Briefing Note: Insurance Regulatory and Development Authority of India

 

Setting the context

The principal legislation governing the insurance sector in India is the Insurance Act, 1938. This law, amended several times since its passage, lays down the procedures and requirements that insurance companies must comply with while doing insurance (and reinsurance) business in the country. The Indian insurance sector operates under the aegis of the Ministry of Finance. The sector is regulated by the Insurance Regulatory and Development Authority (IRDA), a body incorporated under an Act of Parliament, the Insurance Regulatory and Development Authority Act, 1999. Armed with powers vested under the Acts of 1938 and 1999, IRDA sets forth the regulatory framework for the overall supervision and development of the insurance sector in India.

Typically, the insurance industry is classified into life and non-life categories, and comprises entities such as life insurance companies, general insurance companies, reinsurance companies, and insurance intermediaries such as brokers, third-party administrators, surveyors and loss assessors.

 

IRDAI

In India, the insurance industry, including its constituent entities, falls under the regulatory purview of IRDA. The Authority is primarily responsible for protecting the interests of policyholders; prescribing codes of conduct for regulated entities; and monitoring and enforcing standards of financial soundness and integrity among those it regulates. Towards fulfilling these responsibilities, the insurance sector regulator is vested with executive powers, including the power to issue, modify, withdraw or suspend registrations of industry entities; levy fees; call for information, inspect, investigate and audit the conduct of regulated entities. It also has an element of judicial powers so as to adjudicate disputes between insurers and intermediaries or insurance intermediaries. Further, IRDA is also mandated to promote and regulate the functioning of professional organizations related to the insurance and reinsurance business. Section 26 (1) of the IRDA Act of 1999 and Section 114A of the Insurance Act of 1938 provide the Authority with the powers to make subordinate legislations or regulations to carry out its statutory purposes, in consultation with the Insurance Advisory Committee (IAC).

Stipulated in the Act of 1999, IAC should consist of not more than twenty-five members (excluding ex-officio members) who represent the interests of commerce, industry, transport, agriculture, consumer fora, surveyors, agents, intermediaries, organizations engaged in safety and loss prevention, research bodies, and employees’ associations in the insurance sector. The draft of every regulation is placed first before the IAC and its comments/recommendations are sought. Consequently, the draft regulation is placed before the Authority for approval.  IRDA has made regulations on various aspects of the business of insurance including the protection of policyholders’ interests, the manner of investment of funds and its periodic reporting, the maintenance of solvency, and clearance of products prior to their introduction in the market.

As per Section 4 of the IRDAI Act, 1999, the Authority shall consist of 10 members – a Chairperson, five Whole-Time Members, and four Part-Time Members, as appointed by the Government of India. Under the Act, the Chairperson shall have the powers of general superintendence and direction in respect of all administrative matters of the Authority. All appointees are to be chosen from disciplines which, in the opinion of the Central Government, will serve useful for the Authority. IRDA has made regulations pertaining to the meetings of the Authority for transaction of business and procedure to be followed.

IRDA has also laid down regulations on the manner in which insurers are expected to handle grievances of policyholders. The first post of recourse for a policyholder is the insurer. Every insurer is required to have a Grievance Redressal Officer (GRO) to whom the complainant will direct the grievance. All insurers are also expected to be part of the Integrated Grievance Management System (IGMS) put in place by the Authority to facilitate online tracking of grievances. If the insurer rejects the grievance or does not respond to the complainant (within stipulated period) or only partially resolves the issue, the complainant can approach the Insurance Ombudsman.[ The Insurance Ombudsman scheme was created by the Government of India for individual policyholders to settle complaints out of courts. At present, there are 17 Insurance Ombudsman across the country. The complainant can approach an Ombudsman based on territorial jurisdiction – either the office location of the insurer/branch against whom the complaint is or based on the location of the complainant. ] The Ombudsman typically acts as a mediator to arrive at a mutual settlement. In cases where no settlement is possible, the Ombudsman has to pass an award within three months. If unsatisfied, the complainant may approach consumer or civil courts.

 

Sectoral issues and challenges

India’s insurance sector has been growing in recent years. Generally, the development of the sector is assessed using metrics such as insurance penetration, i.e. the percentage of insurance premium to Gross Domestic Product, and insurance density, i.e. the ratio of premium to population (or per capita premium). As per the IRDAI Annual Report 2020-2021, insurance penetration has increased from 3.49 per cent in 2016-2017 to 4.2 per cent in 2020-2021. Similarly, for the same time period, insurance density has increased from 59.7 USD to 78 USD. While both penetration and density of insurance remain low in comparison to global levels, they have grown with respect to their past levels.

Public sector insurers command a large share of the Indian insurance market despite several measures to liberalise the sector. For instance, the market share of the Life Insurance Corporation (LIC) stands at 64.14 per cent of the total premium underwritten in the life insurance segment. This segment itself dominates the insurance sector with a share of close to 75 per cent, and non-life insurance accounting for the remaining 25 per cent. Non-life insurance penetration is astonishingly low in India – only around 1 percent of the population is covered in this segment. Large sections of the Indian population, in rural areas especially, remain generally uninsured – herein lies the insurance gap.

Another long-standing issue with the sector has been that insurers in India lack sufficient capital. The insurance sector was a crucial part of the Central Government’s strategic disinvestment agenda. The LIC is the sole public-sector life insurer in the country whereas there are four public-sector insurers in the non-life insurer segment. The latter, however, have weak financial positions. The planned merger of three non-life (general) insurers was shelved in the year 2020. The Central Government decided to carry-out capital infusion measures to improve their solvency and financial position, enhance internal capacity and risk management capabilities. The LIC IPO and its recent underperformance sends strong signals about market confidence in public sector insurers and their ability to manage money. Given this outcome, the right balance needs to be struck between public sector and private sector in the insurance space.

That insurance policies are prone to mis-selling is now well-documented. When consumers with little understanding of financial products interface with agents and distributors whose remunerative structures incentivise them to ‘push’ these products, the possibility of mis-selling is high. The insurance regulator has made several interventions to resolve such issues. According to the IRDAI Annual Report 2020-21, the number of complaints related to mis-selling has decreased from 41,754 in 2019 to 25,482 in 2021. The sales-agent model in the insurance business has been increasingly challenged with the rise of cross-selling and direct-to-consumer digital sales. An upcoming model in the insurance ecosystem in India is InsurTech. The right mix of technology, innovation, and appropriate levels of regulatory scrutiny offers the much-needed opportunity to shrink the insurance gap in India.

Comment on Budgetary Allocations for the Defence Ministry FY 22-23

2 February 2022
Comment on Budgetary Allocations for the Defence Ministry FY 22-23
READ THE ARTICLE BY SUSHANT SINGH
Following the trend set by his predecessor, Arun Jaitley, the finance minister Nirmala Sitharaman did not mention budgetary allocations for the defence ministry in her budget speech in Lok Sabha on Tuesday. It is a bit jarring because no other ministry can boast of a share of the total budgetary allocations of the union government close to the 13.31% for the defence ministry. Moreover, the budget speech comes at the time of a major border crisis with China in Ladakh which has not been resolved after 21 months and witnessed a massive commitment of the armed forces in a very tough environment.

The allocation for four demands of the defence ministry is Rs 5.25 lakh crore (approximately $72 bn), which is an increase of 4.43% over the revised estimates for the previous year. Considering the high rate of inflation in India, this amounts to a reduction in real terms. As has been witnessed after the implementation of One Rank One Pension scheme and the implementation of the Seventh Pay Commission’s recommendations, the allocation for defence pensions has shot up to 1.197 lakh crore (approximately $16.4 bn). Nearly 86% of the pension budget is allocated for retired Army personnel, while the rest goes to retired personnel of the Indian Air Force and the Navy.

Another major item of expenditure is the salaries, where the total budgetary allocation is Rs 1.536 lakh crore ($21 bn), the lion’s share again going to the 13.5 lakh strong Army. The expenditure on human resources thus consumes 52% of the allocations for the defence ministry, a problem area that has become critical over the past few years but remains untackled, often masked by the big headline numbers of defence spending put out by the government. It was part of the amended terms of reference of the Fifteenth Finance Commission which submitted its report in 2020.

Due to “overall fiscal constraints”, the Fifteenth Finance Commission was forced to recommend that the government “should take immediate measures to innovatively bring down the salaries and pension liabilities”. Recommendations of the commission, such as those of “bringing service personnel currently under the old pension scheme into the New Pension Scheme (NPS) or a separate NPS for the armed forces” are unlikely to find any political support or traction from the defence services. The commission essentially wants the government “to ensure [that] the growth of defence pensions are at par with non-defence pensions,” which is a logical impossibility unless some painful reforms are undertaken in the provision of defence pensions.

At Rs 1.52 lakh crore, the capital allocation for the defence ministry saw an increase of 9.7% over the revised estimates of last year. Of this, Rs 1.24 lakh crore ($17 bn) is budgeted for the capital acquisition by the defence services, the actual amount to be spent towards scheduled payments of already contracted procurements and for the first instalment of new contracts that will be signed this year. Of this, the government has stipulated that 68% will reserved to be spent on domestic industry; last year, the stipulation was 64% but the actual figure achieved was only 58%. These figures, as many experts have pointed out, are also misleading as major sub-systems of these indigenous platforms are often imported from foreign countries. For eg., Tejas Light Combat Aircraft manufactured by Hindustan Aeronautics Limited for the IAF is only 62% indigenous by value.

The armed forces have been crying out for modernisation, with the Army complaining of more than two-thirds of its weapons, platforms and equipment being vintage, the IAF asking for resources to make up its depleting fleet of fighter jet squadrons while the Navy has curtailed its ambitions now to only being a 175-vessel force. While the IAF and the Navy spent more than their capital BE allocations in FY 21-22, the Army returned more than 30% of its BE allocations at the RE stage. The Army’s inability to spend the allocated amount is a very worrying development, considering that India’s emergent security challenges remain continental, both versus China and Pakistan.

In August 2020, defence ministry submitted a note to the Fifteenth Finance Commission which showed that between FY 2021-22 and FY 2026-27, there will be a shortfall of Rs 8.45 lakh crore even if there an increase of 16% per year in capital expenditure. It also said that “consistent shortfalls in the defence budget over a long period has resulted in serious capability gaps, compromising the operational preparedness of the services. Consequently, they have to resort to ad-hoc mechanisms such as postponement of a few procurements and delaying payments, resulting in high carry forward of unmet requirements and committed liabilities”. Nothing has been done to change this perilous state of affairs for India’s national security in the current budget.

The Future of Multilateralism

28 January 2022
The Future of Multilateralism
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In this episode of India Speak: The CPR Podcast, Shyam Saran (Senior Fellow, CPR and Former Indian Foreign Secretary) is joined by Asoke Mukerji (Former Permanent Representative of India to the United Nations). With illustrious careers in diplomacy, Saran and Mukerji unpack the future of multilateralism and its potential for cooperation amongst states, particularly as the world confronts cross-cutting global challenges like the COVID-19 pandemic, cyber security, terrorism and climate change. They discuss the potential of multilateralism to help deliver solutions through Agenda 2030, its structure through the UNSC and the 1945 Charter of the United Nations, the decline in US leadership in the UNSC and the calls for a restructuring of the UNSC. Finally, they discuss India’s legacy of multilateralism, how it can play a leadership role in international relations, its limitations in resource allocation and capacity building and the importance to maintain its claim on a UNSC seat.

The Pension Fund Regulatory & Development Authority


Setting the Context for Regulating Pensions

The Pension Fund Regulatory & Development Authority (PFRDA) was first established in 2003 as the Interim Pension Funds Regulatory and Development Authority by Gazette notification in tandem with the Government of India’s decision to introduce a new restructured pension system for entrants to central government service. The new pensions system was to be called the National Pension Scheme (NPS). It was also subsequently made available on a voluntary basis to all persons including self-employed professionals and workers in the unorganised sector. The Interim Authority was set up to regulate, promote and ensure the orderly growth of the pension market, but in effect this was limited to the NPS as other pension systems (including the Employees Provident Fund, as well as a number of other statutory, mandatory and voluntary pension systems) were already covered by other legislation and governance structures.

PFRDA was constituted in its present form in 2014 through the Pension Funds Regulatory and Development Act, 2013. Its scope of activity was expanded to include other pension schemes that are registered under it and not covered by any other statute. In particular this includes the Atal Pension Yojana, a government pensions scheme that provides a guaranteed minimum income to eligible unorganised sector workers.

PFRDA and NPS are of great salience for government employees. Until 2004, their pension schemes were managed on ‘defined benefit’ principles, or in other words, that they had fixed pension benefits which were calculated in the basis of their last drawn salary, years of service etc., and were in addition ‘cost-indexed’ at current rates. The establishment of PFRDA and NPS have signaled the transition in India from ‘defined benefit’ to ‘defined contribution’ schemes. This means pension benefits are directly linked to individual pension accounts, to which both employees and employees contribute during the term of employment. The quantum of benefit is however variable and dependent on the performance of the fund. Central government employees (except armed forces) who came into employment after 2004 have been mandatorily enrolled in the NPS. The state governments have also subsequently transitioned their pension systems to NPS as well. The NPS, and Atal Pension Yojana are open to the non-government subscribers as well, but it is not mandatory for them and is one among several investment options for them.

PFRDA and NPS also reflect the transition of government pension systems from a public-administered pension system to a system with a number of private operators, and one in which the benefits available to government employees was closely connected with the performance of markets.

The NPS is both mandatory (for most of its subscribers) and partly privatised. The central role of PFRDA is therefore to ensure stability and orderly growth of this system, and to protect subscribers from fund mismanagement, and from high rates and malpractice by intermediaries.

According to official data, as of November 2021, there are 76.8 lakh total members of central and state government employees in NPS, and the total Assets Under Management (AUM) for the central and state government schemes is INR 5.5 lakh crore. In addition, total membership under private NPS schemes stands at 32 lakh individuals, whereas their AUM is INR 1 lakh crore. Total membership under the Atal Pension Yojana is 3.2 crore individuals, and the AUM is INR 19 thousand crore.

Scope and Design of PFRDA Regulation

PFRDA is responsible for protecting the interests of pension fund subscribers. For this, it has power to regulate ‘intermediaries’. Pension funds are included within the definition of ‘intermediary’ in the PFRDA Act. Intermediaries also include central recordkeeping agencies, pension fund advisers, retirement advisers, points of presence and all other persons and entities connected with collection, management, recordkeeping and distribution of accumulations.

The NPS Trust, which was established by the Authority in 2008 under as per the provisions of the Indian Trusts Act of 1882 for taking care of the assets and funds under the NPS is also an intermediary which is regulated by NPS. The powers, functions and duties of NPS Trust are laid down under the PFRDA (National Pension System Trust) Regulations 2015, besides the provisions of the Trust deed dated 27.02.2008.

The Authority is responsible for registering intermediaries, and to make regulations for eligibility norms, including minimum capital requirement, past track-record including the ability to provide guaranteed returns, costs and fees, geographical reach, customer base, information technology capability, human resources etc. Further, the Act provides that intermediaries can only carry out business activities in accordance with the terms of the certificate of registration issued by the Authority. The Authority has range of powers to inspect and investigate the operations of intermediaries and to enforce its regulations and directions.

The Authority has adjudicatory power to decide on inquiries made in respect of intermediaries. It can also adjudicate disputes between intermediaries, and between intermediaries and subscribers.

The Authority is statutorily required to undertake steps to educate subscribers and the general public on issues relating to pension and retirement savings.

In addition, for NPS, the Authority also has some roles in relation to the actual management of the pension fund. It makes key appointments to the NPS Trust, including its Chairperson, CEO and Trustees. This has however been considered a conflict of interest, and a clear delineation of powers between the regulator and the NPS Trust is considered necessary. The Union Budget 2019-2020 proposed the separation of the NPS Trust and the PFRDA in view of this issue. It is understood that an amendment to the PFRDA Act is awaited in relation to the separation of the Trust (operational supervisor) from the PFRDA (legal regulator).

Issues and Challenges

Worldwide, pension system supervisors and regulators face the challenge of having high administrative charges for private pension funds, which leads to poor rates of return for pension fund members. There are often detrimental rules which govern the withdrawal of accumulated funds at retirement, and the risk of potential mis-selling when the retail channel is used to ‘sell’ financial products like pension plans. In this perspective, NPS is considered one of the most low-cost pension system designs in the world. However, consistent regulatory interventions are necessary to ensure that the NPS can continue serving the old-age income needs of individuals and protect their interests on a sustainable, reliable and cost-effective basis.

However, much more needs to be done to expand the low coverage of pensions in India. Out of an estimated Indian workforce of approximately 47 crore individuals[1], around 10.2 crore are covered under mandatory and voluntary pension schemes. In other words, only 21-22% of India’s workforce is covered by some form of pension plan. While pension coverage has incrementally risen in the past decade, a very large fraction of the working population still remains outside the formal pension system.

Expert committees in the past have highlighted the low pension participation rates among households in India – these include the Reserve Bank of India Committee on Household Finance, and some committees of the PFRDA. Risks to income security in old age are increasing due to a few reasons. First, the shifting demographic patterns in the country including the rise of the nuclear family, second, the high levels of unsecured debt (due to borrowings from non-institutional sources such as moneylenders) when approaching retirement age, and third, an increase in the elderly cohort. The general absence of effective formal sources of retirement income exposes the elderly cohort to economic shocks in the non-working segment of their lives.

The Atal Pension Yojana was established with a view of addressing this challenge, especially for unorganised sector workers. However, the challenges to increasing pension coverage in the low-income and heterogeneous unorganised sector in India are rather complex. The design of the savings instrument has to be customised to suit a financially semi-literate individual who may be unable to make regular contributions.

Further, India’s pension sector suffers from a fragmented regulatory landscape and exercise of regulatory oversight. While the NPS and Atal Pension Yojana are ‘regulated’ by PFRDA, the equivalent functions for the Employees Provident Fund and other pension systems are performed by their Board of Trustees or through other governing arrangements. This has led to disparate governance standards, outreach strategies, funding patterns, and investment guidelines across various pension schemes and programmes. These issues could be addressed through a comprehensive national pension policy, but this would require significant changes across the various laws, schemes and organisational structures.

Key Takeaways from Union Budget 2022

2 February 2022

The Finance Minister, Ms Nirmala Sitharaman presented the Union Budget on 1 February 2022. What does the budget mean for India’s economy? What are some of the hits and misses? In this piece, scholars at CPR share key takeaways.

Despite being presented ahead of crucial assembly elections, this is a remarkably non-political budget with neither positive nor negative surprises. There are no income tax cuts for the middle class. There is no increase in PM-Kisan direct benefit transfer payments from the current Rs 6,000/year to, say, Rs 9,000. Increasing this amount would have made political sense, given that small and marginal farmers would benefit the most from DBT. PM-Kisan, it may be recalled, was introduced first ahead of the 2019 Lok Sabha elections. Clearly, the government wants to keep the gun powder dry for 2024 elections.

The budget has announced measures for promoting zero budget natural farming and discourage chemical-based agriculture. One way to do this would have been to rationalise fertiliser subsidies, raise PDS issue prices and cap the current open-ended MSP procurement of paddy and wheat. The resources released from these could have, in turn, been ploughed back into increasing PM-Kisan benefits. That would also signal a policy shift from input- and product-based subsidies to income support to farmers.

Despite ongoing tensions on the China border, this is a regular defence budget with an allocation of Rs 5.25 lakh crore, a mere 4.3% increase over the previous year which will not even cover for inflation. More than half the amount will go towards salaries (1.54 lakh crore) and pensions (1.19 lakh crore). Capital budget has seen a 9.7% rise but the Army’s inability to spend 30% of its allocation in the current year, when it desperately needs to modernise, is a cause of worry.

Read a more detailed piece on defence allocations in the budget here.

The Budget announcement to facilitate opportunities in tier 2 and tier 3 cities, especially for women and children, is very welcome. CPR’s research demonstrates that secondary cities can be low-cost low-risk action spaces for rural and small-town youth – and women – to leverage existing social networks to explore economic opportunities. A ‘paradigm shift’ that combines land-use, economic and social planning and adopts place-based planning approaches, empowering urban local bodies and enabling regional planning approaches would be welcome.

Investments in the social sector remain neglected in this year’s budget. What has been particularly surprising is the low investments for health and also for some of the key schemes that formed an important safety net during the peak of the COVID-19 crisis. For instance, while there remain 77 lakh households that had demanded work under MGNREGS still to receive it, allocations for the scheme saw a 26% decrease over last years Revised Estimates. Food subsidy has seen a 28% decrease even as the Pradhan Mantri Garib Kalyan Yojana providing additional free grains to families was extended till 2022. Similarly, Ministry of Health and Family Welfare, sees only a Rs. 200 crore increase this year.

The budget appears to be a digital budget, and one must be careful it does not become a virtual budget because while technologies can be very transformative, e.g., the inclusion of post offices as part of the core banking system has great potential, the reliance on TV channels to remediate the loss in education during the past two years is a very risky strategy with potentially high downsides.

On urban areas, the move to kickstart green urban transport solutions including battery swapping is laudable as is the recognition of the need to develop a sui generis approach to urban areas but perhaps the fetishisation of metro rail needs some tempering. The thrust on logistics is very welcome but overall, the excessive attention to capital expenditure, including the quantum increase in support to the states, takes the focus away from insufficient allocations for necessary maintenance of existing assets at central and especially at the state and levels.

Gati Shakti provides much needed economic stimulus through infrastructure spending. But will the government adequately consider how to use the money to lock in low rather than high carbon futures? And deploy it to build a climate resilient society?

Energy transition receives rhetorical attention but allocations and incentives don’t completely line up. In power, renewables receive production support, but long-term coal phase-down is ignored and discoms get short shrift, with states receiving limited support.

The lack of attention to and even steps backward on air pollution is among the budget’s biggest environmental shortfalls. The paltry allocations to the CAQM and NCAP, coupled with the rapid phase-out of LPG subsidies risks back-sliding in the fight against air pollution. Indications on public transport are welcome but need fleshing out.

Read a more detailed piece on budget allocations for energy, environment and climate change here.

Despite claims of greater fiscal space, net tax revenues are higher than budgeted, this budget has moved toward fiscal consolidation rather than broad based support to a struggling economy. Revised estimates for the current financial year (FY 22) highlight that total expenditure reduced by approximately 1.5% GDP from FY 21 to FY 22 and will continue this path to reduce by a further 0.95% GDP from 16.24% in FY 22 to 15.2% in FY 23. The fiscal deficit on the other hand has reduced by 2.5% GDP. The extra fiscal space this FY has been used to reduce the fiscal deficit and not to support public expenditure, a trend that will continue into FY 23.

It is certainly true that capital expenditure allocations have increased from 1.65% of GDP in FY20 to 2.16% in FY21 to 2.6% in FY22 and projected to 2.9% in FY23. This rise is consistent and means that less than 60% of the fiscal deficit will be used to finance revenue expenditure in FY23 compared with 71.4% in FY20. This is a structural change in fiscal stance. But, contrary to the braggadocio in the economic survey, this has come about through revenue expenditure compression, and not through an increase in resource mobilization, which is why the capital expenditure/GDP ratio has increased even though the total expenditure/GDP ratio has shrunk.

Sushant Singh on National Security Challenges in 2022

Sushant Singh is a Senior Fellow at CPR. His research interests include international relations, foreign policy, defence and geopolitics. In this interview as part of the Leading Policy Conversations series, he discusses the national security challenges India confronts in 2022.

What do you think will be the main national security challenges for India in 2022?
The biggest national security challenge will continue to be posed by China, which remains a major strategic threat for India. Even if some form of modus vivendi is found on the disputed border, lack of trust between the two sides means that the threat is not going away. The second challenge will come from Pakistan, both as a subset of the China problem where the two together can activate a collusive military threat, and on the Line of Control in Kashmir where India’s domestic political moves have created instability. The third challenge is to complete the integration of three defence services under a new Chief of Defence Staff, following the untimely demise of General Bipin Rawat, and in the absence of any political ownership of the process.

How should policymakers address these challenges in the year?
On China, India has to recreate the deterrence to prevent any further Chinese aggression while creating options for quid pro quo trans-border operations that put PLA under pressure. It also has to provide leadership in the neighbourhood and build its own economic capacity, while positing India as a votary of free trade and a benchmark for liberal democracy. As far as Pakistan is concerned, India will have to start sincerely engaging Pakistan in peace talks and change its domestic policies in Kashmir. To undertake integration of defence services, a wider range of civil society and expert consultations, legislative backing and political ownership of the process that safeguards the civil-military balance is needed.

Rahul Verma on Political Challenges in 2022

Rahul Verma is a Fellow at CPR. His research interests include voting behavior, party politics, political violence, and media. In this interview as part of the Leading Policy Conversations series, he discusses the political challenges India confronts in 2022.

What do you think will be the main political challenges for India in 2022?
There are always going to be multiple political challenges in a country as diverse and as big as India. We can view different problems from specific lenses, for example, COVID-19 can be viewed as a health challenge, poverty alleviation as an economic challenge, or developments on India’s borders as a security challenge. However, all of these are also inherently political problems that require political responses. Therefore, to point out one single political challenge is neither feasible nor desirable. Even in the political-electoral arena, we have multiple tensions and fractures emerging. The increasing polarisation in the society is tied to the trust deficit between political parties, and in turn putting democratic norms and value systems under strain. Various institutions of governance are showing signs of decay. Additionally, the economy is not looking in great shape and so accommodating the aspirations of millions of young Indians would become increasingly difficult. These problems are neither new nor unique to India, but these are some of the tensions that will confront policymakers in the coming year.

How should policymakers address these challenges in the year?
It would be naïve of me to suggest quick fixes to such complex problems. Even when policymakers invest time and energy to find solutions to these challenges, they do so in uncertain informational environments. And often the solutions offered would give rise to newer sets of problems and challenges. In some ways, we have to be open to humbling experiences while engaging with these complex problems.

Increasing political polarisation and trust deficit have created a strain on institutions and democratic culture in society. One way to address these issues is to find ways of increasing dialogue across the aisle. People on either side of the spectrum need to be convinced that we are in this together and unless we collectively join hands to minimise these tensions in society, the fractures are going to engulf everyone involved. To begin this, now is the time to stop the hyperbole, make a realistic assessment of our present and imagine a vision for India’s future. 2022 is the 75th year of Indian Independence and we must plan where do we want India to head as a society and as a nation by 2047, when the country celebrates its 100th year of Independence. This shared vision should bind us all and help us find ways to increase dialogue and decrease the trust deficit.

CPR Faculty Speak: Shylashri Shankar

Shylashri Shankar is a Senior Fellow at CPR. Her intellectual and research interests include constitutionalism and religious freedom, judicial activism and policy making, impact of anti-terror laws on civil liberties, conceptual history and migration of ideas between judiciaries, the political economy of anti-poverty initiatives, food history, nationalism and identity in Hyderabad.

She has a PhD from Columbia University, an MSc from the London School of Economics and Political Science, an MA from the University of Cambridge, and a BA from Delhi University. In this edition of CPR Faculty Speak, she talks about her work and interests at CPR, why they matter, what impact she hopes to achieve and more.

Tell us about your research work and interests at CPR.
My research interests revolve around religious identity, democratic citizenship rights and justice. In Scaling Justice: India’s Supreme Court, Anti-Terror Laws and Social Rights (OUP, 2009), I analysed how the higher judiciary tackled citizenship rights when civil liberties and access to health and education were eroded. I asked identity-related questions such as – how does a litigant’s religious and political identity influence a judge’s decision? Do judges behave differently under majoritarian governments as compared to coalition governments? I used a mix of quantitative and qualitative methods to examine these issues.

I followed a similar mixed-method approach for a co-authored book. Battling Corruption: Has NREGA Reached India’s Rural Poor (OUP, 2013) focused on how anti-poverty programs could be more effectively targeted.

I have written on how and why courts have conflicting interpretations on secularism and religious freedom. For instance, how different imaginaries of Hinduism seeped into the constitution and later muddled the court’s interpretations of religious freedom is a chapter in my co-edited volume: A Secular Age Beyond the West: Religion, Law and the State in Asia, the Middle East and North Africa (CUP 2018).

I have continued to explore how judges read constitutional provisions on secularism in South Asia, and how they borrow from other courts in Asia, America and Europe. I use different lenses such as conceptual history and food history and politics (in my recent book, Turmeric Nation) to make sense of it.

Why do these issues interest you?
Questions of who we are, how we identify ourselves and who we consider to be ‘others’ are pertinent in the current climate. It is important to analyse how these questions were tackled by institutions, political parties and the citizenry historically and in independent India. It helps us understand there were different answers proposed, and pushes us to discover the reasons for the primacy of an answer in a particular era.

How have these issues evolved in the country and globally over the years?
We have moved from a pluralist mindset to a more identitarian one in recent times in India and the world. Ironically, the shift has come with technology that makes our mental and physical access global while simultaneously enabling more partisan and insular ideologies to flourish and reach wider audiences.

What impact do you aim to achieve through your research?
I hope that by reading my work, a person glimpses other ways of thinking about questions of identity and democratic citizenship, and understands the nuances, challenges and implications of treading particular pathways, and the complex trade-offs institutions juggle in interpreting constitutional rights.

What does a typical day look like for you at CPR?
I start my day at 5.30 in the morning and write and compose until lunchtime. Afternoons and some evenings are usually spent on answering emails, edits, reading, and occasional meetings.

What are you currently working on and why is it important?
I am working on a book chapter on Hindu nationalism and Indian politics, and finishing the section of a book on the old city neighbourhood of Hyderabad. In both, the central question examined is how the insider/outsider dichotomy is drawn historically and in the contemporary era, and how democratic values and institutions shape it.

To know more about Shylashri Shankar’s work and research, click here.

The future of MSP

In 1876 – a year after the so-called Deccan Riots, in which indebted Maratha peasants raided the shops and homes of village moneylenders to burn all mortgage deeds and other records lying with them – the British India government initiated the construction of the Nira Left Bank Canal in Pune district. This was followed by the opening of the Girna, Godavari and Pravara canals in Nashik and Ahmednagar during 1910 to 1920.

The colonial authorities had originally conceived these canals as “protective” irrigation works, enabling farmers in a semi-arid drought-prone region to raise their normal subsistence crops of jowar (sorghum) and bajra (pearl millet). What they ended up doing, instead, was convert western Maharashtra into a premier sugarcane-growing belt.

The reason for the Deccan canals turning from “protective” to “productive” works, with their waters being used mainly for cultivation of “cash” (in this case, sugarcane) as opposed to “subsistence” crops, was simple: Why would farmers want to pay for irrigation if they were just producing grain for home consumption? Spending money on water for jowar or bajra made sense only in years when the rains had totally failed. In normal years, no farmer would use canal water that, unlike rainwater, did not come free. The demand for irrigation on a regular (as against emergency) basis even in ordinary (non-drought) years could come only from farmers growing cash crops. Recovering the cost of irrigating their fields was possible only through sale of these crops. The canal works, too, wouldn’t pay for themselves if the water in the dams, built and stored at a great cost, had no assured takers even in normal years.1

The above lesson from history is relevant in today’s times, when there is a demand from farmer organizations to make minimum support prices (MSP) a “legal entitlement” for all crops. What began as a movement for rolling back the three agricultural reform laws enacted by the Narendra Modi government in September 2020 – these were formally repealed by Parliament on November 29 – has since grown into one that itself demands the introduction and passage of a legislation conferring mandatory status to MSP. And this is a demand having universal appeal, beyond the farmers of Punjab, Haryana and western Uttar Pradesh (UP).

MSP and Irrigation

MSP in India has had the same limitations as irrigation; the benefits in both have flowed largely to farmers of a few crops and regions. MSP’s effectiveness has been a function of implementation on the ground, either through direct government procurement or forcing private industry to pay. Such effectiveness, as the table below shows, has been mostly confined to four crops: Sugarcane, paddy/rice, wheat and cotton. While MSP implementation in the latter three takes place via procurement by government agencies such as the Food Corporation of India (FCI), National Agricultural Cooperative Marketing Federation of India (NAFED) and Cotton Corporation of India (CCI), in sugarcane, it is the mills that are, by law, required to pay the Centre’s “fair and remunerative price” to growers (UP, Haryana, Punjab and Uttarakhand fix even higher “state advised prices”).  MSP coverage in these four crops accounts for nearly three-fourths of the country’s sugarcane production, while amounting to roughly 50% for paddy/rice, 40% for wheat and 25% for cotton.

How much of production gets procured at minimum support price

                                                  (In lakh tonnes)

Crop Procurement Production % Procurement
2019-20 2020-21 2019-20 2020-21 2019-20 2020-21
Sugarcane* 2503.67 2984.24 3705.00 3992.53 67.58 74.75
Rice 518.26 600.74 1188.70 1222.70 43.60 49.14
Wheat 389.92 433.44 1078.60 1095.20 36.15 39.58
Cotton** 105.15 91.89 365.00 353.84 28.81 25.97
Chana 21.43 6.30 110.80 119.90 19.34 5.25
Tur 5.36 0.11 38.90 42.80 13.78 0.26
Mustard 8.04 0 91.24 101.12 8.81 0
Groundnut 7.21 2.84 99.52 102.10 7.24 2.78
Moong 1.47 0.20 25.10 30.90 5.86 0.65
Sunflower 0.05 0.04 2.13 2.30 2.47 1.69
Soyabean 0.11 Neg. 112.26 128.97 0.09 0
Masur 0.01 Neg. 11.00 14.50 0.13 0

Note: Figures are for agriculture year (July-June). For sugarcane, it is October-September. Only crops with minimum 1,000 tonnes procurement are taken; *Procurement by sugar mills; **In lakh bales of 170 kg each.

Source: FCI, NAFED, CCI, National Federation of Cooperative Sugar Factories and Ministry of Agriculture & Farmers’ Welfare.

Two points are worth noting here. The first is that the four above-mentioned crops have just over 22% combined share of the total value of India’s agricultural output from crops and livestock products.2 Secondly, all four are relatively water-guzzling. Almost 100% of sugarcane and wheat area in India is under irrigation. The same goes for paddy/rice grown in Punjab, Haryana, Telangana, Andhra Pradesh and Tamil Nadu, which together contributed to about 60% of the grain procured by government agencies in 2020-21.3 Even cotton requires anywhere from 6 to 12 irrigations (https://bit.ly/3GNGb7I), given its long duration of 6-8 months compared to 3-4 months for groundnut, soyabean and most pulses. Farmers who sow cotton in mid-June to early-July after the southwest monsoon rains typically harvest the crop over 4-5 pickings by mid-December to early-January, with some continuing to pick till February-end or beyond. That makes it equivalent to growing two crops, which, in turn, presupposes access to basic irrigation.

Simply put, provision of irrigation facilities to farmers in India has induced them to plant water-guzzling cash crops. This is due to their not wanting to “waste” scarce yet assured water on growing crops solely for self-consumption. Irrigation has gone hand in hand with cash cropping. The existing MSP regime has further reinforced this tendency. With irrigation boosting yields and MSP purchases assuring a stable market, farmers have found it more remunerative to produce crops benefiting from both forms of support. And if this weren’t enough, these crops have also received priority by way of public breeding and research support.

The early Green Revolution varieties in wheat – Kalyan Sona and Sonalika in the mid-1960s and HD-2285 and HD-2329 in the mid-1980s – raised potential yields from 10-15 quintals to 45-50 quintals per hectare. They have gone up further to 70 quintals-plus with HD-2967 and HD-3086 in the current decade (https://bit.ly/3dUUxqw). In paddy, recent breeding efforts have reduced crop durations by 20-30 days with minimal yield sacrifice (https://bit.ly/3GPcnYF), while also enabling dry direct seeding, as opposed to flooded-field transplanting (https://bit.ly/3sfCtzI). The release of the blockbuster Co-0238 cane variety has, likewise, transformed UP’s sugar industry. It has resulted in average cane yields in the state rising from below 60 tonnes to over 80 tonnes per hectare and sugar recoveries of mills from 9-9.25% to 11-11.5% since 2011-12 (https://bit.ly/3pSEEXk and https://bit.ly/3sn0AwC).

The most recent example of irrigation and MSP creating a bias towards water-guzzling cash crops is Telangana. Since 2014-15, the Kaleshwaram Lift Irrigation Project and schemes for micro-irrigation and revival of village tanks under Mission Kakatiya has increased the proportion of the state’s net sown area that is irrigated from 39% to 53%. It has led to a huge jump in paddy production, with its share in the state’s gross cropped area soaring from 26.6% to 50.3% between 2014-15 and 2020-21. This has been accompanied by a six-fold rise in government procurement (see table below). Telangana has, in fact, emerged as the second biggest contributor of paddy to the Central pool after Punjab (https://bit.ly/3F1ycUq), while being ranked No. 1 in cotton procurement (https://cotcorp.org.in/msp.aspx). Cotton is Telangana’s second largest crop, with its area of 61 lakh acres in 2020-21 next only to paddy’s 103 lakh acres.4

               Telangana’s paddy and cotton revolution

Paddy* Cotton**
Production Procurement Production Procurement
2014-15 68.2 24.32 50.50 36.91
2015-16 45.7 23.57 58.00 5.95
2016-17 99.0 53.67 48.00 0
2017-18 93.9 54.00 54.44 2.63
2018-19 100.0 77.46 42.00 7.77
2019-20 193.0 111.26 54.00 41.80
2020-21 251.0 141.11 59.95 34.01

Note: *lakh tonnes; **lakh bales of 170 kg each.

Source: Government of Telangana, FCI and CCI.

Outlived policy

Promotion of rice, wheat and sugarcane cultivation through MSP procurement/enforcement and expansion of irrigation wasn’t really bad policy, when the production of these carbohydrate-dense foods had to be increased in order to meet the country’s growing requirements. That situation does not, however, hold today when India has become surplus in cereals and sugar. Data from successive National Sample Survey rounds points to declining or stagnant per capita household consumption of both items (see table below).

All-India per capita household consumption

                 (In kg over 30 days)

Cereals* Sugar**
Rural Urban Rural Urban
1993-94 13.40 10.60 0.78 0.96
1999-2K 12.72 10.42 1.08 1.32
2004-05 12.12 9.94 0.74 0.87
2011-12 11.22 9.28 0.78 0.86

Note: *Includes atta and other cereal flours; *Includes gur.

Source: NSS rounds.

At 10 kg per capita per month, India’s annual household cereal consumption requirement for a 1.4 billion population would come to around 168 million tonnes (mt). Even taking 25% additional consumption in processed form (as bread, biscuits, cakes, noodles, vermicelli, flakes, etc) plus another 25 mt of grain (mainly maize) used for feed or starch, the total yearly demand will not exceed 235 mt. As against this outer limit, India’s cereal output has averaged 265 mt during 2016-17 to 2020-21 (https://bit.ly/3J9AbbJ). Allowing for official exaggeration, which might be offset by our own over-estimation of demand, it still yields a surplus of at least 25 mt. This is the excess that’s being produced every year and putting pressure on market prices, if not adding to government stocks. Evidence of that is seen in the table below: At 81.6 mt as on October 1, total stocks of rice and wheat in public warehouses were more than 2.5 times the required operational-cum-strategic reserves for this date and twice the levels five years ago. This is even after the all-time-high offtake of 93.11 mt in 2020-21 and another 45.91 mt in April-September 2021 under the National Food Security Act and various post-Covid welfare schemes. On top, India has exported record quantities of cereals: 22.83 mt in 2020-21 and 14.26 mt in April-September 2021. We have already alluded to these trends in a previous note (https://bit.ly/3spCP78).

Rice and wheat stocks in Central pool

     (In lakh tonnes)

Oct 1, 2016 372.00
Oct 1, 2017 433.36
Oct 1, 2018 553.69
Oct 1, 2019 669.49
Oct 1, 2020 684.88
Oct 1, 2021 816.03

Source: FCI.  

It’s not very different in sugar, where the direct household consumption, even at 1 kg per capita for 1.4 billion people, would work out to 16.8 mt.  Adding another 50% indirect consumption by sweetmeat, confectionary, soft drink, ice-cream and other industrial users will take that to 25-26 mt. Again, this has been trailing production, which has averaged close to 29 mt in the last five years and crossing 33 mt in 2018-19. With mills accumulating stocks – these were equivalent to 7 months of domestic consumption at the start of the 2019-20 crushing season – they have defaulted in payments to sugarcane growers. This, notwithstanding MSP of cane being a statutory obligation and payable within 14 days of purchase! The excess stocks have, then, had to be liquidated through heavily-subsidized exports and diversion of sugar for the ethanol-blended petrol programme (https://bit.ly/3ecJg5m).

Things aren’t as unsustainable in cotton, though, for three reasons. The first is that in states like Punjab, Haryana and even Telangana, paddy farmers can be encouraged to switch to cotton, which in any case consumes less water than the former. Secondly, cotton has no significant demand problems, unlike rice, wheat and sugar. Thirdly, lint (the white fibre that textile mills spin into yarn) constitutes only roughly 34% of the kapas or raw un-ginned cotton that farmers bring to the market. The balance is seed (65%) and moisture (1%). Cotton seed further yields both oil and cake. One of the useful byproducts of the genetically modified Bt revolution has been India’s cottonseed oil production trebling since 2003-04. With an estimated output of 1.25 mt in 2020-21, it was India’s third largest domestically produced vegetable oil after mustard (2.74 mt) and soyabean (1.33 mt).5 There’s no dearth of market either for lint (which is also exported) or cottonseed oil and cake (used as a protein ingredient by livestock feed manufacturers).

The road ahead

From our analysis, it is clear that the existing MSP procurement regime is neither economically nor agro-ecologically sustainable. Being skewed towards four crops, in terms of actual government procurement or enforcement, it incentivizes their production beyond the country’s consumption requirements. Such overproduction has been particularly pronounced in the last 5-6 years, a period coinciding with low price realizations on account of a variety of factors – from the collapse of a decade-long agri-commodities boom after 2014, to demonetization and inflation-targeting policies back home (https://bit.ly/3moY6dv). Those have engendered risk aversion among farmers and led them to expand production of MSP-protected crops that, we saw, are also relatively water-intensive. All this, of course, applies more to rice, wheat and sugarcane than to cotton.

Making MSP legally enforceable on all crops can potentially address the aforesaid distortions. To start with, farmers can be assured of getting MSPs for at least the 23 officially notified or “mandated” crops (https://bit.ly/3qjI99j). It should further be possible to fix MSPs in such a way to ensure higher returns (maybe C2 costs plus 50%) on crops consuming less water than the others (which may be entitled to not more than A2+FL plus 50%).6 This would help break the perverse reinforcing nexus between MSP and irrigation.

If MSP is to be made legal and implementable on all crops, the natural question that arises is how? Of the available options – government procurement at MSP, enforcing it on the private trade and price deficiency payments (PDP) – the last one seems the most workable, including from a fiscal standpoint. PDP entails the government not physically buying or stocking any grain and simply paying the difference between the market price and MSP, in case of the former ruling lower. Such payment credited to farmers’ bank accounts would be on the actual quantity of crop sold by them.

There are many advantages with a PDP scheme.

First, it would allow capping of procurement even of paddy and wheat, which is currently open-ended. Government agencies bought 103.42 mt of rice and wheat from last year’s crop, whereas the total annual requirement under the National Food Security Act and other welfare schemes isn’t more than 65 mt. With PDP, the government does not have to buy and stock beyond its operational and buffer requirements.  It just needs to pay a price difference, without incurring the handling, distribution, storage and other “carrying” costs on the excess grain. The savings on this count are enormous.

Second, since price difference is payable on sales taking place in APMC (agricultural produce market committee) mandis, it would force state governments to create the necessary market infrastructure to enable their farmers benefit from PDP. Madhya Pradesh, in fact, had implemented its own PDP scheme called Bhavantar Bhugtan Yojana in the 2017-18 kharif marketing season for eight MSP crops: urad (black gram), soyabean, maize, arhar/tur (pigeon pea), moong (green gram), groundnut, sesamum and nigerseed. Despite payments of Rs 1,952 crore made to the state’s farmers (https://bit.ly/3qlCz6z) and as many as 21 lakh registering under the scheme, it was dismissed as a failure. Apart from such sweeping judgment, based on a single season’s performance7, the scheme did not receive any Central support despite the initial enthusiasm shown by NITI Aayog (https://bit.ly/33HtAVs). It died within a year of launch.

Third, the necessity for recording of transactions (including how much quantity of produce every farmer has sold) to enable payment of price difference will impart transparency, which is also key to better regulation of agricultural markets. This is, moreover, consistent with the government’s efforts at integration of APMCs across the country to create a unified national market for agricultural markets.

Fourth, assured MSP implemented through PDP would make it possible to undertake crop area planning based on water availability, soil types and market demand-supply conditions. Telangana is the first state to attempt such an exercise in the 2021 kharif season, wherein it targeted a reduction in paddy area to 41.85 lakh acres (from last year’s 53.33 lakh acres) alongside an increase in that of cotton (from 60.54 lakh to 70.05 lakh acres) and tur (from 10.85 lakh to 20.01 lakh acres). State agriculture extension officers were instructed to maintain daily data on acreages in their clusters, “with details of crops grown in each gunta (0.025 acres)”.8 But this kind of planning, to nudge farmers to switch from one crop to another, can succeed only when they have reasonable confidence about prices at the time of harvest.

That brings us to the last but not least point. Agriculture is, perhaps, the only business where there is high probability of both production and price risks (https://bit.ly/3FlFCSh). One mustn’t, therefore, beyond a point debate over the “whether and why” of legal MSP. In today’s time, it may be more worthwhile to consider “how best” to make MSP work for the farmer.

Our notes in this series in the coming days will look closer at the role of both price policy and public investment in shaping the past and future of Indian agriculture.

This note, part of the Understanding the Rural Economy series by CPR, has been authored by Harish Damodaran

Find all previous notes as part of the series here:


Notes

  1. For a historical background and analysis of the impact of the Deccan Canals, see Donald W. Attwood, Raising Cane: The Political Economy of Sugar in Western India, Delhi: Oxford University Press (1993), pp. 41-5, 49-67.
  2. These are figures for 2018-19. The total value of output from all crops and livestock produce at current prices stood at Rs 31.74 lakh crore. Out of that, the value of paddy production was Rs 3.09 lakh crore, while Rs 2.01 lakh crore for wheat, Rs 1.22 lakh crore for sugarcane and gur (jaggery) and Rs 76,211 crore for kapas (raw un-ginned cotton). See State-wise and Item-wise Value of Output from Agriculture, Forestry and Fishing, Year: 2011-12 to 2018-19, National Statistical Office (2021), pp. 362-7.
  3. The All-India average area under irrigation was 95.5% for sugarcane and 94.5% for wheat. In paddy, these were at 99.7% for Punjab, 99.9% for Haryana, 98.5% for Telangana, 96.7% for Andhra Pradesh and 91.6% for Tamil Nadu. See Agricultural Statistics at a Glance 2020, Ministry of Agriculture & Farmers’ Welfare, pp. 49, 51, 83. Also, see https://bit.ly/3ypqf8K.
  4. Socio Economic Outlook 2021, Planning Department, Government of Telangana, pp. 46-9, 52-3. Also, Telangana State at a Glance 2021, Directorate of Economics and Statistics, p. 25.
  5. https://seaofindia.com/sea-kharif-crop-estimate-for-2020-21/.
  6. A2 covers all actual paid-out costs (on seed, fertilizer, fuel, labour, water, crop protection, etc) incurred by farmers in cultivating any crop. FL is the imputed value of unpaid family labour. C2 is a more comprehensive cost that includes A2+FL plus rental value and interest foregone on own land and fixed capital assets.
  7. See https://icrier.org/pdf/Working_Paper_357.pdf.
  8. Agriculture Action Plan 2021-22, Department of Agriculture, Government of Telangana, pp. 8, 10, 13.

‘Know Your Regulator’: Mr P.K. Pujari, Chairperson, Central Electricity Regulatory Commission (CERC)

The State Capacity Initiative at the Centre for Policy Research (CPR)’s talk series titled: ‘Know Your Regulator’ is held in collaboration with the National Council of Applied Economic Research (NCAER), the Forum of Indian Regulators (FOIR) and the Indian Institute of Corporate Affairs (IICA). In this talk series, we are talking to chairpersons and members of India’s regulatory agencies about regulation of Indian markets and the economy.

Our guest for the fourth event in the series was Mr P.K. Pujari, Chairperson, Central Electricity Regulatory Commission (CERC).

He was in conversation with Ms Arkaja Singh, Fellow, CPR, Dr Abha Yadav, Associate Professor, IICA and Director, FOIR Centre at IICA, and Dr Ashwini K Swain, Fellow, Initiative on Climate, Energy and Environment, Centre for Policy Research.

Dr Mekhala Krishnamurthy, Senior Fellow, CPR and Ms Amrita Pillai, Consultant, IEPF Chair Unit on Regulation, NCAER made welcome remarks.

The event was held on 20 December 2021, and a full video recording is available above.

Here is a summary of the conversation:

Background, role and purpose of CERC

CERC was setup with a purpose to distance the government of the day from getting into running the power sector. From 1991, power generation was opened to accommodate private participants and dealing with these private players on commercial issues was not within the government’s expertise. This led to the creation of a regulator. Subsequently, in 2003, the government distanced itself from tariff setting and other commercial aspects of the power sector. The mandate of the regulator is very clear: CERC is an independent regulatory body, but it must work within the framework of the Electricity Act.

CERC frames its own regulations, and the objective is to strike a balance between the suppliers and the consumers. In the process, CERC’s role is to ensure that the cost of electricity is recovered in an affordable manner and that competition and efficiency are brought into the system.

Dealing with the transition to renewables

The power sector all over the world is undergoing a tremendous change because of the introduction of renewables. The regulator needs to keep itself abreast with these developments and create a legal framework that enables and facilitates the changes that the sector is experiencing. In India, the government has announced setting up of large-scale renewables with a capacity of 480 GW. The biggest challenge that the CERC faces at this time is to integrate this into the Indian grid. Battery and hydrogen alternatives are also showing a promising potential.

This has regulatory, commercial and operational aspects. The regulator needs to keep itself abreast of these developments and develop a legal framework to facilitate these changes. The regulator also needs to be able to anticipate what changes are going to happen, and create the necessary background so that they can be assimilated into the system.

CERC might frame regulations facilitating integration of renewables into the system but how does it play out in practice? CERC needs to address technological operations that involve forecasting and scheduling issues as well. The grid operator must upgrade itself but how can CERC facilitate this transition? These functions are not visible to the public. The public only know the generation and distribution part of the sector, but operating the grid is not something people see. It takes a lot of effort to manage the grid. EVs are coming up and those challenges needs to be addressed too. CERC must be prepared to facilitate these developments; it must also prepare the grid to absorb the changes without disruption. When we discuss market turbulence, market monitoring and new emerging trends are where the issues begin. CERC must be very quick to develop capacity in those areas. Either we recruit people, or we have in-house capabilities, and CERC usually takes a call on how to upskill its employees. But the nature of the requirements keeps changing and this is another challenge.

CERC is mandated to promote competition and increase the efficiency. The body also advises government on the removal of institutional barriers to bridge the demand and supply gap, and therefore to foster and develop the interest of the consumers. Has the CERC been able to fulfil this mandate for its consumers?

As far as bulk power generation is concerned, there are two ways in which we determine the cost. The Electricity Act provides for either the cost-plus approach, which means that, for example, for an NTPC plant, you determine the capital cost and tariff. Or you can have a competitive bid through which price is discovered. This is more appropriate when there are private sector generators. But it is not as if only the second approach is competitive. In the first one too, it is the job of the regulator to determine efficiency parameters and mimic the market in fixing tariff. So it is not that the cost-plus approach is based on actual expenses. Over the years, the regulator has had to analyse and find the most efficient norms. In either of these ways, what the regulator does is to discover the tariff that is competitive.

Electricity is a concurrent subject and the state regulators set the distribution tariff that is paid by the consumer. State regulators determine the tariff of distribution of power within the state. They take the price set by the central regulator (both through costless and competitive bid), add the transmission charges (determined by the central regulator) and once the cost is fixed, they fix the tariff for the utilities and this final cost is passed to the consumers. So, the benefit of efficiency that finally reaches the consumer is through both the central and state regulatory levels. The CERC is a central regulator and does not directly deal with consumer tariff. But CERC’s generation cost becomes a bigger input in consumer tariff, and the regulator is fully responsible for discovering tariff that is competitive. The approach that CERC takes is to fix the tariff within competitive and tight normative parameters, discover tariff through competitive bidding and make sure that the transmission system is planned in an efficient manner so that there are no strained assets, and lastly, ensure that the efficiency is passed on to the consumer. The bidding guidelines, based on which the competitive bidding takes place, are framed as per the Electricity Act. Over the years, solar prices have been reducing sharply after competitive bidding, and regulators have to see the benefits of these falling tariffs are also passed down to the consumer. This is the broad framework under which CERC makes sure that the efficiency, economies of scale and competitiveness of those tariff gets passed on to the consumer.

CERC’s legislative, executive and adjudicatory powers

CERC has powers that are quite similar to legislative powers; the regulator frames regulations and places it in the Parliament. The regulations made by CERC are adjudicated based on the Electricity Act and the regulator also adjudicates on its own regulations and in that, it functions like a civil court. The CERC also does operations functions. It is a whole system operator and thinks about how systems function and does transmission planning, which is almost like an executive function. The CERC as an organisation has all the three elements of legislative, judiciary and executive functions. The need of the organisation is not specialization in one part; for electricity is the sector where there is techno-commercial economics. Every technology has its own commercial use. Finance, technology, and legal components are important in decision making. So, there is a need to ensure that CERC has enough expertise in these areas. This is a challenge since it is difficult to get competent people in all the three areas. Being in the electricity sector, people with technical backgrounds understand finance and law easily. CERC also has in-house people who acquire capacity and contribute to the government’s decision making. The regulator has autonomy to the extent that it does not report to the ministries but there are general financial guidelines under which the body requires governmental approvals. The CERC does not depend on the government budget and there is financial independence since we have charges and fees. The Act also defines the nature of our independence. If the Act is followed in true spirit, there is enough independence. The government can give directions to the central regulator, but the regulator is not bound by their advice. They also cannot issue guidelines specific to commercial or tariff issues. There is also a provision where CERC can advise the government on competition and market regulation; these are not binding on the state governments. We are independent but we are guided by the national policies; the jurisprudence is very clear on what is meant by guided and what is mandated.

The Kerala High Court described the domain of regulation as “unfathomable ocean of technical gobbledegook”. One of the key features of a regulatory authority is to be able to respond to complex technical demands in a rapid timeframe. The that is not all, CERC also has considerable legislative, executive and adjudicatory power. In what ways is the exercise of power by a regulator distinct from what you would do in the ministry, and can you explicate what the term regulate means in the context of CERC?

The role of the ministry is to make broad policy framework; the Electricity Act provides tariff policy, national electricity policy etc. The ministry gives policy guidance for the sector and the regulator is guided by that policy framework. The regulator works on the nitty gritty functions of the Act. For example, if we say that there is 450 GW of renewables, that is a policy statement. To do that, the ministry may take a document and ask us to setup a solar generation project, but the regulator needs to think about how this gets integrated within the larger framework, commercial issues involved in the contract, etc. CERC’s regulations comes into the detailing of all these activities. Its regulations promote implementation of policy.

The judgement you refer to of the Kerala High court is about a simple order relating to transmission. There is a transmission network in the country, but you can’t identify the exact line that goes to a specific consumer. How do we account the cost for this and how do we regulate? We found out that X amount of money needs to be recovered from the consumer. It flows from the policy that money needs to be recovered but how do we apportion the cost? Should it be based on usage? Should it be based on distance from the generating system? This is what CERC determines. We frame regulations to figure out the percentage cost for reliability and security; we also determine the x% that is a national component, the x% that is a regional component and how we estimate components becomes complex. The nitty gritty of translating policy and making it workable is CERC’s job. A lot of detailing takes place and CERC’s underlying policy is to do it in an equitable, affordable, fair, and efficient manner.

How is CERC’s adjudicatory powers different from what the judiciary does?

CERC’s adjudicatory powers are derived from the Electricity Act. The Supreme Court recently pronounced that composite schemes fall under the domain of the CERC. A private or government generating station supplying to more than one state comes under the CERC. Transmission is a monopoly, and it comes under the CERC as well. Intra-state generation and intra-state transmission is investigated by the CERC. Any contractual issues are adjudicated by CERC, and the regulator has its own procedure, it has the powers of the civil court and follows the process of the civil courts. We adjudicate disputes and we also investigate tariff setting issues in the same manner we resolve disputes. Adjudication comes in when there are issues of power supply agreement or when there is a force majeure issue, we adjudicate for the provision in the contract based on the law prevailing and whether the parties can claim for compensation or additional costs for recovery etc. We follow the basic principles of adjudication; we issue orders, and our orders are self-speaking. In the earlier days, all entities were government entities and there were very few disputes.  Today, there are many private entities, and these issues are very important since huge amounts of commercial stakes are involved. Our intention is to adjudicate these issues in a fair and quick manner. We also investigate how many of our orders are appealed and how many of our orders the courts have set aside etc. Usually, our orders are very good. Parties do look up to us since we provide a quicker way of resolving issues, and both the distribution utilities and generating utilities accept our judgements.

How does CERC integrate the market at a national level and how does it help consumers in tariff and supply reliability?

One can have a power plant purely as a merchant power plant. One can go anywhere else in the market for power exchange. This is delicensing. Transmission is a natural monopoly; we will not have competition in this space. Earlier all the transmission lines were built by power grids belonging a common entity but now these lines are bidded out and then private players who build these lines, operate, and maintain them for 35 years. We license them so that they can run and manage those lines. In the last 2-3 years, close to 50% of transmission assets have been bidded out. In the distribution part, utility will not have competition, but the point is who manages the distribution. The issue is about bringing in efficiency in the delivery of these services.

One issue we thought about was the carriage and content separation. In distribution, we take the lines part and make it a separate company. For example, the Central Transmission Utility is the monopoly in transmission, and we allow entities to supply in that line. The lines remain as monopolies. Recently there was a talk about delicensing distribution utilities but again switching over form one supplier to another is difficult because of the way in which the Act stands and hence, there is limited competition on this side.

There are other developments which need to be looked at: traditionally we have long term Power Purchase Agreements (25 years) but now because of the dynamics within the power sector there are not many takers for long term PPAs. In the long term, if you look at the distribution utilities, even the good utilities in the states of Gujarat, Maharashtra and Tamil Nadu can lock in 40-50% in long term PPAs, 30% in medium term PPAs (3-5 years) and for the rest 10-20% they can look to the short-term market. The whole load curve is changing and if you lock into long term PPAs you don’t have that flexibility. This is happening now. The demand for the market will grow and because of necessity, we will go to the market and buy.

CERC’s job is to facilitate market operations. We have different types of products; our term end market was limited to 11 days but now we are going for products with longer periods, and we will have contracts of 3 or 6 months. Everyone is looking at flexibility and managing their portfolios in an efficient manner, rather than locking into a contract for the long term and paying unnecessarily. Second, the scheduling that takes place on a PPA basis sometimes doesn’t optimise the power sector. For example, if I don’t schedule cheaper power the gain to the system is minimised. Market based economic dispatch (MBED) says that instead of every individual player scheduling power based on their contract, we can pull everything together and put it in the market to schedule it. The schedule is done from cheaper to higher cost and cheaper power is dispatched 100% so that there is efficiency gain in the system.  This is the basic concept behind MBED.

The challenge is implementation. Not technology implementation, but that the Discoms are the larger buyers and have to agree to go out of the PPAs and go to the market. There is a financial issue, because once you go to the market you have to pay upfront, so they have to have the resources. A lot of effort is being made by the ministry and by us so that we proceed in that direction. It is a slow process, we have floated a paper, a lot of comments have come, we have been discussing with stakeholders. My understanding is that it will happen. Security Constrained Economic Dispatch has been happening for the last 1.5 years, that is a precursor to MBED.

This is very important because 80% of the tariff we pay as consumers is the bulk power cost, and this will bring down that cost. However, the challenges are also political. The way electricity has developed, we treat states as islands of electricity grid, and there is a state-level sense of energy security. But moving to integrated market is a necessity for the future.

The Draft National Electricity Policy discusses the need to shift to light touch regulations. There is a transition happening in the sector. Supply and demand were predictable but now with renewables and various behind the meter interventions, demand is going to be variable. We are also moving away from a control to a market-based economy. Given all these changes, what does light regulation mean? Will there be a reduced role for regulators, or a more substantive role?

In the value chain of electricity, generation is the first point. The main cost is the generation cost. If you go through the process of competitive bidding, it is much easier. You go through a guideline, bid document, follow a process, and discover tariff. You ensure that the process is fair and transparent. The difficulty comes in the cost-plus tariff setting, since you must discover the tariff based on ‘n’ number of factors which is time consuming. Initially, we thought that we will do away with the cost-plus efforts and move into competitive bidding, but we realised that we cannot do away with one option. Today, instead of a deterministic approach, we are thinking to build normative parameters and then determine some benchmarks to set the tariff. For example, there are ‘n’ number of NTPC plants with various sizes and types and if we can determine O&M expenses based on size and capacity as a formula, it will be easier to add weightage. Can we also have an average normative number for capital cost? Everything is much more predictable in these situations when the norms are fixed. But we cannot make a norm for 10 years and go to sleep, this needs to be updated. For this, the regulator needs to be much more sensitive to what is happening in the market.

Another point is that today we have multi-year tariffs. We notify norms applicable to whichever power plants come in and are operating during a 5-year period. There is some regulatory certainty. We notify it before the tariff period kicks in, so everyone knows about it and this makes everything simpler. We cannot do away with regulations, but we can make them more normative, predictable, and this will certainly reduce the burden on the regulators and uncertainty for the other entities. This is our effort, but we have a long way to go because fixing up normative numbers is a difficult task.

What is CERC’s role in making sure there is universal access to electricity? How does CERC do advocacy and engage with the public?

The Act itself provides for various advocacy roles for the state regulators, and state regulators deal with the retail consumers and their awareness campaigns. The PSU generators like NTPC also do their own awareness campaigns as part of their CSR activities.

Our role in awareness generation is limited because we are not dealing with retail consumers. However, at our level, public engagement in regulation-making is something that we promote and encourage. For any regulations we make, we do engage with the expert bodies. Secondly, we take out a staff paper and ask for public comments. Thereafter, we consider those public comments. Then we make a draft regulation, and we ask for comments on the draft regulations and do a public hearing, and then we finalise it. The whole process is transparent, and we value the comments we receive.

In cases where larger public interest is involved, we allow certain non-governmental bodies to participate in the hearing. They bring the other side of the picture, or the counter point. We have recognised some NGOs and they are expert bodies. We also have interactions with various associations and societies who are active in the field of power sector.

But if you look at the level of engagement in regulation-making it is quite surprising and effective. We recently made a special provision for waste-to-energy plants – there are only 5-6 plants in the country, but we want to encourage them, so we made a special provision. We received comments from people who had read very clearly and made comments.

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