleum prices has been challenged recently in the Kerala High Court)

Price differentials in the international market between a refined product and crude oil reflect the product specific demand-supply equation rather than the inherent cost of producing the product. Shortage of refining capacity for a particular product – real or artificially created – pushes the differential up.

International price differentials over crude ($/bbl)


The table above (compiled by taking Singapore & Europe prices as listed in Page 21 of the Reliance annual report for 2010-11) shows the price differentials for petroleum products between 2009-10 and 2010-11. In 2009-10, petrol, diesel, and jet-kero (used to benchmark kerosene in India) all carried similar price differentials. The next year saw a near doubling of the differentials for diesel and jet-kero reflecting the pressure on the refining capacity for these products.

[This differential has gone up even further this year. For the 2nd fortnight of Nov 2011, the average price of India's crude oil basket was $108.80/bbl. During this period, the reference price of Diesel was $130.24/bbl and that of Jet-kero $127.63. (All data from the Petroleum Pricing and Analysis Cell (PPAC) of the the petroleum ministry.) The price differentials for Diesel and Jet-kero were greater than $21 and $19 respectively. Why have the 'diesel cracks been strong' (in the language of the refiners) ? Demand staying over refining capacity in China is cited as a reason.]

India has adequate refining capacity to meet the demand on each product. In any case, there is no reason why Indian public sector refineries should be making higher margins on diesel (or kerosene) because of the shortage of refining capacity in China. In linking the cost of diesel or kerosene in the Indian market to the international price, the government’s ‘under-recovery’ calculation assumes a fat refining margin for these products. ‘Under-recoveries’ do not represent losses, just as the assumed refining margins do not represent costs.  

If ‘under-recovery’ is not the loss of the OMC’s, how much are they actually loosing and what is the extent of the ‘subsidy’ that the government has to extend to them? A look at last years (2010-11) consolidated results of the three companies provides some surprises. All three showed profits, paid income tax, and declared dividends. Government provided support to these companies under two heads – a fixed amount for each liter of Kerosene and cylinder of LPG sold, and a discretionary grant announced quarterly. The aggregate amount is presented in the table (Data is from the published financial results of the companies) as subsidy.

Excise and Subsidy 2010-11 (Rs crores)


Each of the three oil companies paid more excise to the government than it received as subsidy. In effect, the government returned a portion of the taxes it collected on petroleum products from the OMC’s. ‘Subsidy’ considered in this light, appears to be a tax concession by another name, not very different from the ‘fiscal stimulus’ the government extends to an industrial sector when it is in trouble.

The OMC’s showed a large loss in the first half of 2011-12 and this tells its own story. We will return to this a little later.

Who benefits from Indian crude?

Leaving refining costs and taxes aside, the price of petroleum products is determined by the price of crude oil. Government’s economists would have us believe that this is completely outside its control.

The fact is that a significant quantity of crude oil is produced in India, sufficient to meet one third of the crude oil requirements of the public sector oil refiners for products for the Indian market. The public sector producers – ONGC, GAIL, and Oil India – account for nearly 75% of this oil, while the rest comes from Reliance, Cairn and other private producers. (Monthly production statistics put out by the Petroleum ministry) The locally produced crude could be priced to moderate petroleum product prices for the Indian consumer. Alternatively, revenues derived from local production could be used for this purpose. The government’s economic philosophy however dictates otherwise.   

Private oil producers get rights to oil fields after signing production-sharing contracts with the government. These contracts mandate selling oil to Indian refiners at no less than the prevailing international prices. The contracts are structured such that government’s share of production will increase if the producers get a higher price for the oil. While providing the government with another source of revenue, these contracts, by locking Indian oil produce to international prices, ensure that the Indian public does not enjoy the benefits of local production.

The government treats the public sector oil producers somewhat differently, based on historical imperatives. They must sell their oil at a ‘discount’ to international prices to the public sector refiners. The ‘discount’, however, is not tied to the rise in international prices or the windfall profits made when this happens; it is fixed every quarter, at the government’s discretion.

The 2011-12 first half results of the OMC’s provide insights into how the government uses its discretion on ‘subsidies’ and ‘discounts’.

The oil companies together showed second quarter (Q2) losses of about 14000 crores, on the backs of first quarter (Q1) losses of about 9000 crores (Data from the quarterly published results). The government delayed announcing the Q2 ‘subsidy’, which, had it been timely, would have allowed the OMC’s to show a small profit for the quarter instead of a large loss. The Q1 ‘subsidy’ announcement was not followed up with cash, forcing the OMC’s to borrow from banks and pay high interest to finance crude oil imports. The public sector oil producers provided sharply lower ‘discounts’ to the OMC’s on crude oil price in Q2 compared to Q1 and showed sharply higher profits. One is left with the strong suspicion that these moves were orchestrated to make a strong case for increasing retail petroleum prices as well as to make government’s planned disinvestment in ONGC and OIL more attractive.

Taxing the aam admi

The central government has several revenue streams from petroleum products collected at different stages of processing.  At the crude oil stage, it collects royalty, a share of the production (from private producers), and excise on oil produced and customs duty on the oil imported. At the refining stage, it collects excise on the refined products such as diesel and petrol. Oil producers, refiners and marketers also contribute to the central exchequer by way of taxes on their profits, dividends and tax on the dividends. State governments collect royalty on crude oil and sales tax on petroleum products. Sales tax rates range from 18% - 25% on diesel and 19% - 33% on petrol with a few exceptions.

Last year, the central government’s income from the public sector oil and gas producers, refiners and marketers alone was in excess of Rs 100,000 crores, eclipsing the ‘subsidy’ it provided. State governments were not far behind, collecting over Rs 80,000 crores. (Estimates are based on figures for ONGC, MRPL, OIL, IOC, HPCL, NRL, and BPCL obtained from their annual reports)

Taxes on petroleum products add to the cost of all goods and services and reflect in their prices. Far from subsidizing the public, governments raised a substantial part of their revenue from the aam admi by taxing petroleum.

Tuesday, October 11, 2011

Thermal power clusters in the making

The geographic distribution of the new thermal power generation capacity under development is highly uneven showing clustering in certain districts and regions of the coal producing heartland. The governments at the center and in the states have forsaken the local communities - who will bear the adverse consequences of the large concentration of thermal plants - to favor the power producers. The thermal power clusters are detailed in the EPW piece "New thermal power clusters" that appeared in the October 1-7, 2011 issue. The article has been reproduced below.

Economic Times in a recent review of the progress of power plants in Chattisgarh has quoted from this article.

Thermal power – currently accounting for 65% of overall installed capacity[1] in India - will continue to be the mainstay for power in the coming years. The Central Electricity Authority (CEA) expects that about 80% of the new capacity addition during the 12th plan will be thermal.

The prevailing policy environment has led to an explosion of interest in thermal power generation in recent years. Evidence of this is available in the number of Memoranda of Understanding (MOU) that state governments have signed with private companies and in the number of new applications the Ministry of Environment and Forests (MoEF) gets every month for environmental clearance.

The list of companies planning or building thermal power plants is not limited to those belonging to large business houses such as Tata, Reliance, Vedanta and Adani. It also includes a number of unknown entrepreneurs with no experience of any large industrial enterprise, let alone power generation. Private investors clearly sense a great opportunity here.

How much thermal capacity is actually under development? In the past, the CEA, as the body responsible for planning and monitoring power generation in the country, would have provided the figures. With the private sector playing an increasing role in new generation capacity, the CEA has become cagey about figures. It is however possible to obtain estimates from a different source, the MoEF.

Estimating the thermal capacity under development

Setting up a thermal power plant based on the common fuels - coal, lignite and gas – with capacity equal to or greater than 500 Mega Watt (MW) requires a clearance from the MoEF. The clearance is broadly a two-stage process[2] and the ministry maintains a public record of projects clearing each stage.

Project promoters approach the ministry after reaching an understanding with the government of the state where they intend to set up a plant. On the successful conclusion of the first stage of scrutiny, they are provided the Terms of Reference (TOR), a list of environmental issues that have to be evaluated for the Environmental Impact Assessment (EIA) of the project.

During the second stage, the EIA is carried out and a “public consultation” held with the people affected by the project. Environmental clearance is subsequently granted after a detailed scrutiny of the EIA and other project documents. Environmental Clearance represents a significant milestone for a thermal project, for, at this stage the project site has been identified, agreements exist with the state government for provision of land and water, the formal consent of the people of the area has been obtained for the project and most importantly, the linkages for fuel are in place. Specifically, if the project intends to use domestic coal, it has either been allotted captive coalfields or been provided linkage with a coalmine. Construction activity can begin as soon as the land acquisition is complete.

Counting only projects that have a capacity of 500 MW or above, data from the MoEF[3] indicates that since 2006, environmental clearance has been given to nearly 200 projects for generating close to 220,000 MW of power. Thermal plants take a minimum of five years from the start of construction to get their first unit operational and two-three more years to get the additional units on stream. In the normal course, this capacity should become available for electricity generation between 2011 and 2019. To put this number in perspective, the total electricity generation capacity in the country – from thermal, nuclear, hydro, and other sources – is just over 176,990 MW at the end of June 2011 (CEA 2011). The thermal generation capacity expansion underway works out to 1.3 times the total generation capacity in the country.

How much additional electrical generation capacity does India need? While the exercise of the Planning Commission for the 12th plan is yet to conclude, reports suggest that the target will be around 100,000 MW from all power categories. Assuming that eighty percent of this new generation capacity is thermal and liberally extrapolating for the two years beyond the 12th plan, one arrives at a figure of 120,000 MW of new thermal capacity until 2019. Measured against this, the thermal capacity under development at 220,000 MW indeed seems on the high side.

Of course, not all of this capacity may materialize in this timeframe. There could be problems with land acquisition, financing, or project management delays. Promoters may even decide to go slow for other reasons. Nevertheless, the fact remains that the development activity has been unleashed for these projects.

Thermal power hubs

The thermal capacity addition underway across India is unevenly distributed. The top six coal mining states – Jharkhand, Orissa, Chhattisgarh, West Bengal, Madhya Pradesh, and Andhra Pradesh – account for close to half of the capacity addition. Tamil Nadu, Maharashtra and Gujarat account for a third. The remaining is spread across UP, Bihar, Haryana, Rajasthan, Karnataka, Punjab, Delhi and Tripura. The focus of the rest of this paper is on the features of thermal power development in the first group of states.

Table 1 (From EPW) shows the total power generation capacity currently available from all sources and the thermal capacity addition in various stages in the top coal mining states. The projects labelled ‘under development’ are those for which the MOEF has given environmental clearance while the projects labelled ‘in the pipeline’ only have the TOR for the EIA. The project statistics spans the different types of projects – public sector and government (state and central) promoted, private sector based on competitive bidding and the projects of Independent Power Producers (IPP’s) – and include both new and expansion projects. The ratio of the thermal generation capacity under development to the generation capacity from all sources currently available to the state is presented in the column headed ‘B/A’.

The coal rich states – with the exception of West Bengal - are adding between 2.2 and 4.7 times their existing generation capacity in thermal capacity alone, against the all India average of 1.3, a clear indication that capacity is being developed for exports outside this region.

Chhattisgarh for instance has a long stated policy of becoming a “power hub”, using its large coal deposits to competitive advantage. In line with this policy, the state government has signed MOU’s with 61 would-be IPP’s, to generate more than 50,000 MW of power. Most of the other coal rich states have also signed numerous MOU’s.

A typical MOU[4] promises an IPP help in acquiring land, meeting water requirements, conducting the public hearing mandated under the Environmental Protection Act, facilitating clearances from state and local bodies and pushing the case of the company with the central authorities for coal linkages and other central clearances. The companies with projects ‘in the pipeline’ have the backing of state governments (except in West Bengal & AP) through MOU’s.

The thermal capacity addition from the projects ‘in the pipeline’ at over 200,000 MW is humungous. However, the question arises if one should attach much significance to these projects. To get environmental clearance, these projects will need fuel linkages and that can be a major problem today.

With the exception of the coastal regions of AP (where imported coal and piped gas are options), the viability of projects in these states depends on the availability of the relatively inexpensive local coal for which they have to approach the central government. Given that the increase in coal production is not keeping pace with the increase in coal based thermal generation capacity, the Ministry of Power has sought to prioritize the allocation of coal linkages. For IPP’s seeking coal linkage, progress in acquisition of land for the plant will count towards higher priority[5]. Government policy is driving independent power producers to acquire land even before obtaining environment clearance.  

The projects in the pipeline, backed as they are by the state governments, therefore need to be taken seriously for the immediate footprint they will leave on the ground even if plant construction is some years away.

Thermal Clusters

Thermal projects in the coal mining states are concentrated in certain districts. Table 2 (From EPW) shows the generation capacity of thermal plants that are in operation, the capacity under development and capacity expansion and new projects that are in the pipeline for certain districts.  Past record suggests that expansion projects in the pipeline will get environmental clearance – so these have been clubbed with the projects under development.

Within these districts, the projects tend to cluster in locations that will presumably minimize operational costs. All the plants in Nellore district, for example, are located near Krishnapatnam port, which will berth the large cargo ships transporting the imported coal. They will meet their cooling water requirements from the sea or, in some cases, from inland creeks nearby. In Janjgir-Champa and Raigarh, all the plants are located along the Mahanadi (from where they will draw their cooling water) and the railway and national highway (which will be used to transport the coal) are close enough.

The effects of such a deadly concentration of coal based thermal power plants are likely to prove devastating to the communities in the midst of whom they are coming up.

The loss of farming land and commons will be felt first. The CEA estimates land requirements for pithead thermal plants to range from 0.6 to 1.1 acre per MW. Taking Janjgir-Champa as an example, and assuming 1 acre/MW, the land requirement for all the plants planned works out to 2.5% of the area of the district! Twenty-one of the 26 plants planned in the district do not have environmental clearance yet. However, land acquisition is already underway[6], with government policy linking progress in land acquisition with allotment of coal linkage.

Once the plants become operational, the surrounding communities will face threats to their health and, where they are agricultural, to their livelihood. Thermal power plants using coal are extremely polluting with environmental damage arising from the transport of coal to the plants, the emissions from the smoke stack, the storage and disposal of the ash from the burning of coal, the continuous withdrawal of a large quantity of water for cooling and the disposal of wastewater and effluents. Indian coal has high ash content and a practical solution is yet to be found for its safe disposal.[7]

Returning to the subject of clusters, if the preferred location for a thermal power plant is mainly to do with geography and connectivity, one should see clustering across district boundaries. Table 3 (From EPW) shows certain regions spanning districts and even state boundaries, which have a large concentration of thermal plants.

The Singrauli region centred on the reservoir of the Rihand dam and composed of parts of Singrauli district of MP and Sonebhadra district of UP will be the largest thermal cluster in India in the near future, hosting 14 thermal plants with total capacity of about 33,000 MW. Incidentally, this area with its six operational plants and 12,000 MW capacity is already marked as critically polluted.

The geography of the regions with large thermal plant concentration provides pointers into potential large-scale environmental effects. The plants in Raigarh and Janjgir-Champa districts of Chhattisgarh are located along the Mahanadi. The Chhattisgarh government has announced plans to construct a chain of seven barrages on the river upstream of Hirakud dam to ensure supply to these plants. Several thermal projects in Jharsuguda district of Orissa are also slated to withdraw water from the Hirakud reservoir. Studies are yet to be carried out on the sustainability of using Mahanadi waters for so many power plants and the effects it may have on other water users downstream.


The current electricity policy has turned thermal power generation into a lucrative proposition. The generation capacity is coming up in dense clusters in the main coal mining states in locations chosen to minimize running costs. While many of these planned plants may not deliver on the promise of power because of non-availability of domestic coal, they are already leaving their imprint on the ground. Given the drastic negative fallout from coal based thermal power plants for the health and livelihood of communities where the plants will be located, one would expect government to intervene on behalf of the communities.

These clusters are however coming up with the full support of the state governments. The central government’s efforts to regulate the location of power plants are limited to ensuring that the rules and procedures laid down for obtaining environmental clearance are followed. It has refrained from taking any decisive action to stop clustering of thermal plants. One can only conclude that the government – both in the states and at the centre – has forsaken the communities who will bear the brunt of these thermal clusters in favour of power producers.


Sethi, A (2011): Power plants insulated from protestsThe Hindu, 7 Feb, Viewed on 5 Sept 2011

Sharma, S (2011): Chhattisgarh Minister's son buys farmland for Videocon, Times of India, 23 June, Viewed on 5 Sept 2011


[1] Inferred from CEA (2011)
[2] The environmental clearance process is described in the Environmental Impact Assessment Notification, 2006 available at the MoEF website
[3] These numbers have been arrived at by aggregating data from the MoEF Environmental Clearance Database which can be accessed from (
[4] The model for the MOU that Chhattisgarh signs with companies is available at (, last accessed on 5 Sept 2011
[5] The coal linkage policy for 12th plan projects is laid out in a 2009 office memorandum of the Ministry of Power. IPP’s wanting coal linkage are assigned priority based on the points they score on several criteria. Progress with land acquisition is the most important criteria with 50% weight. (, last accessed on 4 Sept 2011
[6] See Sharma (2011) for a report on land acquisition for a thermal project that has not yet got environmental clearance.
[7] See Sethi (2011) for the problems faced by India’s largest power producer, NTPC, in handling fly ash.

Tuesday, August 9, 2011

National Manufacturing Policy

A Hundred Million More Jobs in Manufacturing by 2025 is the clever advertisement for the government's soon to be unveiled National Manufacturing Policy. The jobs are to be created by rapidly growing the share of manufacturing in the GDP from the current 16 per cent to 25 per cent by 2025. The government's seriousness in pushing the new policy is evident from its involvement of senior executives of Tata Steel, Vedanta Aluminum, Maruti Suzuki and other major maufacturers in putting together the plans to implement it.

The situation on the ground, however, is quite in contrast to the ambitious plans. The share of manufacturing in GDP has remained almost flat over the last decade, sharply differing with the historical pattern seen in countries transitioning from being agrarian to industrial societies. The total employment in manufacturing, inferred from the results of the National Sample Survey 66th round (NSS-66) conducted in 2009-2010, is just short of 53 million. Eighty percent of this employment is in 'unorganised' manufacturing (units using electricity that employ less than 10 workers, as well as units not using electricity that employ less than 20 workers). Organised manufacture employs fewer than 11 million workers.

On top of these poor numbers, the employment in India's manufacturing sector is actually showing a declining trend, despite the high GDP growth rate of the recent past. Employment growth in the period 2005-2010 has been entirely in services and in the construction industry, while an estimated 3.6 million jobs have been lost to manufacturing, almost all of them in rural India (inferred from an NSS-66 report of June 2011). It would be a safe assumption that this loss has been entirely in unorganised manufacturing.  Read the full India Together piece here

Sunday, June 26, 2011

Thermal Electricity: Power hubs and hot spots

Several states – Chattisgarh, Orissa and Andhra Pradesh among them - are building thermal power capacity far in excess of their foreseeable needs. Chattisgarh, for instance, is developing 21000 MW of thermal power, more than four times the generation capacity that it uses today.

This is however not the complete picture. Chattisgarh has signed dozens of memoranda of understanding (MOU) with companies to generate more than 50,000 MW of power. Most of these companies have joined the pipeline of projects working towards getting environmental clearance from the MoEF. The states profligacy in signing MOU’s is in line with its long stated policy of becoming a “power hub”, of using its large coal deposits to competitive advantage and “exporting” power to other states. Orissa, with similar ambitions, has signed MOU’s with 30 private companies for generating 38000 MW of power, over and above the power generated in state and public sector plants. Some of these projects are in the construction phase, the rest in the pipeline. Andhra Pradesh, too, wants to be a “power hub”, using imported coal at coastal power plants.

In these “power hubs” of the future, the projects (under construction and in the pipeline) are concentrated within a few compact geographical regions. The table below shows some of these ‘thermal hot spots’.

Thermal Hot Spots
District, State
Thermal Power Generation Capacity (MW)
Number of new plants
In Operation
Being built
In the pipeline
Coast around Krishnapatnam port
Nellore, AP
Samal reservoir and downstream on Brahmani river
Angul, OR
Dhenkanal, OR
Hirakud reservoir and upstream on Mahanadi
Jharsuguda, OR
Raigarh, CG
Janjgir-Champa, CG

Private producers, given the freedom, will invariably pick the locations for thermal plants suited to produce electricity at the lowest cost. The stretch of the Brahmani river in Orissa near Talcher and the stretch of the Mahanadi river just upstream of the Hirakud reservoir are extremely popular and the reasons are not too far to seek. Coalfields are located nearby, the water from the rivers and reservoirs can be accessed for meeting the large cooling water requirements of the thermal plants, and the areas are well connected by National Highways and railways.

The complete piece may be accessed at  India Together 

Monday, April 25, 2011

The demographic masculinization of India

Census 2011 - the bad news

Census 2011 finds that for every 1000 males, there are only 940 females in India. India compares unfavorably in the sex ratio even with its neighbors – Bangladesh (978), Pakistan (943) and Sri Lanka (1034). China with 926 women for every 1000 men is the major exception being worse off than India.

This is however not the worst of the news in the census. The child sex ratio – the number of females to every 1000 males in the age group 0-6 years - at 914, is sharply lower than the sex ratio in the overall population. What is most shocking is that the child sex ratio continues to follow the decreasing trend established over four decades ago.

At normal biological levels, the sex ratio at birth should be close to 952 and this is seen to be the case even in many Asian countries - Japan, Thailand, Indonesia and Sri Lanka for instance. The normal child sex ratio should be equal to or higher than the sex ratio at birth. The extent to which the child sex ratio in India falls below the figure of 952 represents the numbers of the ‘missing’ girl children.

The worst offenders

The tribal belt states, and the eastern, north-eastern and southern states have far better sex ratios than the states of the north, west & central India. The worst offenders are Haryana, Punjab and the National Capital Region.

Child Sex Ratio
Arunachal, Nagaland, Manipur, Mizoram, Tripura, Meghalaya, Assam
Kerala, Tamil Nadu, Andhra Pradesh, Karnataka
Tribal Belt & East
Chattisgarh, Orissa, Jharkhand, Bihar, Bengal
North & Central
Punjab, Haryana, NCR-Delhi

Uttar Pradesh, Madhya Pradesh
Rajasthan, Gujarat, Maharashtra

In Haryana, male children exceeded female children by over 22% in 2001 (this has decreased marginally to 20% in 2011); and in certain districts like Kurukshetra and Ambala, it was closer to 30%. Read the complete India Together piece here.

An excellent discussions of the problem may be found in this reference: ‘The Sex Transition Ratio in Asia’, Christophe Z. Guilmoto - available online here