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Friday, November 25, 2011

Taxing investors to pay NGOs











Thursday, November 17, 2011

Guide to the Eurozone crisis

by Percy S. Mistry.

How did it happen?

























How has the Eurozone crisis been handled?






























Where are we now?




























So where do we go from here?






The next Greek crisis is perhaps 10-12 weeks away.




















Wednesday, November 09, 2011

Interesting readings










How to decontrol the price of oil

We know a lot about price controls from the field of exchange rates. Here's an argument from way back, in 1998:
When change comes to a stabilised currency, as it must, that change is painful. Change in the long term is inevitable. The random walk doles out a little change every day, which is less painful than sudden large changes. 
Currencies which are random walks yield a deeper sort of stability. The steady pace of small changes every day generates realistic expectations about currency risk and continual realignment in production processes in the economy. It avoids sudden changes, and keeps the currency out of the domain of politics. The random walk regime is sustainable without incurring serious distortions in the economy.
In the field of exchange rates, India understood these arguments, and moved to a floating exchange rate. In March 2007, the INR/USD volatility moved up to roughly 9% and from early 2009 onwards, RBI stopped trading in the currency market. This was the biggest achievement of the UPA in economic reforms: In the 2007-2009 period, we got to a market determined rate on the most important price of the economy.

These same ideas are useful in thinking about the price of petrol. A large jump of Rs.1.8 per litre attracts attention. It is far better to let the price fluctuate every day. Ultimately, the price has to adjust. We suffer a lower political cost by letting it adjust every day (through the depoliticised market process). If we bottle up the small changes, then we have to make large changes. These are a bad use of political capital.

Monday, November 07, 2011

Are the inflationary fires subsiding?

On 25 October, Dr. Subbarao announced a 25 basis point hike in the policy rate. Alongside this, he made statements that were widely interpreted as being dovish:
Keeping in view the domestic demand-supply balance, the global trends in commodity prices and the likely demand scenario, the baseline projection for WPI inflation for March 2012 is kept unchanged at 7 per cent. Elevated inflationary pressures are expected to ease from December 2011, though uncertainties about sudden adverse developments remain.
Inflation is broad-based and above the comfort level of the Reserve Bank. Further, these levels are expected to persist for two more months. ... However, reassuringly, momentum indicators, particularly the de-seasonalised quarter-on-quarter headline and core inflation measures indicate moderation, consistent with the projection that inflation will begin to decline beginning December 2011.
The projected inflation trajectory indicates that the inflation rate will begin falling in December 2011 (January 2012 release) and then continue down a steady path to 7 per cent by March 2012. It is expected to moderate further in the first half of 2012-13. This reflects a combination of commodity price movements and the cumulative impact of monetary tightening. Further, moderating inflation rates are likely to impact expectations favourably. These expected outcomes provide some room for monetary policy to address growth risks in the short run. With this in mind, notwithstanding current rates of inflation persisting till November (December release), the likelihood of a rate action in the December mid-quarter review is relatively low. Beyond that, if the inflation trajectory conforms to projections, further rate hikes may not be warranted.
WPI inflation is not interesting in thinking about monetary policy. The WPI basket is not consumed by any household. The right measure of inflation that all of us should focus on is the CPI.

We just released an updated batch of seasonally adjusted data, and the news for inflation, for September 2011, is bad. CPI-IW grew at an annualised (seasonally adjusted) rate of 20.15% in September 2011. As a consequence, the 3-month moving average inflation went up from 8% in August to 11.77% in September.  If we compute the policy rate as the halfway mark (8%) and subtract out this latest value of the 3-month moving average inflation rate (11.77%), the policy rate expressed in real terms is -377 basis points.

Here's the picture of what's been going on with point-on-point seasonally adjusted CPI-IW inflation:

The key fact about India's inflation crisis is: "Headline inflation", which I would define as the year-on-year rise of CPI-IW, has been outside the target range of 4-5 percent in every single month from February 2006 onwards. High inflationary expectations have now set in. Given what is happening on prices of both tradeables and non-tradeables, I find myself skeptical about the sanguine picture on inflation that was painted on 25 October.

The bottom line: Headline inflation (year-on-year rise of CPI-IW) went up from 8.99% in August to 10.06% in September. This is inconsistent with a sanguine analysis of inflation on 25 October.

Or perhaps the econometricians at RBI have some aces up their sleeves. Will point-on-point seasonally adjusted inflation, under the benign influence of a strongly negative real rate, veer back into the 4-5 per cent range by December 2011? Stay tuned. So far, the score is: September 2011, 20.15%.

Piped natural gas (PNG) in India: Not priced to displace electricity

In continuation of my previous post on piped natural gas, I found that Mahanagar Gas charges Rs.33/m^3 for natural gas. The energy content is 8500 kcal/m^3 or 35.56 MJ/m^3. This corresponds to 10 kwhr i.e. 10 units. In the units of electricity pricing, then, this gas is priced at Rs.3.3 per unit (i.e. $0.066 per unit). This is slightly cheaper than electricity but not by much. I'd have expected gas to be cheaper than this. This isn't a pricepoint at which one can obtain a big shift from electricity to NG. It is more convenient than shipping bottles around, but that's about it.

For a comparison, in Los Angeles, the price of gas works out to $0.036 per kwhr while the price of electricity is $0.132 per kwhr. That is, piped electricity is 3.667 times costlier than piped gas. It makes you wonder about what we're doing wrong with natural gas in India.

Sunday, November 06, 2011

Residential water heating and the rise of the gas-fired economy

When electricity distribution networks fall into place, people start using electricity for everything. Heating, air conditioning, cooking, etc.: electricity is the supple path to all applications. Electricity is conveniently accessed at home, but at a system level, there are problems. Electricity is typically made in big facilities, primarily by burning coal or gas. It is then inefficiently transported to the home. Coal has the worst carbon footprint. Given the domination of coal in Indian electricity production, electricity consumption in India is highly carbon intensive.

Gas delivered to the home is a superior alternative, but this requires gas distribution to the home. A brand-new distribution infrastructure needs to be built, for delivering gas to the home. Once gas is at the home, it can be used for cooking and for heating. To the extent that this is done, it reduces the carbon footprint of residential energy consumption. And, given the way the world is going, gas delivered to the home is likely to be significantly cheaper (per joule) when compared with electricity, even without a carbon tax. (Question: Does someone know the price per joule for residential electricity versus piped gas in India?)

When we think about global warming in India, the dominant impulse is to say to the rich countries "this is not our problem; you guys loaded up the atmosphere with CO2, you guys fix it". While this approach has strengths, it is also important for India to find low-carbon paths to development. We have a problem in having a highly coal-fired economy. We also have the malleability in having the bulk of our energy system of 2050 having not yet been built out: this gives us choices about what should be done. In contrast, most rich countries have less room to maneuver. Policy decisions in India will determine whether cities develop energy-efficient mass transportation systems (such as the Delhi Metro) or not; in contrast, there is no possibility of Los Angeles or the Bay Area developing a good transportation system.

I suspect that gas is likely to be India's low-carbon bridge to renewables and nuclear, exactly as it will be for the rest of the world. From this perspective, we need to start looking for market-based channels to do more on building the gas ecosystem. One interesting litmus test that we can use is the number of households where one sees gas-fired water heating. 

This requires distribution networks for gas, and then households have to switch from electric ovens, water heaters, stoves to gas-fired equivalents. In India, a few cities are now starting to have gas distribution to the home. In time, households should increasingly build up the capital stock of gas-fired appliances, motivated by the superior pricing of gas.

And this gives us an illustration of India's malleability. The CMIE household survey shows that at present, 5.5% of households in India today have one or more geysers (this is for the quarter ended June 2011). For these 5.5% of households, there is the question of junking the existing capital stock and shifting over to a gas-fired appliance. Presumably the differential pricing of electricity versus gas will justify such a shift for the household, but for India, it is a waste when there is such destruction of capital stock. Far more interesting are the remaining 94.5% of households. We should be doing things today, so that over the next 25 years, when 94.5% of India's households will buy a geyser, they will go towards a gas-fired heater rather than an electric one.

From this perspective, I was surprised to see a sales flyer of a small company -- P. K. L. Ltd. -- talking about a gas-fired water header:

This was news, atleast to me. I have never seen a gas-fired water heater being sold to a household before in India. I walked over to the Croma website and they don't have one. Similarly, all the water heaters at ezone are electric. Amusingly enough, the P. K. L. Ltd. website also does not talk about a gas-fired water heater. So either this is vapourware or their website is not updated. Do you know any firm selling gas-fired water heating for homes in India, and do you know any home that has one?

Thursday, November 03, 2011

Pakistan, India, MFN: What are the implications?






Wednesday, November 02, 2011

`The Quest' by Daniel Yergin: A great job but we need more

I recently read Daniel Yergin's fascinating book The Quest. It's a panoramic view of the global energy industry. For me personally, many parts were familiar territory. But many parts were new to me, and the overall integration of the story was valuable. I encourage every non-specialist (like me) who is curious about energy to read the book.

But I was left thirsty for two more books.

The first book would be a more technical treatment of the same material.

I repeatedly found myself wanting more technical detail. The pollution from cars has come down by 99% between 1970 and 2010. How was this done!? New nuclear reactor designs are fundamentally safer than the reactors that got into trouble at Chernobyl or Fukushima. What are these designs and why are they fundamentally safer!? Hybrid cars give you much higher mileage than ordinary cars. What are the key innovations which make this possible and how much did each of these new ideas contribute? The oil industry is doing incredible things digging deep into the sea. What are these engineering challenges and how are they being overcome?

And so on. The Quest is a good book but the The Quest for Geeks would be a great book.

The second direction in which I was curious and unsatisfied was India. The book has roughly nothing about India. It talks a bit about about Suzlon and has some political stories about India's views in global climate negotiations. For the rest, there is nothing about India's energy industry. It would be great if a comparable panoramic treatment was done, focusing on India. Perhaps Girish Sant and/or Rangan Banerjee should embark on such a project.