This column first appeared in Indian Express on August 5th, 2014. Like all products of the Brookings Institution India Center, this is intended to contribute to discussion and stimulate debate on important issues. The views are solely those of the author.
The finance minister announced in his budget speech that he would enhance the resources of the “clean energy fund” by doubling the cess on coal production from Rs 50 per tonne to Rs 100 per tonne. This fund was set up in 2000 to incubate, encourage and develop innovation in clean energy. A few days after his speech, I read that a significant percentage of the funds would be allocated to cleaning River Ganga. I asked a senior finance ministry official at an “on the record” gathering of CEOs whether this report had substance. I also asked why the fund was being managed by the finance ministry, and not the ministry of non-conventional and renewable energy. The latter, after all, had the domain expertise.
The answer was honest and revealing. The official said the “clean energy” fund covered more than just clean energy. It supported all projects related to the environment. He implied that “environment” is a capacious term under whose umbrella many seemingly unrelated projects can take shelter. He agreed that the finance ministry did not have domain expertise, but said that a specialist was always invited to the meeting. I found the answer to be revealing in two respects. It threw into relief two avoidable inefficiencies of bureaucratic governance — the disjunct between captioned intent and actual practice, and the skew in leadership on technical matters towards generalists over specialists.
The budget has evoked varying responses. Supporters have dug deep to locate nuggets that bear positively on growth, inflation, fiscal prudence and jobs. Critics have belaboured the absence of grandstanding reforms and the reversal of regressive policies like retroactive taxes. Both can bring logic and substance to their argument. Both make valid points. Both miss a central reality. The FM had 45 days to prepare the budget. He could do little more than signify a directional shift. Further, the budget is not the only forum for pronouncing on reforms.
It can be done at any time and through any medium. It would not surprise me, for instance, if the prime minister made a major statement on reforms from the ramparts of Red Fort on August 15. The point is that the budget was presented so early in the government’s tenure that it is wrong to use it as the touchstone to judge its commitment to reforms or for that matter, its arithmetic for evaluating the macroeconomics. What is not wrong is to evaluate the efficiency of the management of budgetary resources and the extent to which the FM will correct the institutional and leadership weaknesses that have in the past led to avoidable losses. It is in this context that the narrative on the clean energy fund is relevant.
Indian Railways’ business model is based on passengers underpaying and freight overpaying. Already, in financial year 2016-17, coal’s extra freight charge increased the cost of power by about 10 paise per kilowatt on average. For power plants in distant states, which inherently rely on Railways for coal, this number can be three times higher.
Gujarat, Punjab, Tamil Nadu that are far from coal mines, and therefore pay more than others, will contribute proportionately more to recover the coaching loss — the passenger subsidy. This overpayment by coal-based power applies to all coal generation in States like Punjab as all their coal comes via Railways.
Discussion | Indian Railways and coal: An unsustainable interdependency-New Delhi, India
The clean energy fund has never been constrained for money. In 2001, it had Rs 1,066 crore. This grew to Rs 3,350 crore in 2012 and Rs 8,648 crore in 2013 because of the increase in domestic coal production and imports. Now, with the doubling of the cess, the fund will be even more flush. With this level of resources, India should have been at the forefront of clean energy research. That it is not is due to the money not being deployed for the purpose intended. It was not allocated to universities, laboratories and companies engaged in researching clean energy technologies like coal gasification, fuel cells, energy storage, carbon capture and sequestration and concentrated solar. Instead, it was diverted to the consolidated fund and/ or used to support projects that were long past their technical due date. There were three reasons for this disconnect between intent and practice. One, the government was not really serious about clean energy research.
It wanted simply to generate additional revenues. A tax on a polluting industry for the purpose of cleansing the environment got it what it wanted and at the same time affirmed its green credentials. Two, there was institutional confusion. Five ministries were engaged in clean energy research — the ministries of power, coal, petroleum, non-conventional and renewables, and heavy industry. Each had some domain expertise but none had exclusive charge. As a result, and perhaps also because the money was raised through an indirect tax, the fund was placed under the purview of the Central boards of taxes and excise. The result — and this is the third reason — there was a lack of specialist leadership. The chairman of the fund was a finance ministry official with limited, if any, knowledge or understanding of the clean energy sector. As a result, there was no cutting-edge initiative.
The clean energy fund is not the only example of a case where stated intent diverged from practice. A cess has been levied for years, for instance, on oil and gas production to finance the development of the petroleum industry. The fund is captioned the “oil industry development bond”. It was always intended that OIDB funds be managed by the ministry of petroleum. The fact is that other than an initial disbursement, the funds have been kept in the finance ministry. It could be argued, of course, that there is no financial downside to the government taking funds from one metaphorical pocket to fill another. This would be an erroneous argument. There are significant negatives in adopting a cavalier approach to disbursement. Every time a project or programme is created, people are mobilised, expectations are raised and resources are deployed. The wilful non-implementation of projects creates waste and inefficiency. It leads to avoidable losses. Similarly poor and ignorant leadership also wreaks damage. In today’s connected and complex world, such leadership can push the economy off the rails. Our system still looks to “generalist” career civil servants to provide leadership for even the most technical of subjects. It does not encourage lateral entry into senior executive positions. This has created an imbalance that needs to be corrected, for even the most gifted of generalists do not have the bandwidth to keep pace with the dynamism of technical innovation and change.
The PM has talked of maximum governance. The touchstone by which I would judge the FM is what he does to improve the management of resources. This requires him to bridge the gap between intent and usage. It requires the placement of the right people in the right job at the right time. It requires him to ensure that the mistakes that have been made in the management of the clean energy fund are not repeated.