Public Affairs Round-up1

April 2015 | Vol 2 | Issue 6

03 Focus: Why India isfocusing on renewables

08 Viewfinder:Insurance Bill 09 Analysis:

How GST can boost India’s retail sector

07 Viewfinder:Land Acquisition Bill

inside

2 Public Affairs Round-up

Why renewable energy? Why now?

What does the dependence on a single natural resource for energy generation mean for India? The answer: The difference between a functioning, robust economy and a struggling one.

Just over half of India’s energy is generated by coal-fired plants. With energy demand likely to rise from 700 million tons of oil equivalent (mtoe) to 1500 mtoe by 2030, and coal supply proving to be erratic, India is staring at an energy crisis.

Recognising this, the government has stepped on the gas to diversify the source base and establish a renewable energy paradigm. Roughly 400 million Indians don’t have access to electricity and the country’s plants are not operating even close to full capacity. With climate change being an additional worry, the push for renewables couldn’t have come sooner.

With solar power prices falling, it is clearly the focus of the push. Wind is another priority area. Ambitious targets have been set but the plan has its flaws. Critics point out that innovative funding models are required, so are tax incentives. However, there is neither a roadmap for financing this task nor investment and manufacturing incentives other than some excise reductions. Clearly, India has a way to go.

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VIEWPOINT

It is this national priority that the latest edition of this newsletter shines a light on.

To get growth back on track, there are two other landmark legislations that the government has on the front burner – the controversial Land Acquisition Bill and the Insurance Bill. Both have been the subject of intense debate. While industry has lauded both of them, critics say the bills would have an adverse social and economic impact.

Similarly, the Goods and Services Tax (GST) finds itself at the centre of a political storm. A consensus among the states on it was elusive even as the government committed to implementing it next year.

We put these three landmark legislative pushes under the microscope.

What will they mean for India and will they help achieve the economic resurrection the country needs? Read on to know what our experts think.

Ashraf Engineer

Vice-President – Content & Insights, MSLGROUP in India ashraf.engineer@mslgroup.come

Public Affairs Round-up3

FOCUS

Why renewables?

The ‘Make in India’ initiative is a precursor to the push for renewables. This ambitious project cannot be successful without 24x7 power supply to industrial units across the country, which looks dubious at the moment due to the below-normal capacity utilisation of thermal power plants. Energy availability could be make or break for manufacturing and employment creation for the 13 million youths entering the job market every year.

The government also realises that foreign investors will stay away unless infrastructure bottlenecks are not resolved – energy being the prime one.

Apart from the erratic supply, roughly 400 million Indians have no access to electricity. Focus on energy generation through renewables is vital to diversify the supply base, reach every household and reduce dependence on coal.

Traditional power plants spew billions of tons of climate-changing carbon dioxide into the atmosphere. A recent study of 47 coal-based thermal plants by the Centre for Science and Environment found that not only are India’s power units are among the most inefficient in the world, they operate at an average of only 60%-70% of their installed capacity.

Despite international pressure, there was no emissions cut target for India, unlike China. India insisted on managing climate change through clean and renewable energy using efficient technology.

Total renewable installed capacity (December 2014)

Source Capacity (in GW)

Wind 22.46

Solar 3.06

Small hydro 3.99

Biomass 1.36

Bagasse cogeneration 2.8

Waste to power 0.1

Total 33.77

Source: Ministry of New and Renewable Energy

Why India is focusing on renewables

Nirav Khatri

Manager - Research & Insights, MSLGROUP in India nirav.khatri@mslgroup.come

India’s energy security is more of an imperative than ever before,

especially given the uncertainty around coal production. A little

over half of India’s energy supply comes from coal-fired plants.

The McKinsey report ‘India – Towards Energy Independence 2030’

estimated that energy demand is likely to rise from 700 million

tons of oil equivalent (mtoe) to 1500 mtoe by 2030. However, the

struggle to increase coal supplies to meet the growing need is

worsening the fuel crisis in India – the third largest emitter of

greenhouse gases, after China and the US.

India, therefore, needs a thrust on power through renewables,

which currently contribute a meagre 13% of the total 259 GW of

installed capacity. Debasish Mishra, senior director, consulting,

Deloitte Touche Tohmatsu India, told LiveMint.com: “Given an

ever-growing demand for energy and over-reliance on coal-based

thermal power, any other alternative source of energy helps India.”

Public Affairs Round-up4

Focus on solar and wind

Solar radiation is an important input for power generation and, though India gets twice as much sunshine as many European countries that use solar power, solar contributes just 1% to its energy mix. The time is ripe to harness this abundant free resource also because equipment costs are falling – the US solar cell price fell to $0.6/watt in 2014 from $0.75/watt in 2013, with Chinese models available at $0.5/watt.

Though the cost of generating power using photovoltaic cells has come down from Rs 20 per unit to Rs 5.50, it needs to be reduced further for large-scale implementation.

The initial target of 22 GW of installed solar power capacity has now been revised to 100 GW by 2022; India is envisaging ultra-mega solar power projects with a capacity of up to 4 GW.

Prime Minister Narendra Modi was an early proponent of this initiative in his home state, Gujarat. The state became the first to announce a solar policy in 2009. Modi’s home turf – with an installed capacity of 929 MW of the total 3.06 GW – remains the undisputed leader among Indian states, followed by Rajasthan and Madhya Pradesh. Naturally, Modi wants to extend this to the rest of the country. Consequently, solar equipment manufacturers said they were willing to commit $200 billion to kickstart India’s renewable energy push.

With an installed capacity of 22.4 GW, India is the fifth largest wind power producer in the world after China, US, Germany and Spain. However, its significance has been overshadowed by solar projects in recent years. Wind energy generation suffered a setback in new installation capacity after the benefits of accelerated depreciation were ended in 2012-13.

Taking note of this, immediately after coming to power, the Modi government restored the benefits. Clubbed with generation-based incentives, wind power is getting a serious boost. However, the plant load factor – which measures average capacity utilisation – is a worry due to the uncertain wind velocity.

Road ahead is no cakewalk

Expanded targets to be achieved by 2022

Source Capacity (in GW)

Solar power 100

Wind power 60

Bio-fuel plants 10

Small hydro power 5

Total 175

Beginning this year, the ministry announced plans to add 175 GW of renewable energy by 2022. This includes 100 GW of solar at a cost of $100 billion, 60 GW of wind energy, 10 GW through bio-fuel plants and the rest in small hydel. These ambitious targets have made India a fast-growing market for photovoltaics with demand for solar power reaching 3.2 GW this year. However, experts feel that this is aspirational and achieving 100 GW will require a compounded annual growth rate of over 50% over the next eight years, overtaking market leader Germany’s industry growth and maturity – a tall order.

However, there is neither an explicit roadmap for the financing of this task nor investment and manufacturing incentives other than excise reduction on round copper alloys and tin alloys for photovoltaic ribbons.

FOCUS

Public Affairs Round-up5

Speaking to ‘Forbes India’, Anish De, partner - infrastructure and government services, KPMG in India, said: “Unlike rail and roads, tax-free bonds have not been specifically proposed for renewable energy.”

There are indirect benefits in the form of doubling of coal cess from Rs 100 to Rs 200 for every ton of coal mined or imported, the proceeds of which will fund renewable energy projects through the National Clean Energy Fund. It is expected that coal cess can amass Rs 14,000 crore in 2015-16 and Rs 20,000 crore by 2019-2020 – not enough to finance the ambitious targets. India needs to emulate the US and China to make this programme successful. For example, these nations have issued green bonds to lower interest rates to finance renewable energy projects.

Blame the constricted transmission system for the fractured capacity during peak demand. The grid faces difficulty in absorbing renewable electricity because of varying voltage and supply. The expanding renewable capacities will demand an equal and unhindered evacuation of power to regional and national grids.

Typically, evacuation is a major challenge for wind project developers due to the unavailability of the grid around farm sites in remote areas. The ‘green energy corridor’ aims at synchronising electricity from renewable sources with conventional power stations in the grid.

Another obstruction is non-availability of water for generation of solar power using photovaltiac (PV) technology. Non-availability of water mainly due to the unpredictable monsoon or lack of irrigation can impede the development of colossal solar PV parks in arid regions.

India must also explore the possibility of sourcing renewable energy through tidal currents using undersea turbines. They operate similarly to wind turbines; however, unlike the wind, tides are more predictable and the power input is constant. Technically, a marine turbine blade needs to be only a third of a wind generator and is capable of producing three times as much power.

Though the Budget addressed the issue of continuity – the doubling of clean energy cess is a step in the right direction – more clarity is needed on incentivising manufacturing of renewable energy components. This is a modest beginning, but more follow-up action is required to make it impactful.

FOCUS

Public Affairs Round-up6

`

Harnessing abundantinputs like solar radiationand wind will help achieve

energy security

Compounded annual growth rateneeded over 8 years to achieve100 GW of solar energy generation,up from 3 GW now

50% 43,000 crore`

Investment in green energycorridor to facilitate flow ofrenewable energy intonational grid

Why doesIndia need to shiftto renewables?

Power demand outpacing supply. Most of India’s energy comes from conventional

resources – coal, petroleum, natural gas. Shift to renewables will reduce dependence on them

Fixed cost of setting up a solar plant of one megawatt capacity, as per Gujarat Energy

Research and Management Institute, is Rs 3.5 crore; it used to be Rs 15 crore

Cost per solar power unit fell from Rs 20 to Rs 5.5. Further

reduction possible

India needs toreduce its energy

import bill

How viable aregreen sources?

What shouldIndia do now?

Draw up roadmap for financing to encourage private investment

in the sector

Manufacturing and investment incentives will propel fabrication of

equipment, parts

400 million without electricity today; they could be brought within the power umbrella

Huge savings due to reduced import bill; fiscal deficit would shrink

‘Make in India’ would be a success, providing jobs and boosting economy

How wouldIndia benefit?`

$300 billionEstimated energy import bill by 2030. Crude oil, natural gas account for 80%

and 18% respectively of import requirements

Rs 5.50Cost per solar power unit.

Decline from Rs.20 per unit convinced government solar

energy was viable

India needs renewable energy

INFOGRAPHIC

Public Affairs Round-up7

Land Acquisition Bill – all is not well

VIEWFINDER

Why is this bill so important?

Hurdles related to land acquisition – environment clearances, red-tapism and other bureaucratic procedures – are serious systemic issues that have hurt the business climate, often keeping investors away. Through this law, the government is trying to simplify procedures and underscore its pro-industry image.

Without the clauses

The ordinance expanded the list of projects exempted from the two clauses to include five new categories – national security, defence, rural infrastructure (including electrification), industrial corridors and housing for the poor. This means that the mandatory 80% consent clause in those five sectors will no longer be applicable on land acquired by the government or public/private enterprises.

This has not found favor with the Opposition. Bypassing the SIA provisions, it claims, destroys the roadmap for effective resettlement and rehabilitation. Stakeholders argue that the transaction cannot be equitable as the ordinance aims to expropriate land rather than acquire it. The Campaign for Survival and Dignity, a national platform of tribal and forest dweller’s organisations in 10 states, alleged that the bill has many loopholes favouring industrialists and commercial interests.

Consequences

An SIA is a barometer of whether the proposed acquisition serves a public purpose, it projects the number of families affected and provides alternatives to the displaced. Without an SIA, only the land owner would be compensated since the mechanism used to track the dependence of others on the land ceases to exist. It may also endanger food security as fertile land could be acquired.

Outrage

Experts slammed the government for failing to address stakeholders’ – farmers and farm labourers’ – concerns. When the government realised that resistance to the ordinance was real, it decided to connect directly with farmers. Other stakeholders, such as labourers and other affected families, were not allowed to participate in the process.

Flipside

The government has tried to maintain equilibrium by including 13 thus far excluded laws under the Land Acquisition Act. This includes the Coal Bearing Areas Acquisition and Development Act (1957), the National Highways Act (1956), the Land Acquisition (Mines) Act (1885), the Atomic Energy Act (1962), the Indian Tramways Act (1886) and the Railways Act (1989). With this, rehabilitation, resettlement and compensation provisions will be applicable for the 13 existing central pieces of legislation. So far, land could be acquired under these acts and there was no uniform central policy for rehabilitation and resettlement.

The central government was grappling to get the Right to

Fair Compensation and Transparency in Land Acquisition,

Rehabilitation and Resettlement Bill (Amendment) Bill

2015, popularly known as the Land Bill, passed in the

upper house of Parliament. The Opposition was simply

unwilling to relent on the consent and social impact

assessment (SIA) clauses in the amended version at the

time of writing.

Nirav Khatri

Manager - Research & Insights, MSLGROUP in India nirav.khatri@mslgroup.come

Public Affairs Round-up8

What the new insurance Bill means for you

VIEWFINDER

Recently, the Rajya Sabha passed the Insurance Laws (Amendment) Bill 2015, raising the limit on foreign direct investment in Indian insurance companies to 49% from 26%. The industry cheered the move, but it is important to note that the Bill has implications for policyholders as well. For the Narendra Modi government, this is in keeping with its agenda of pushing hard for economic reform.

Ironically, the Bill had been pending in Parliament since 2008, opposed by Modi’s own Bharatiya Janata Party when the United Progressive Alliance was in power.

India’s insurance market is growing exponentially but has a long way to go in terms of reach. A vast majority of the population is outside its ambit. With more players coming in and investments being pumped into the system, the industry could undergo a significant transformation.

The Bill is likely to benefit several foreign players, such as Prudential, Metlife, Allianz and Standard Life. They could now look at not only expanding their businesses, but also getting better returns on investments. Some Indian firms like Max India, Religare and HDFC Standard Life Insurance could expect to draw funds and widen their reach.

It would be interesting to see how Life Insurance Corporation (LIC) of India – which controls more than 65% of the market – copes with the change. Once the market gets more aggressive, LIC and other state-run insurance companies could feel the heat. However, some experts believe that in a sector like this people like to play it safe and stick to the tried and tested.

The insurance sector is expanding in several segments like health, directors’ and officers’ liability, and reinsurance. However, the current Insurance Act, 1938, does not cover these directly. It is time for a relook at the regulatory mechanism.

There’s a lot in it for consumers as well. Greater investment from global firms would bring in advanced products, improved technology and a marked difference in service. The new Bill ensures greater transparency, facilitating informed choice. It also offers greater accessibility to consumers by giving them options to pay premiums in installments and makes legal recourse more accessible. Currently, the collection of premiums in installments is restricted to health insurance. Extending this to other sectors would spawn diverse products, making it a win-win situation for both stakeholders.

The Bill also proposes an independent grievance redressal authority that would have powers on par with that of a civil court. Composed of judicial and technical members, it is bound to strengthen the redressal of policyholders’ complaints.

By introducing a cap on agents’ commissions, the Bill ensures that there is a check on misselling. As of now, agents benefit through a host of perks – including international trips offered by insurance companies to sell more. This drives them to push products that consumers don’t need.

Critics, however, believe the government cracked under pressure from industry to open up the market. Unfortunately, the global economy is not at its healthiest so whether foreign players hurry to pump in money is far from certain.

Amrita Choudhary

Associate Director – Content, MSLGROUP in India amrita.choudhary@mslgroup.come

Public Affairs Round-up9

How GST can boost India’s retail sector

ANALYSIS

Role of GST

Under the present system, taxes on services cannot be offset against taxes on goods. Retail being a service industry has to pay service tax, despite paying taxes the manufacture of the goods it sells. GST is expected to not only solve the problem of service tax, but also reduce other tax-related complexities through a uniform State GST.

It would impact retail positively by reducing payments on services, real estate rents and other service-related activities. The benefits will percolate upstream to manufacturers as well. GST can help retailers reduce the snowballing impact of taxes.

Depending on the final GST base and rate, there will be a significant redistribution of tax across goods and services. Goods currently subject to both central and state taxes should see a net reduction in tax and an increase in consumer demand.

Transforming supply chains

Besides simplifying the system and lowering the cost of business, GST calls for a fundamental redesign of supply chains. It will affect how companies operate, presenting significant opportunities for long-term revenue and margin improvement.

For instance, under the current tax structure, supply chains are designed to minimise the burden of Central Sales Tax (CST) through distribution centres in states where consumers are located. They are sub-optimal from a strategic and economic perspective. The elimination of CST will lead to the optimisation of supply chains, enabling companies to reevaluate procurement patterns, distribution and warehousing.

Retail apart, according to the National Council of Applied Economic Research, implementing GST would boost India’s economy by 0.9% to 1.7%. At a time when growth has taken a hit, experts said a simplified tax structure could be the fuel required to put it back on track.

A well-designed GST would make India a true common market, giving manufacturing the required boost, encouraging local production – thus tying in to the ‘Make in India’ agenda – and limiting the scope for corruption.

Daylon D’Cruz

Associate Account Director, MSLGROUP in India daylon.dcruz@mslgroup.come

As Finance Minister Arun Jaitley presented the Union

Budget, kickstarting the “rebuilding process”, retailers

watched keenly. They were looking for a pro-growth

Budget that would promote the ‘Make in India’ initiative,

facilitate skills development and tease the ‘demand

dividend’ out of consumers.

India, with more than 12 million retail outlets employing

over 33 million people, could do with the speedy

introduction of the much-delayed Goods and Services

Tax (GST). The GST is a uniform tax applied nationally,

replacing all indirect levies of central and state

governments on goods and services.

Public Affairs Round-up10

Impact

A unified GST is an economically efficient solution even for multinationals, which have to compete with companies in the unorganised sector, as it simplifies the indirect tax structure to one general rate to be paid by all companies.

Under the GST structure, every company gets a deduction on taxes already paid by suppliers. That results in every buyer ensuring that his/her supplier has paid up.

To put things in perspective, let us assume there is a cloth manufacturer that procures raw materials at Rs 5 crore per batch. The manufacturer keeps his operating profits at Rs 1 crore and encumbers a processing cost of Rs 50 lakh. The flow would look something like this:

Calculation based on tax @10% for easy computing

ANALYSIS

If we calculate the total tax that the manufacturer has to pay currently, it would be Rs 1.2 crore (Rs 50 lakh on procurement and Rs 70 lakh on sale).

With GST, the total tax the producer pays is Rs 70 lakh. How?

The producer had initially paid an input tax of Rs 50 lakh. Now when he sells his batch for Rs 7 crore, he gets a tax credit of Rs 50 lakh. Thus, he pays Rs 20 lakh in the form of taxes for the final transaction. This adds up to just Rs 70 lakh for the producer.

The GST, hence, reduces the tax burden on producers. The biggest benefit of such a system is that it would contain various indirect taxes currently levied on various participants of the supply chain. Reducing such taxes would lower overall production cost and increase the output of the economy in the long run.

GST would be one of the most significant fiscal reforms of independent India. It is expected to result in a major rationalisation and simplification of the consumption tax structure at the central and state levels.

Procurementof Raw

materials

Processingcosts

500lakhs +10%Tax

50lakhs

100lakhs

550+50+100 =

700 lakhs

Profitmargin

SellingPrice*

*Sum of thetotal value of the

product andprofit margin

Value of the Product

Value of the Product

Public Affairs Round-up11

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BACK OF THE BOOK

Rs 171,000 croreFinance from state-run banks to set up green energy projects over the next five years

116India’s position in the global internet speed rankings, according to an Akamai Technologies report for Q4 of 2014. The average connection speed in India is 2MBPS; China’s is 3.4 MBPS

Rs 110,000 croreAmount fetched for the biggest telecom spectrum auction in four bands

$5.18New price of natural gas per million British thermal units effective from April 1 till September 30 on net calorific value basis. It was $5.61 earlier

$300 millionLoan extended by the Asian Development Bank for improving road connectivity, and increasing domestic and regional trade along the North Bengal and North Eastern regions

2 millionThe number of jobs leading e-commerce company Flipkart hopes to create directly or indirectly through its marketplace and ancillary services in 2015.

17The number of mega food parks sanctioned by the Centre. The parks are expected to attract an investment of Rs 6,000 crore, provide employment to 80,000 people and benefit 500,000 farmers directly or indirectly when functional

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