Will corporate India come to the rescue of India’s farmers?

This piece has been published in India Together under the title "From mandi's to markets: Will this round be any better?"

Farmers across the country are extremely agitated.

A quick scan of just the English language media – which typically does not show much interest in rural India – reveals the numerous protests in which they have taken part, among the recent being the long march to Mumbai by tens of thousands of farmers. More protests are expected in the coming days.

Common to all the protests are the demands for a complete loan waiver and fair prices for farm produce. As an earlier piece explains, the returns to the farmer are barely sufficient to sustain him and often below the cost he incurs. At the same time, wholesale traders bringing the farmer’s produce to the consumer enjoy hefty margins unjustified by the value they add. The market has failed the Indian farmer and this is at the root of the farm crisis.

How is this situation to be remedied? There are two diametrically opposing views.

One view is that the state must accept responsibility for the well being of the farmer and weigh in on the side of the farmer to compensate for the fundamental asymmetry in the economic standing of farmers and traders.

The other view derives from an unquestioning belief in the efficacy of the free market. It is useful to consider this in some detail because of the influence it has on policy makers.

The free market vision

‘Free marketers’ believe that state interventions and controls in the agriculture market have distorted prices. Freed from these, the market itself would enable true price discovery and improve the terms of trade for farmers.

The specific interventions that India’s free marketers would like to see ended are the state declaring Minimum Support Prices (MSPs), procuring grains and pulses, regulating wholesale trade with farmers, controlling stocks with traders and controlling exports.

But this is not all. The free marketers would like the state to “free” land markets too so that farm land can be sold or leased freely. This would enable aggregation (by buying or renting) of farm land into large farms. An editorial in Livemint (Mar 21, 2018) lays out the wish list of the free marketers in full.

The United States is possibly the inspiration for these free marketers.

The US has 2.1 million farms compared to India’s 90 million. Just 8% of farms that are >1000 acres in size account for 70% of overall farmland (US Census of Agriculture). The large farm sizes are possible because 40% of farmland is leased. In the US, the agricultural supply chain is dominated by massive companies such as Cargill, ADM and Bunge whose operations range from global trading in agricultural commodities to transforming crops into packaged products for supermarket shelves.

In the world of agriculture envisioned by the free marketers, India would have far fewer farmers and a large fraction of agricultural land consolidated into large farms. Corporations trading in and processing food would be directly able to deal with farmers and the government would have no influence or control on the price of agricultural commodities.

But how would the farmers ousted from agriculture find alternate livelihoods when there are no jobs even for the youth entering the labour force? The free marketers will not be bothered by such questions.

While the present Indian government does not want to give up its ability to influence price and availability of agricultural commodities (by doing away with MSP, procurement and export controls), it has bought into the prescriptions of the free marketers to dismantle existing regulations governing wholesale purchases from farmers. Before delving into how this is driving policy, a brief introduction to the existing agriculture supply chain structure will be useful.

Mandis and their regulatory capture

The wholesale purchase of produce from farmers in India is governed by the Agricultural Produce Marketing Committee (APMC) Act. Agriculture is a state subject and each state has its own version of the law based on the template put out by the centre.

According to the APMC Act, wholesale transactions between farmers and traders must take place in designated market yards (mandis) and follow certain rules. These yards have been established throughout the country in agricultural production centres. The yards are managed by an elected authority with government supervision.

The concerns of this law can be better understood when seen in the context of the 60’s and 70’s when the APMC’s were set up. Small farmers were extremely vulnerable to being cheated by agents who would purchase their produce locally in the village. In the APMC yards, farmers got a better feel for the price. The sale of produce under public scrutiny brought a level of protection against being cheated on weights and measures and price. The APMC markets were clearly an advance on the situation prevailing earlier. Most trading shifted to the regulated mandis though there is still a significant fraction that takes place in the villages.

Over time, traders have established their control over the regulated markets. That this has happened is not hard to understand if one takes into account the huge asymmetry in the economic standing of traders and farmers.

The market committees are elected bodies and APMC elections too are fought with political affiliations. Traders with their economic power and ties to the major political parties end up controlling the committees. Government supervision is weak at best and cannot stand up to the economic and political clout of traders. Traders can cartelize with ease and set prices for agricultural produce right in the face of regulations meant for farmer’s protection.

Farmers are unable to stand up to this cartelization. They lack pricing power as suppliers. Added to this, they are often beholden to traders who help them through the production cycle with short term loans, transport and storage. Though aware that prices are fixed, they have no option other than to play along.

Reforming the mandis through competition

The government acknowledges the cartelization that happens in APMC markets right under state supervision. However, it does not want to acknowledge this as a governance failure. Instead, in line with the thinking of the free marketers, it argues that what is necessary are alternate channels which can compete with the regulated APMC mandis for farmer’s produce. This competition, it is claimed, will lead to farmers getting better prices and more investment flowing into the agriculture supply chain. This is thinking is behind the new (model) agricultural produce and livestock marketing (APLM) Act of 2017 that the present central government has unveiled.

The Prime Minister was reported to have written to the chief ministers of states recently emphasising the need to “swiftly undertake market reforms of our decades old and restricted agriculture produce and marketing committee (APMC) architecture”. The government is clearly in a hurry to get the states to adopt the new law which will replace the APMC Acts.

The alternative channels to APMC markets for farmers are to be privately managed markets and farmer-consumer markets. But most importantly, large buyers such as firms engaged in food processing, large scale retail or exports will be able to bypass the wholesale markets and buy directly from the farmer.

Actually, all the above measures to “free” the agricultural market are old hat. Back in 2003, the then BJP government put together a ‘model’ regulation (APMC Act 2003) for allowing alternate channels in agricultural marketing and the Congress government notified the rules to go with the regulation in 2007.

26 states have since carried out modifications to their state specific APMC Acts in line with this model Act. Bihar has gone to the extent of getting rid of the APMC regulated markets altogether to allow free private play.

What has been the impact of these changes on the markets?

Private markets have been a non-starter. While a number of licences have been issued in Maharashtra and a few in Karnataka, Gujarat and Andhra, most licensees do not seem to be operating markets on the ground. It seems no one wants to invest in setting up market yards just to earn the market fee of 2% of transaction value.

Bihar too has seen no investment in private market infrastructure. As reported in the Hindu Business Line (Feb 8, 2015), trade happens in informal makeshift markets that have no facilities and no competitive price discovery; their only advantage seems to be the ease of access for farmers.

There are farmer-consumer markets in several states – AP, Tamil Nadu, Punjab, Haryana – variously named rythu bazar, apni mandi, etc. They have not made a difference as a whole as few farmers can afford to take their produce to these markets which need to be located near cities.

What about the ‘direct marketing licences’ issued to large firms to procure directly from farmers?

Maharashtra has been in the forefront giving licences to many large firms including Tatas, Aditya Birla, Reliance, Big Bazaar, ITC, ADM Agro and Mahindra & Mahindra. But as of 2016, their purchases represented only a tiny fraction of the total purchases from farmers - 1000 crore annually against 60-75,000 crore transactions in APMC mandi’s and 25,000 crore in village and other informal markets (Indian Express, July 21, 2016). Big retailers, it appears, prefer to recruit existing middlemen as their agents and buy in the APMC markets. This is not surprising, for which corporation would like to directly deal with lakhs of small farmers?

Pinning the hope on big corporations

The government is acutely aware of the failure of the previous reforms. There is no private investment flowing into public use infrastructure that can benefit the farmers. Neither is there any movement towards farmers getting fair prices. The government however argues that this is because private firms wishing to set up alternate channels still do not have a “level playing field”.

With this argument, the APLM Act 2017 goes beyond the earlier reforms to make things extremely attractive for private firms wanting to enter the agricultural supply chain.

Under existing law, states are territorially divided into market areas and the market committees constituted under the APMC Act exercise regulatory functions (such as collecting market fees) over their respective market areas. This also places certain constraints on the movement of agricultural produce across market area boundaries.  

The new law confines the role of these market committees to within the publicly owned mandis. Licensing and regulation of private firms and traders is vested with the state government and licensed entities can operate anywhere within the state.

The government claims that the new law by allowing the farmer to sell anywhere in the state and to whomever he chooses will help the farmer realize better prices. The fact is that farmers have difficulty transporting their produce even to the nearest market yard. It is the private firms and traders who will now have the freedom to buy anywhere and profit from arbitrage.

Further, while traders must still operate within private or public market yards, licensed firms can make their purchases in front of the existing market yards without any need for investing in private yards. They have to pay a market fee only 1/4^th of what is charged in the market yards. It is not clear by what logic this number was arrived at. There are also no transparency requirements imposed on them in respect of trades.

In summary, the APLM Act 2017 goes all out to help corporations entering the food chain to buy direct from the farmers by allowing them unfettered access to aggregation centres (the existing market yards) throughout the state for a token market fee, without having to invest in their own yards.

Will the entry of a new class of buyers help farmer producers realize a better price?

The fact is that the basic lack of pricing power among farmers does not change when they deal with corporations instead of traders. The experience of the last 11 years shows that corporations tend to merge into the existing supply chain at the last mile to the farmer. There is no reason to assume that the margins they make because of bringing in greater efficiency in the supply chain will be shared with farmers. Corporate India is not going to come to the rescue of India’s farmers.

The 2003 APMC reforms did not lead to any appreciable improvement in the lives of farmers; neither will the APML Act 2017 being pushed by the present government. These reforms are not about helping farmers realize better prices, but about opening up more opportunities for corporate India.

The market has failed the Indian farmer

This piece appeared in India Together under the title "The missing market for agriculture".

India’s farmers face an existential crisis. Dramatic protests, demands for loan waivers and mounting suicides are symptomatic.

Fundamentally, the crisis stems from the routinely low returns from agriculture even after a normal monsoon. Then there are risks to even obtaining these low returns. While drought or pest attacks can decimate returns, ironically, so can a bumper crop.

Markets are supposed to help find a price that works for both the producer and the consumer. Economic theory presupposes that a producer will produce something only if he can make a profit by selling it in the market at the prevalent price. This does not seem to apply to the Indian farmer.

A few examples will illustrate.

The struggle to recover cost

Take Maharashtra, a hotbed of farmer’s protests. The Indian Express (Apr 15, 2018) reports that in Maharashtra with the exception of Soyabean all commodities are trading below the Minimum Support Price (MSP) fixed by the government.

Farmers sell their produce mainly in yards of designated agricultural markets. The government run ‘agmarknet’ portal provides price information from agricultural markets across the country on different agricultural commodities. A visit to the portal shows that the market price of food grains, oil seeds and pulses is routinely below MSP.

Tracking the details of a specific commodity provides more insight. 

Tur (Arhar) dal is an important part of the diet in both South and North India. Production is insufficient to meet local demand and India regularly imports Tur. Karnataka is a major producer with Kalaburgi district accounting for most of the produce. The harvest is brought to the wholesale markets starting January. The MSP has been set at Rs 5450/quintal by the central government, while the state government has fixed a higher support price of Rs 6000/quintal, making good the difference from its resources.

Following a relatively good monsoon, the ‘modal’ prices registered at the wholesale market in Kalaburgi in Jan 2018 were in the Rs 4100-4200 range. Transactions happen over a price spread around the ‘modal’ price and there will be many farmers getting lower than the reported ‘modal’ price.

What does it mean to get a price below MSP?

The MSP declared by the government is based on the recommendations of the ‘Commission on Agricultural Costs and Prices’ (website: https://cacp.dacnet.nic.in/ ). The Commission is asked to recommend the MSP based on the total cost of production including input costs, labour and capital employed as well as other considerations such as demand and supply, inter-crop parity, etc. 

In the case of Tur dal, the production costs for 2017-18 work out to Rs 4612/quintal and the recommended MSP is Rs 5450/quintal, 18% above production costs. When farmers get paid significantly less than the MSP, they may not even be recovering the cost of inputs.

Why the MSP provides no price support

The government appointed ‘National Commission on Farmers’ headed by the well known agricultural scientist, Dr Swaminathan recommended way back in 2006 that MSP should be fixed at 50% above the cost of production to allow for a decent margin for the farmer. The present government announced in the 2018 budget that it would fix MSP’s according to this recommendation. There is no clarity yet on how or when it will do it.

The MSP as it is currently fixed has barely enough margins built in for a small farmer to survive. However, the central government does not adequately support even this MSP.

Firstly, a commodity may have an announced MSP, but will not be procured unless it is also a commodity distributed through the PDS.

Secondly, the government places limits on how much can be procured on certain crops and procures selectively in certain regions. Returning to our example of Tur dal, because of these restrictions, each farmer in Karnataka can sell only a maximum of 20 quintals at MSP to the state agencies as reported in the Hindu (Feb 3, 2018).

Drilling further into government procurement reveals some of these details.

The NSSO survey of farming households, ‘Key Indicators of Situation of Agricultural Households in India, NSS 70^th round, Dec 2014’ (NSS70), reports the estimates of procurement by government and co-operatives at MSP and these are captured in the table.

Share of crop on sale procured by government and co-operatives at MSP (Data from NSS 70th round, 2014)
	%age of crop	%age of farmer beneficiaries
Sugarcane	52	39
Wheat	19	3
Paddy	14	4
Maize	9	1
Cotton	7	5
Groundnut	3	2
Onion	3	1

The table shows the  relatively high procurement in sugarcane, wheat and paddy. The procurement in commodities not appearing in the table including Tur dal was 1% or less of the total produce on offer for sale. These numbers provide an idea of commodities with some price support and commodities where MSP is just a number.

There is another number of interest - the percentage of farmers selling a particular commodity who are able to get the benefit of sale at MSP to government. From the table, it can be seen that this is always lower than the percentage of produce procured indicating that larger farmers have better access to government procurement.

The contrast between the percentage of farmers selling to government agencies and percentage of produce procured is particularly striking in the case of wheat, paddy, maize and onion. This is because procurement in these crops is concentrated in regions with large scale production where there are also large farmers specializing in the crop.

Punjab and Haryana currently account for nearly 50% of the paddy and 70% of the wheat procured. This means that even for commodities with price support, the support may be available only in some regions.  In February 2018, both paddy and wheat were selling below MSP in many markets of Karnataka.

The unjustifiable cost of intermediation

There is another revealing characteristic of India’s agricultural markets. This is the huge spread between the price realized by the farmers and the price paid by consumers. Returning to the example of Tur dal, in Jan 2018, while farmers were getting paid Rs 41/kg, consumers were paying almost double, Rs 79/kg in Bengaluru, according to the state civil supplies price monitoring cell.

This spread is not warranted by the value added by the middlemen in the agricultural supply chain. It means that the middlemen – primarily commission agents, traders and wholesale merchants – are able to control prices paid to the farmers and prices charged from consumers to their advantage. Farmer’s income falls well short of potential because of the high cost of intermediation.

Intermediaries corner the profits even when market prices are high because of supply shortages, denying farmers most of the upside in prices. Returning to the Tur example, following severe rainfall deficit in 2015, in Jan 2016, the retail prices in Bengaluru climbed to 170/kg. However the farmers with reduced quantities to sell were getting only a price of between 90-98/kg in the Kalaburgi mandi.

The returns below MSP to the farmer along with the high intermediation costs point to a market failure. The debt of the Indian farmer is a consequence. NSS70 estimates that small and tiny farmers - with 1 ha or less of land constituting nearly 70% of agricultural households - on average earned income less than consumption expenditure.  

Unsurprisingly, 52% of agricultural households were indebted in 2013 with an average outstanding loan of Rs 47,000. Across farmers, 40% of the borrowing was from non-institutional sources such as money lenders, shop keepers etc, typically paying high interest.

The debt incurred by farmers is for buying seeds and fertilizer and other inputs, the working capital if you please, and to meet consumption expenditure. The low returns on average means that the farmer is never able to repay his debt. It also means that there is very little investment in agriculture.

Why the market does not work for the farmer

It does not require rocket science to spot the reasons for this market failure.

The basic hypothesis of the ‘market’ is that any producer will produce and sell only at a price where he makes profit. This unfortunately is not true for India’s farmers.

Firstly, there is the issue that is common to agriculture everywhere in the world. Unlike in industry where producers get continuous price signals and can react by stepping up (or down) production, farmers have no control over production once they have sown the seeds. The production cycle once set in motion has to be carried through till harvest irrespective of what price their produce will eventually fetch. Decisions on what to produce have to be made based on expectation of future price. If the expectation proves wrong, the farmer is faced with losses.

Coming specifically to Indian agriculture, there are tighter constraints. 

India’s 90 million agricultural households (as of 2013) work tiny pieces of land - 85% work less than 2 hectares - mostly lacking irrigation and dependent on rainfall. They have limited choice on what they can grow under these conditions. Soil type, rainfall, climate are the determinants. There are of course exceptions to this rule such as the farmers who have irrigation in the Punjab or the sugarcane belt of UP.

Farmers do not have the option to stop farming as they are mostly already in debt, there are no other job options available and the income from farming is essential for survival. This means that farmers will continue to produce the crops they have done season after season and in particular, try to increase production as the only way known to them to maximise income. At best, they will choose to grow crops (if they have do have a choice), based on expectation of future prices.

The lack of access of farmers to storage facilities means that on harvest, they have no other option but to sell even their non-perishable crops at whatever price they get.

Farmers as a whole have no pricing power, no ability to reduce production even if the sale of their produce is not profitable. They are also often beholden to the very traders with whom they trade for these traders would have helped them through the production cycle with short term loans, transport and storage.

In the backdrop of the fundamental asymmetry in the economic standing of farmers and traders, regulations intended to protect farmers interests do not work. Traders effectively control the regulated mandis, cartelize with ease and set prices. The farmers are aware of this but have no option but to play along.

Do farmers need out-of-the-box ideas?

How is this situation to be remedied? There are two diametrically opposite views.

In the view of what one may call the “free marketers”, what farmers need are alternate channels to the regulated mandis to sell their crops. With full freedom to sell to whomever they please, the claim is that farmers will be able to get the best prices. The hopes for establishing these alternate channels are pinned on big corporations.  

The BJP government put together a ‘model’ regulation for allowing alternate channels in agricultural marketing in 2003 and the Congress government framed the rules to go with the regulation in 2006. Most states adopted these changes in the following years.

We will defer a detailed discussion to a subsequent piece, but suffice it to say that 12 years after the wholesale agricultural market was opened up to corporate India, there is no appreciable change in the way the market functions or the returns that farmers get.

The fact is that the basic lack of pricing power among farmers does not change when they deal with corporations instead of traders. Also, there is no reason to assume that the margins that corporations make because of bringing in greater efficiency in the supply chain will be shared with farmers. Corporations are not going to bail out farmers.

The state therefore must intervene!  It needs to weigh in on the side of farmers so that they have better pricing power. This requires the extension of MSP to all major produce and active government procurement to ensure these price floors hold. This is the safety net the farmers need.

It requires small market yards and storage facilities that are easily accessible to the farmers. It requires use of technology and better governance of agricultural markets to inhibit cartels and bring transparency. It requires supply chains in the public sector to compete with the private supply chains.

But all this is well known.

Addressing policy planners at a recent meeting organized by the agriculture ministry, the Prime Minister was reported calling for “hackathons” in the IIT’s for out-of-the-box ideas to increase farm income. 

The ideas and schemes to further the interests of India’s farmers outlined above have been around for a long time. What is required is commitment of adequate resources and efficient implementation. That may also be described as good governance.

Public Infrastructure: A misplaced emphasis on highways and expressways

(The following piece appeared in India Together ; reproduced below )

Why does the government continue with its blind focus on highways and expressways when infrastructure for water supply, waste management and mass transit system is in desperate need of attention? Kannan Kasturi criticises the government's prioritization and says there is more to public infrastructure than just highways and expressways.

Highways have occupied an exalted place in central government spending on infrastructure ever since the first NDA government. The 2016-17 allocation for the Ministry of Road Transport and Highways is no exception. At Rs 58000 crore, it is 23% higher than the previous year and most of it is budgeted for developing National Highways. In comparison, the Ministry of Water Resources, River Development and Ganga Rejuvenation has a budget of Rs 5500 crore, half of which is for the ‘Namami Gange’ program to clean up the Ganga.

Developing a national highway network is no doubt the responsibility of the state. However there is more to public infrastructure than just highways and expressways. For instance, infrastructure for water collection, storage and distribution across the country needs urgent attention. Our cities are crying out for waste disposal and mass transit systems. Developing water supply, waste management and mass transit infrastructure is equally state responsibility.

The usual economic justification for investing in highways is that they will have a “multiplier effect”. The argument is along these lines: highways will lead to greater efficiencies in trade and industry by allowing faster transport of goods. On the other hand, investment in “social infrastructure” – such as water or waste management - may not offer immediate benefits to the economy.

The government’s lopsided emphasis on highways is not entirely without support. It has the approval of a section of the car owning public that has discovered the joys of fast inter-city travel without the constraints imposed by public transport. But more significantly, it has had the approval of corporate India for whom it opened up another area of business.

Creating “non-performing” assets

Corporate involvement in highways was initially limited to executing government contracts. Setting itself ambitious targets for highway addition, the government came up with a new form of “Public Private Partnership” (PPP) that allowed corporations to invest in and own public highway infrastructure and earn toll income. The justification of this form of PPP – the “build operate and transfer” (BOT) toll model - was that it would bring in private investment into infrastructure and thus make possible infrastructure addition at a faster rate than would be possible with the government’s own resources.

The BOT toll model became popular very quickly. The government had in parallel made changes to policy that made it easier for banks to finance infrastructure. Corporate investments were made on the back of large scale borrowing from banks, exploiting the banking norms that allowed up to 70% debt financing for infrastructure.

Under government prodding, public sector banks who were the major corporate financiers (they account for 73% of all lending by banks in India) channeled national savings reserved for lending to infrastructure disproportionately to highway projects. According to RBI data, outstanding bank loans to the roads sector is Rs 1.8 lakh crore as of Mar 2016. 80% of bank lending for infrastructure is in just two areas - roads and power. The remaining 20% is shared between infrastructure for telecom, airports, ports and “social infrastructure”.

In the last few years, private ownership has turned the spotlight on the economics of highways. A large number of projects are unable to service their debt taken mainly from public sector banks. They have become non-performing assets (NPA’s) for the banks and this is reflected in the statistic that 50% of bank NPA’s are in the infrastructure sector which is largely just roads and power. The major role of public investment even in the BOT toll model stands exposed. The government will ultimately have to pay for the non-performing ‘highway assets’ held by the public sector banks, one way or another.

While delays in land acquisition and environmental clearance leading to cost overruns are commonly held to be the cause for non-performance, many of these projects have not had the expected initial traffic or traffic growth at the rates envisaged during planning. In particular, goods traffic growth on toll roads has been abysmal. This has resulted in toll collection – despite yearly increase in rates – falling short of debt servicing requirements. The poor traffic growth shows up the specious nature of the economic multiplier argument for highways.

The unattractive revenue from toll has pushed the government in recent times to resort to forms of engagement with private corporations where the revenues of the private partner are independent of toll collected. The contract model is once again in vogue. The government is also pushing various “annuity” models where the infrastructure companies cover the investment requirements fully or with government participation, build and operate a highway and receive an agreed amount as annual income.

In this arrangement, the government collects the toll and bears the traffic risk. In other words, the government is back to encouraging “risk free capitalism” in the roads sector. The need for these forms of engagement is telling; private corporations do not see economic justification in these highways but the government will nevertheless build them.

A recently completed mega highway project – the Yamuna Expressway - for which detailed information is available in the public domain, corroborates the general picture of the performance of recent highway projects in India. It also illustrates an alternate model of financing – “land value capture” - that has been used to build grandiose economically unviable highways.

The Yamuna Expressway – a case study

The Yamuna Expressway project connecting Noida (on the outskirts of Delhi) to Agra was initiated in 2001 by the BJP Government in UP lead by Rajnath Singh. It was to be a six lane access controlled highway. The economic justification provided for the project was typical: besides encouraging tourism, the highway would “open up avenues for industrial and urban development” of the region.

The Jaypee Group, one of only two bidders, was selected for the project during Mayawati’s tenure as CM of UP. The private partner would make the entire investment and have rights to the toll. Anticipating that toll revenues would be inadequate, the government came up with a scheme where the builder could recover his investment in the expressway through “land value capture”.

The government would acquire land along the expressway and pass this on to the builder for developing urban townships. The value of the land was expected to go up for several reasons - the change in land use from agricultural to urban (residential, commercial, industrial) decreed by the government and the speedy access to Delhi and Agra via the expressway from these pockets.

A CAG audit of the partnership agreement carried out in 2012 was extremely damning. It found that the government of the day accepted the cost and revenue projections of the developer without any independent analysis. It also recorded that the government allowed the developer to actually select the location of the land parcels! Nearly three fifths of the 2500 hectares of the land selected was in the National Capital Region. 500 hectares was prime real estate in Noida.

It took till 2007 for the UP Government to decide on the alignment of the expressway after which the newly formed Jaypee Infratech began project execution. The project was completed ahead of time and what is touted as India’s most advanced highway was opened to traffic in Aug 2012.

As is the case with most highway projects, the traffic projections for Yamuna Expressway turned out to be wild. An average of 16490 vehicles used the highway per day in 2014-15 against the expected 100,000. The annual revenue from toll for that year was only Rs 168 crore on a highway on which the company claimed to have invested Rs 9962 crore. (For comparison, the annual investment in the railways which transports 13 million passengers a day is now around Rs 40,000 crore.)

True to the general pattern, the project expenses were met mainly through borrowing from banks. Jaypee Infratech’s debt stood at more than Rs 8700 crore as of Sept 2015.

The low traffic indicates that the hopes of the access controlled “world class” expressway spurring economic development in the region were misplaced. Some of the reasons for the low traffic are related to the very conception and design of the highway. Access control has meant that people of towns and villages along the Yamuna banks cannot use the highway and will not reap the benefits of faster travel and transport to the metros. The high toll on the expressway has kept potential users away despite heavy congestion on the alternative NH 2.

Even the Taj tourist does not seem to have benefited greatly. While the 165 km length of the expressway can be negotiated in 100 minutes, the congested roads from Delhi to Noida (where the expressway begins) and the drive through Agra to the Taj bring home the reality of roads in urban India.

Financing highways through land capture

The land along the course of the expressway is fertile canal irrigated three crop farmland. Farmers co-operated with the government when land was being acquired for the highway. However the government’s move to acquire land to hand over to the company for urban enclaves met with resistance. The government used time tested methods to harass farmers – disconnecting electricity supply, stopping cultivation and implicating them in false cases.

The government agency acquiring land has the high sounding name of “Yamuna Expressway Industrial Development Authority” (YEIDA). It has plans of ‘developing’ much more land along the Expressway - a draft master plan of Feb 2011 shows no less than 58000 hectares earmarked for development! Among the first acts of ‘development’ of YEIDA was acquiring and transferring 2500 acres of land in Greater Noida to the Jaypee Group for a race course and a “sports city".

In the run up to the inaugural Formula 1 race at the racecourse built on their land, farmers in the villages of Bhatta & Parsaul at the outskirts of Delhi protested demanding that their land be returned. Clashes took place between farmers and the police in which four people lost their lives. Subsequently, the government let loose a reign of terror on the hapless villagers. Thus was acquired the land which would pay for the expressway.

Farmers were paid an average of Rs 35 lakh/acre by the government for the 6175 acres of land acquired along the expressway. The expressway builder paid the government on average Rs 44 lakh/acre. By 2013, the company had sold a 300 acre piece of this land lying near the race track to a real estate company at Rs 5 crore/acre!

Fifteen years after the project was conceived even the urban enclaves along the expressway have not materialized, let alone industry. However, the rural agricultural economy has been made poorer with the loss of large tracts of fertile irrigated land.

Why not social infrastructure?

The overall experience of highway development in India over the last 15 years is of low traffic volumes and slow traffic growth. Toll revenues do not provide an adequate return on the investment in these highways. Low traffic growth also exposes the specious nature of the “economic multiplier” argument. 

The question that presents itself is this:  why does the government continue with its blind focus on highways and expressways despite this negative experience?

There is no shortage of infrastructure outside highways that is in desperate need of attention. The low priority for water infrastructure has made the country extremely vulnerable to vagaries of nature. This is seen in the terrible scarcity of even drinking water affecting a large part of the country today. The lack of adequate waste management has polluted all the lakes and rivers near our urban areas and is rapidly making our cities unlivable.

The central government cannot absolve itself of responsibility by claiming that “social infrastructure” is in the domain of the states. It is high time it changes priorities from “world class expressways” that will benefit only corporate interests to infrastructure that has an immediate impact on the life of the average citizen.

Idle Generators and power deficit

India Together published this piece which deals with how thermal plants are idle in some parts of the country even while other parts are facing a severe power crisis. Reproduced below:

ELECTRICITY CONUNDRUM

Idle generators in the midst of power deficit

The Southern region of India is expected to face high energy deficit this year while the Western and Eastern region will have a surplus of energy generation. Kannan Kasturi explains why such regional skew in energy generation and energy consumption exists and what it will take to resolve it.

04 August 2015 -

Southern India is expected to face a severe electricity shortage this year. The Central Electricity Authority (CEA) in its latest annual forecast anticipates the energy deficit in the southern electricity grid to be over 11 percent, equivalent to a generation capacity deficit of 4000 MW. For Karnataka and Telangana, the forecasted energy deficit is greater than 16 percent.

Historically, India has been divided into five regional grids from an electricity distribution perspective – the Southern, Northern, Western, Eastern and North Eastern. The CEA forecasts a small deficit for the Northern region and a surplus for the Western and Eastern regions. The North Eastern region, while accounting for only a tiny fraction of all India electricity consumption, is also expected to have a large deficit.

The annual forecast results from an exercise, in which the electricity requirement and the available power for each state is collected and vetted by the CEA. The sources of power considered are both the public sector plants (belonging to the central or state governments) and private plants; however the forecast takes into account only firm contracts that are already in place between power producers and the distribution companies.

Energy deficit states may improve their power availability in the short term by buying electricity from surplus states during the year. It is also possible that actual demand turns out to be lower than projected demand, leading to a lower deficit. The numbers as they stand, however, predict a reversal of three years of decreasing power deficit in the southern region.

Before proceeding further, some clarification about CEA demand projections is in order. These projections are ultimately obtained from the electricity distribution companies (discoms) in the states and do not capture the full extent of demand for the following reasons.

The projections made by discoms are based on actual current usage and a projected rate of growth of demand for each category of customer, based on past trends. They are made assuming the limitations of the existing distribution network. The latent demand from a population left without service by the existing network, or from areas provided limited energy due to network limitations, do not figure in the demand projections.

Another issue with the demand projections is that discoms are supposed to compensate for the lower current usage figures resulting from scheduled and unscheduled power cuts (for example, the curtailed supply to irrigation pump sets).

Discoms by and large are not transparent about the power cuts they impose and the power outages due to faults, making independent estimation of the ‘unconstrained demand’ – the likely demand in the absence of power outages – very difficult. The CEA demand and deficit projections for the different regions need to be understood in the light of the above.

The regional skew in energy generation

Why do some regions have energy deficit and others have an energy surplus? Historically, electricity generation capacity was planned to keep each region self sufficient. Each state had its own power plants and the central government, while building plants in any region, also built the transmission systems to distribute power to the states in the region. Inter-regional transmission systems came up only on a case by case basis, typically if a part of the power from a central generating unit located in one region had been promised to a state in a neighbouring region.

The following graphic shows how power generation capacity and energy consumption have changed in recent years across the regions. Rather than absolute numbers, generation capacity and energy consumption for each region are shown as fractions of the all India capacity and consumption.

This shows the increasing imbalance between generation and consumption in some regions. (Note: The generation capacity pertains to Dec 2009 and Mar 2015 respectively. The energy requirement for 2015-16 is as per CEA projection).

The Eastern (including North East) and Western regions have a greater share of energy generation than their share of energy consumption. The opposite is true for the Northern and Southern regions. Moreover, this proportion (of electricity generated to electricity consumed) has significantly fallen in the southern region and significantly increased in the western region in recent years.

The missing transmission

Electricity surplus in some regions co-existing with electricity deficit in other regions points to problems in wheeling electricity between the surplus and deficit regions. The rapid build-up of generating capacity in the western region requires a simultaneous build-up of transmission capacity to evacuate the power to the energy deficient regions. That this has not happened will become clear from the price pattern of electricity traded in the market in the different regions.

Electricity producers sell their surplus electricity in the short term electricity market after they have met their long and medium term contractual obligations. Over 40 percent (2013-14 figures) of the electricity that is available for sale in the market is traded through the Indian Energy Exchange (IEX).

The graphic below shows the average price of electricity traded at IEX in the western region states of Maharashtra, MP and Gujarat and the southern region states of TN, Kerala and Pondicherry.

(Note: The units of the y axis are Rs/Mwh and not Rs/Kwh as incorrectly shown)

Since 2010, the prices in the southern region have ruled significantly higher than in the western region indicating that there are barriers to moving the electricity generated from the west to the south. The price in these western states has been range bound between Rs 2-4 /kwh from 2012 and below Rs 3/kwh since Nov 2014. The price in Chhattisgarh which is also part of the western electricity grid remains marginally lower. The range bound price over an extended period indicates that electricity supply may not be a constraint in this region.

IEX data shows that in the Northern region too, electricity tends to trade at a higher price than the western and eastern regions; however the price differences are not very large suggesting that the transmission capacity from east and west into the north may be nearly adequate. In fact, an examination of inter-regional flow data shows that power import into the northern region has been steadily increasing from an average 2800 MW in 2010-11 to 5300 MW in 2014-15, compensating for the deficit in energy generation capacity.

The power import into the southern region, on the other hand, has only marginally increased from an average 1200 MW to 1800 MW between 2009-10 and 2014-15 (This does not include about 1800 MW of power from an NTPC plant in Talcher, Orissa which is exclusively meant for the southern region and for which a dedicated transmission line exists).

The Central Government has periodically trumpeted the new inter-regional transmission capacity additions. Prime Minister Modi personally inaugurated the second of two Raichur-Sholapur transmission lines in August 2014. Together, the two lines were supposed to add 4200 MW of transmission capacity from the western to the southern region. As of June 2015, the increased capacity available has been less than a tenth of this at around 400 MW.

The reason behind this, it turns out, is that crucial transmission links from the generation clusters in the western region to its periphery with the southern region, which will allow the full utilisation of the Raichur-Sholapur lines, are delayed.

Other high capacity links from Chhattisgarh to Telangana and Tamil Nadu have also been stuck with the centre at the planning stage despite representations from the concerned states. The lack of urgency in implementing these projects, one suspects, may have something to do with political considerations.

After the government opened up power production to the private sector, the coal-bearing states of the western region – MP, Chhattisgarh, and Maharashtra – became the preferred destinations for private companies seeking to exploit the cost advantages of pit head power plants. This is the reason for the disproportionate build up of power generation capacity in the western region. The inability to deliver power to the load centres in the south has meant that many new plants are idling or operating much below capacity.

Even as the thermal (coal-based) generation capacity of private producers in these three states has gone up from 5.7 GW in April 2009 to 26.4 GW in April 2015, the Plant Load Factor (PLF) of these plants, the capacity usage indicator, has come down from 83.5 percent to 43.1 percent. Coal availability has not been an issue since 2014 because of higher production, adequate imports and low international prices. Low capacity utilisation is a consequence of the inability to sell the electricity.

The problem clearly is that generation capacity has increased without adequate expansion in transmission capacity connecting it to power deficit load centres. The greed of the private promoters who did not tie up their production in long term contracts with discoms, hoping instead to make quick profits through merchant sales, is partly to blame.

Merchant selling - sales against short term contracts - allows the producer to charge prevailing market prices for electricity. Some years back, independent merchant producers made a killing in an environment of scarcity. Long term contracts, however, are based on competitive bidding by different producers and will not yield such high margins. But long term contracts would have kept the focus on building the necessary transmission links.

The major part of the blame must fall on the central government. Plants unable to sell electricity translates to banks, mainly public sector ones, saddled with non-performing assets. Further, operational plants are only a part of the problem. In the coal-bearing states in the same region, work is at a standstill in many more plants that are in various stages of development, awaiting better prices for electricity.

The government has clearly failed in its responsibility of overall planning of the electricity network and allowed scarce national capital to be wasted in generation capacity that cannot be utilised.