Briefing Note: Kerala State Electricity Regulatory Commission

Setting the context for state electricity regulatory agencies in India

Electricity is a concurrent list subject, with a federal dimension in the sharing of power and responsibility between the Centre and States. This reflects in the structure of electricity regulation in India. The Central Electricity Regulatory Commission (CERC) regulates tariffs for generating companies owned or controlled by the Central Government, those with an inter-State dimension, and those concerned with inter-State transmission of electricity. The State Electricity Regulatory Commissions (SERCs) regulate tariffs for generation, supply, transmission and wheeling of electricity within the States.

State Electricity Boards (SEBs) were set up by the Electricity (Supply) Act, 1948 to oversee generation, transmission and distribution activities. These were the backbone of the electricity infrastructure, and controlled 70 percent of electricity generation and almost all distribution by 1991. State governments performed the tariff-setting role. The decision on electricity pricing was often made with political considerations, and this led to a sharp deterioration of the financial condition and management practices of SEBs. A failed attempt to privatize the sector in 1991 was followed by a World Bank-supported reform effort in the state of Orissa, organized around unbundling and privatization in the sector. Several states followed in its steps, and in 1998 the Ministry of Power did the same through the Electricity Regulatory Commissions Act, 1998.

The CERC and SERCs were set up under the 1998 Act (later reconstituted under the Electricity Act, 2003) with the objectives of depoliticizing the sector and incentivizing private investment.
The Electricity Act, 2003, designed to consolidate the various laws governing the electricity sector, brought in two key changes: (i) generation was delicensed; (ii) SEBs were to be ‘unbundled’ or separated into uni-functional utilities.

State in focus – Kerala

In the year 1958, the electricity department of the Kerala State was converted into the Kerala State Electricity Board (KSEB), under the Electricity (Supply) Act, 1948. KSEB was responsible for generating, transmitting and distributing electricity within the State. Kerala is a land of mountains and rivers. As such, the region is conducive to the generation of hydroelectricity. In the 1980s, the state depended on a surplus supply of inexpensive hydroelectric power to attract energy-intensive industries. The KSEB even exported the surplus power to neighboring states to earn revenue. By the mid 1990s, however, there was a shortage of generation facilities coupled with growing demand. KSEB is understood to have turned into a net importer of electricity during this period. As a result, not only was the state deficient in power supply but also had to deal with KSEB’s financial burden.

In 2003, with the passage of the Electricity Act, the SEBs were required to be re-organised such that the key activities of generation, transmission and distribution of electricity could be undertaken by different entities. Under a mutual agreement with the Government of India, KSEB continued to function as a State Transmission Utility (STU) and distribution licensee until 2008. From 2008 to 2013, the state government took over the functioning of KSEB as per section 131 of the Electricity Act, 2003. Subsequently, the state government revested all functions, properties, interests, rights, obligations and liabilities of KSEB to its successor, a corporate entity named the Kerala State Electricity Board Ltd (KSEBL) which is a transmission and distribution utility.

The Kerala State Electricity Regulatory Commission (KSERC) was constituted in November 2002, under the Electricity Regulatory Commissions Act, 1998. It later came under the purview of the Electricity Act, 2003. The KSERC regulates generation, transmission, wheeling and distribution of electricity within the State. It regulates power purchases and procurement processes, issues licenses and determines tariffs for electricity operations in the State. The Commission also specifies and enforces standards with respect to quality, continuity and reliability of service by licensees. It is responsible for adjudicating disputes between licensees and distribution companies. Consumer grievances are addressed at the level of the utilities or the licensees. The Electricity Act stipulates that forums for redressal of consumer grievances be set up by all licensees. Consumers whose grievances are not settled by this forum or those who are aggrieved by the decision of this forum can approach the Ombudsman appointed by the State Commission. The KSERC primarily has a standards-setting and policy advisory role quite similar to the CERC, but limited to the State, and is bound to follow national electricity and tariff policy in the discharge of its functions.

As per Section 82 of the Electricity Act, a State Commission shall consist of 3 members, including the Chairperson. All members of the Commission are appointed on the recommendation of a Selection Committee chaired by a judge of the relevant High Court, and comprising the Chief Secretary of the State, the Chairperson of the Authority (for the selection of a member) or the Chairperson of the Central Commission (for the selection of the State Commission Chairperson).

Sectoral challenges

Kerala’s reliance on power purchases from other states in order to meet its needs imposes huge costs on the state exchequer. As per the 19th Electric Power Survey conducted by the Central Electricity Authority, the state’s energy consumption is projected to increase by 54% in 2026-2027. [1] With an ever-growing demand, the State may need to strategically diversify current sources of power generation. Long-term resilience in the State’s power sector will be dependent on harnessing the region’s unique topography and environmental features. The Kerala State Power Policy (2019) acknowledges that the State is facing issues related to the quality and reliability of power supply. A detailed assessment of the current transmission and distribution network may be necessary to identify nodes that require revamp.

Kerala’s electricity sector, much like the rest of the country, faces a combination of legacy issues and future challenges. There is a tendency to over-judicialize the field of regulation, which increases costs and tends to benefit financially stronger parties in legal disputes. Further, in terms of a future agenda for the sector, the State will need to explore Renewable Energy (RE) sources best suited for its conditions including the increasing occurrence of climatic events like floods.

As a regulator, KSERC aims to provide a level-playing field to the players in the electricity sector. Amongst the many interventions it has taken towards this, the Commission has released open access regulations to enable power consumers, especially those who consume large quantities of power, to access energy from sources of their choice using the linking network of transmission and distribution licensees. It has recently announced a revised tariff structure for the State. The last such revision took place in the year 2019. State regulatory commissions play an important role in defining the broad contours for the development and functioning of the electricity sectors in their States. An independent, consistent and forward-looking electricity regulatory regime will nudge States closer to achieving self-sufficiency, transition to newer and cleaner energy sources, and encourage an integrated development of the sector.

 

 

[1] Kerala State Planning Board, Economic Review, 2017, https://spb.kerala.gov.in/economic-
review/ER2017/web_e/ch52.php?id=50&ch=52; percentage increase projected as per energy consumption values in 2017-2018.

The Return of Food Inflation: Why it’s Different this time

Since the start of this calendar year, annual consumer price index (CPI) inflation has ruled not only above the Reserve Bank of India’s (RBI) target of 4%, but even its upper tolerance level of 6%, for every month from January to May. If we take the 38 months from April 2019 to May 2022 – roughly coinciding with the Narendra Modi-led government’s second term (Modi 2.0) – CPI inflation has exceeded the 4% target in as many as 32 months and even the 6% ceiling in 18 months. This has been seen by many as a failure on the part of the central bank to adhere to its inflation-targeting mandate, enshrined in law since June 2016 (https://bit.ly/3b1JJbZ and https://bit.ly/3OcrDCp).

The above “failure” is in contrast to the “success” achieved in the Modi government’s first term (Modi 1.0). During that period, roughly from April 2014 to March 2019, the 6% ceiling was breached only in 6 out of the 60 months. Moreover, CPI inflation was contained within 4% in 23 out of the 60 months. A far cry from the 6 out of 38 in Modi 2.0, with even those six being in the first six months from April to September 2019!

But the story isn’t just about overall retail inflation. During Modi 1.0, year-on-year general CPI inflation averaged 4.49%. It was even lower, at 3.52 per cent, for the consumer food price index (CFPI) inflation, with the latter ruling below the former in as many as 38 out of the 60 months. In other words, while inflation in general was benign, food inflation was even more so. That trend was visible particularly after September 2016, as can be seen from Chart 1.

It’s been quite the opposite in Modi 2.0. Overall CPI inflation has averaged 5.59% during these 38 months, 1.1 percentage points higher than in Modi 1.0. No less striking is CFPI inflation, which has averaged even higher, at 6.21% or almost 2.7 percentage points more than during Modi 1.0. In 18 out of the 38 months, food inflation has exceeded general CPI inflation, while also exhibiting greater volatility, as Chart 2 shows. For both the government and RBI, food inflation has been the bugbear – due to greater political sensitivity and less amenability to control through monetary policy tools such as repo interest rate and cash reserve ratio hikes.

Imported inflation

A major source of the resurgent food inflation has been global prices.

During the Modi 1.0 period, these were low: International agri-commodity prices actually collapsed from around late-2014. The UN Food and Agriculture Organization’s food price index (FPI; base year: 2014-2016=100) averaged 131.9 points in 2011, which was at the height of the previous commodity boom/super cycle. The index fell to 122.8 in 2012, 120.1 in 2013 and 115 in 2014, before plummeting to an average of 93 and 91.9 points in the subsequent two years. The average annual FPI inflation during April 2014 to March 2019 was minus 3.95%, below even the corresponding Indian CFPI rate of 3.52%.

Again, it’s been the other way round in Modi 2.0, where global FPI inflation has averaged 13.42%, higher than the 6.21% retail food inflation in India over the 38 months from April 2019 to May 2022. Simply put, while low international agri-commodity prices helped control domestic food inflation during Modi 1.0 – even translating into depressed crop realizations for farmers – their soaring from around October 2020 has produced the opposite effect. The FPI crashed to a four-year-low of 91.1 points in May 2020 when most countries had severe lockdown restrictions in place. But with the post-Covid demand recovery and easing of lockdowns, the index rose to 135.6 points by January 2022. The Russian invasion of Ukraine on February 24 took it to an all-time-high of 159.7 points in March, from where it has marginally fallen to 157.4 in May.

The transmission of international prices to domestic inflation in India is best illustrated by edible oils. During the Modi 1.0 period, average year-on-year inflation in the global FPI for ‘vegetable oils’ was minus 5.79%, while at 2.89% for the CPI in ‘oils and fats’. But in Modi 2.0, the former has averaged 33.31% and the latter 15.5%. Charts 3(a) and 3(b) plot the month-wise FPI and CPI inflation rates in edible oils for both periods. The correlation coefficient for international and domestic inflation is positive for edible oils: 0.33 in Modi 1.0 and 0.85 in Modi 2.0. Indian consumers benefitted from very low (almost flat) inflation during 2014 to much of 2020, whether in palm, soybean, sunflower, mustard and groundnut oil or vanaspati (hydrogenated vegetable oil). But as global prices of vegetable fats skyrocketed – for reasons we shall detail in the next section – consumers experienced sudden and sharp inflation in this commodity (https://bit.ly/3tBalqX).

There’s no such correlation, though, when it comes to cereals. Average annual inflation was low both for CPI in ‘cereals and products’ and FPI in ‘cereals’ – at 3.38% and minus 3.32%, respectively – during the Modi 1.0 period. In Modi 2.0, India’s CPI cereal inflation averaged even lower, at 2.6%. This was despite the average year-on-year global cereal FPI inflation shooting up to 12.81% during this 38-month period. Unlike with edible oils, the correlation coefficient for international and domestic inflation has been weak and negative in cereals – at minus 0.017 during Modi 1.0 and minus 0.40 during Modi 2.0. The reason for it has to do with government’s minimum support price (MSP)-based procurement and stocking of wheat and rice for channeling through the public distribution system (PDS). Maintaining more than adequate stocks in the Central pool, both for the PDS and open market operations, has effectively insulated Indian cereal prices from the vicissitudes of the world market. The PDS prevented inflation from being imported into India during Modi 2.0, just as MSP procurement ensured no cereal deflation during Modi 1.0.

We have found similar results for sugar and dairy. As the table below shows, average CPI inflation has fallen for both during Modi 2.0 compared to that in Modi 1.0, even while rising significantly for the global sugar and dairy FPIs.

Sugar and Milk inflation: Domestic vs Global
(% average year-on-year) 

Low international sugar prices weighed heavily on realizations for domestic mills and, in turn, their ability to pay cane growers during a greater part of the Modi 1.0 period. But in Modi 2.0, high global prices helped Indian mills to export record quantities. At the same time, production being in excess of
domestic consumption requirements – which was the case for rice and wheat as well – ensured little CPI inflation in sugar. Production self-sufficiency, coupled with established systems of procurement and marketing by cooperatives and organized private dairies, has resulted in no imported inflation for milk and milk products either. The correlation coefficient between international and domestic prices has been negative and weak for sugar, dairy and cereals, while positive and strong in edible oils during Modi 2.0. Inflation from import dependence and the resultant transmission of international prices has been a factor for pulses too. Average CPI inflation in pulses was only 4.29% in Modi 1.0. It has more than doubled to 10.31% during Modi 2.0. Pulses imports peaked during 2015-16 to 2017-18, averaging over 6 million tonnes (mt). In the last three years, imports have more than halved to about 2.7 mt, but they are still significant relative to domestic production of 24-25 mt.

Structural versus idiosyncratic inflation

Food inflation isn’t new to India. Average annual inflation in the wholesale price index for ‘food articles’ was 10.21% during the previous UPA regime from 2005-06 to 2013-14. That inflation, though, was structural and demand-led, driven by growth in incomes, including of poor and lower-middle class households. Rising real incomes, as a previous note in this series has shown (https://bit.ly/3nheUTP), also contributed to significant dietary diversification, with per capita consumption of foods rich in proteins, vitamins and minerals (milk, egg, meat, fruits and vegetables) going up and that of carbohydrates/calories-based foods (cereals and sugar) declining. A byproduct of it was what the former RBI deputy governor Subir Gokarn termed “protein inflation”. In a late-2010 paper (https://bit.ly/3N4vEb0), he wrote how “increasing demand for proteins appears to be an inevitable consequence of rising affluence”, while warning of persistent demand-supply balances that would make pulses, milk, eggs, fish and meat relatively costlier down the line.

The current food inflation, on the other hand, is more idiosyncratic and supply shock-driven, rather than structural. We have already noted that retail inflation in milk and milk products has fallen during the Modi 2.0 period. Annual growth in milk sales by cooperatives, too, has averaged just over 3 per cent from 2014-15 to 2020-21 (National Dairy Development Board annual reports). Low price increase and sales growth in milk – a product with very high income elasticity of demand in India (https://bit.ly/3HyTlHA) – is indicative of no major “structural” drivers and the return of food inflation being attributable mainly to “supply-side” factors.

The last two years and more have witnessed four kinds of supply shocks – from weather, export controls, pandemic and war.

Ukraine, even before the war, had drought in 2020-21 (https://bit.ly/3bfzYaw) that reduced its exports of sunflower oil, corn and wheat to 5.27 mt, 23.86 mt and 16.85 mt, respectively, from the previous year’s levels of 6.69 mt, 28.93 mt and 21.02 mt. Russia also faced dry and hot weather issues, cutting its sunflower oil exports from 3.83 mt in 2019-20 to 3.25 mt in 2020-21 (US Department of Agriculture, Grain and Oilseeds World Markets and Trade reports). Their smaller sunflower harvests started pushing up global vegetable oil prices from around September 2020. This was followed by the Russia government, in December 2020, issuing a series of decrees restricting exports of wheat, corn, sunflower and rape seeds, barley and rye in order to control domestic food inflation (https://bit.ly/3tJ8Uqp).

The pandemic’s impact was felt in Malaysia’s oil palm plantations, which, until April 2020, employed some 337,000 migrant labourers mostly from Indonesia and Bangladesh. Thousands of them flew home, as Malaysia closed its borders and stopped issuing new work permits to prevent the spread of Covid-19. With its plantations operating with about 75,000 fewer workers than needed (https://reut.rs/3n16Aak), Malaysia’s palm oil output fell to 17.85 mt in 2020-21, from 19.26 mt and 20.80 mt in the preceding two years (USDA). The war was the final straw. Supply disruptions from Ukraine and Russia triggered a wave of food export restrictions by countries concerned about inflation faced by their own populations. The most prominent example was Indonesia. The world’s largest palm oil producer and exporter, during February-March 2022, levied price controls, domestic sale obligations on exporters and finally tariffs on shipments (https://bit.ly/3y1SOur). For a brief period, between April 28 and May 23, it even slapped an outright ban on exports. Exacerbating these was drought in South America, with the USDA estimating the combined soybean production of Brazil, Argentina and Paraguay in 2021-22 to have fallen by 11.25% over the previous year.

India is probably one of the few countries that did not face any adverse weather events, at least in 2020-21. Bumper crops – both kharif (harvested mainly over October-December) and rabi (April-June) – led to record government purchases of rice (60.17 mt) and wheat (43.34 mt). Huge carryover stocks, in turn, enabled unprecedented quantities (55.06 mt rice and 50.55 mt wheat) to be sold under various welfare schemes in 2021-22 (financial year from April to March). The PDS turned out to be a savior – indeed, the only effective social safety net – during the pandemic, with the poorest states benefiting the most from the substantially stepped-up offtake of free/near-free grains (https://bit.ly/3n5nfcN). What’s interesting is that India in 2021-22 also exported record quantities of both rice (21.21 mt) and wheat (7.24 mt).

However, 2021-22 (the agricultural year from July to June) has been different. Rainfall during the southwest monsoon season (June-September) was normal on the whole. But the precipitation was irregular. Surplus rains in June, prompting brisk kharif sowings by farmers, were followed by a long dry spell from the second week of July till the third week of August. The period thereafter was marked by excess rainfall extending to all the subsequent five months till January. The kharif crop, thus, suffered first from moisture stress during the vegetative growth stage and, then, inundation at harvesting time. It did not stop there. Excess rains in January also affected yields of the rabi mustard that was in late-flowering stage. The culmination of these black swan (climate change?) events was the sudden spike in temperatures from mid-March, which took a toll of the wheat crop just when was in the final grain-filling stage (https://bit.ly/3tKqSbS). If March was bad for wheat, January was similarly so for mustard.

Conclusion

There are three broad takeaways from our analysis of the return of food inflation in India.

The first is the inflation being partly imported. The same factor – international prices – that kept food inflation low during Modi 1.0 has pushed it up in Modi 2.0. At the same time, this imported inflation has been disproportionately felt in edible oils and pulses. It hasn’t been so much in cereals, sugar and milk – commodities where India is self-sufficient and even in a position to export when global prices are high.

The second is the role of domestic supply shocks. These were, by and large, absent in 2020-21. But that wasn’t the case in 2021-22. While the National Statistical Office’s data shows the agriculture sector’s growth rate at 3%, on top of 3.3% in 2020-21, we have reasons to be skeptical. For, 2021-22 was a story
not only of the heat wave in March, but also of unseasonal rains from September to January. Both the kharif and rabi crops were impacted as a result. The double whammy of unseasonal rains and early summer also hit the production of mangoes and lemons, by causing flower drops and not allowing adequate time for fruit formation and growth. Had the intensity of the damage to wheat yields from the heat wave been properly understood and acknowledged, the government would in all probability have declared a bonus over and above the MSP. By not doing that, it left the field open for private millers and traders. They bought bulk of the wheat from farmers, paying slightly more, sensing both crop shortage and opportunities for exports. As the government’s own procurement plunged from 43.34 mt to under 19 mt in the current marketing season, it ended up doing what Indonesia and Russia had earlier done: Ban exports. This wouldn’t have been necessary if official procurement had even touched 25 mt.

The final point is to re-emphasize that there is nothing “structural” about the current inflation. Supply shocks, by their very nature, are temporary. While they may correct sooner than we would imagine, the more enduring problem of Indian agriculture – stalled dietary and cropping diversification, courtesy of weak income and demand growth – will remain and come to the fore.

This note has been authored by Samridhi Agarwal and Harish Damodaran.

Find all previous notes as part of the series here:

Yoga in the City

Group yoga at Lodi Gardens (Photo credit: Mukta Naik)

On a recent weekend visit to Lodi Gardens, I was greeted by the delightful sight of a few dozen people engrossed in a collective yoga practice on the large lawn in front of the Bada Gumbad. Instantly, it reminded me of the group dancing I saw in public squares during trips to southeast Asian cities like Hanoi and Shenzhen. The contexts might have been different, but the sheer joie de vivre of being part of that experience, at that place and time, is exactly the same.

As Indians emerge from the loneliness and isolation of the pandemic, public places in our cities are teeming with people seeking to reconnect, in a noisy, messy, happy celebration of communal life. This reconnection with humanity is the very essence of cities, where ideas and aspirations, skills and opportunities serendipitously collide and coalesce to create new ventures, forge partnerships and add value. And while transactional encounters dominate our use of public space, the urban Indian is increasingly seeking spaces of leisure, introspection and even spirituality, right in the midst of the busy city.

Dancing in China’s public squares (Photo credit: By N509FZ – Own work, CC BY-SA 4.0)

Why then is the practice of yoga, increasingly an intrinsic part of the urban Indian’s wellness and self-care routine, confined to the home, the fitness studio and the occasional private garden? Why does the scene that greeted me in Lodi Gardens that Sunday morning not replicate across the city, country, and in every public space?

Perhaps we can re-imagine urban public spaces as opportunities for a shared and inclusive practice of wellness, where yoga is a catalyst to enable meaningful social interactions and spiritual interchange. To achieve the democratized transformation of public spaces at city and neighbourhood scales to trigger a wellness revolution, we might need, not just the critical elements of land and infrastructure, but also an imagination of activities and processes of interaction.

These are questions for urbanists to ponder, this International Yoga Day, at a time when cities are expected to propel the nation towards its ambitions of inclusive and sustainable economic growth. In addition to smart, inclusive and sustainable, a healthy city is just as vital for our collective future.

CPR Faculty Speak: Marie-Helene Zerah

Marie-Helene Zerah is a Senior Visiting Fellow at CPR’s Initiative on Cities, Economy & Society, where she is focusing on the role of small towns in India in the urbanisation process and urban energy governance. She is a Senior Researcher at the Institute of Research for Development, Paris. 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.

I have been associated with CPR since 2010 when we launched a monthly urban workshop series with my colleague, Partha Mukhopadhyay. From then on, my work has focused on the role of small towns in the urbanisation process. I was the co-coordinator of a research project titled, Subaltern Urbanisation in India, that aimed to make the diversity of urbanisation pathways visible beyond metropolitan cities. This desire to look at smaller urban settlements, including urbanising villages, came from a need to move beyond big towns, in particular Delhi and Mumbai, where I had conducted research for many years. I felt there is much more to the representation of the urban in India.

Why do these issues interest you? 

I started my research looking at water access in Delhi and then moved on to governance issues related to other infrastructure. I have also been interested in the relationship between urban governance, democracy and the right to the city. My reading of urban India has revolved around a range of topics- for instance the role of bureaucrats in urban governance, the emergence of resident welfare associations, the unequal access to basic services in slums etc. In fact, I have published in French (and hope to work on an updated English version) a book titled, How India Urbanizes, in order to bring all these strands of research together. To put it simply, I am trying to develop a comparative approach to understand the complex and diverse nature of Indian development and raise questions about its future possible paths.

How have these issues evolved in the country and globally over the years?

My key focus is to understand why, in the context of sustained economic growth, access to basic services is not generalised to include all urban citizens in India. Changes are not rapid enough and I am trying to make sense of the various factors that prevent faster improvement. I think the priority status given to large metropolitan areas, the emergence of urban regimes favouring real estate speculation as well as megaprojects have overlooked the needs of many poor settlements and far-away urban places. Additionally, the commodification of basic amenities and the push for public modernisation have increased the heterogeneity of socio-spatial arrangements in terms of access to urban services, and thereby access to the city. Finally, the fragmentation of public action reflects the multiple social divisions, which in turn foster the clientelistic dimensions of a vibrant democracy. All these factors combine to create a differentiated citizenship, which makes it difficult to build a shared urban future.

What impact do you aim to achieve through your research?

As an academic, I would like to contribute to the “Southern turn” in urban studies. I think our collective work on Subaltern Urbanisation did achieve this by bringing to the fore the urbanisation of the rural in emerging countries. India will have the highest contribution to future world urbanisation and by 2050 the number of Indian urban citizens is estimated to reach 800 million. The stakes and the challenges are high, be it social, environmental or political. I would like my work to bring a nuanced understanding of these issues within policy circles.

What does a typical day look like for you at CPR? 

I am often one of the first to arrive in the office. I usually start with checking my emails and planning my day. I try to keep my mornings for writing and my afternoon for meetings. However, in the last few years, my responsibilities have increased with the coordination of a team on Smart Cities and institutional tasks at my home institution (the French National Institute for Sustainable Development, IRD).

What are you currently working on and why is it important?

I am currently working on a project on Smart Cities governance in three Indian states (Madhya Pradesh, Punjab and Karnataka). We are trying to analyse how representations around Smart Cities perform shifts in power relationships among scales of government, consultants and private companies. Many people have criticised the smart city rhetoric and, indeed, there is much to say about it. However, I am convinced that once the “100 Indian Smart Cities” programme will end, the changes brought about by digital solutions and the push for data-driven urbanism will remain and strongly impact both the urban fabric and city governance.

To know more about Marie-Helene Zerah’s work, click here.

Why the Russia-Ukraine crisis could rock India’s boat in the Indo-Pacific, and how India can avoid that

 

There is no doubt that Russia’s military invasion of Ukraine will have ramifications far beyond their own borders or even Europe’s. Save for immediate economic shocks owing to Western sanctions on Russia, there is little sense of what medium-to-long term consequences President Vladimir Putin’s actions will have on various regional theatres. Yet, some preliminary assessments and forecasts may be made based on pre-existing patterns and networks of interest.

For India, the Russia-Ukraine crisis complicates an already-complex geopolitical environment. Most obviously, it puts New Delhi in an awkward midpoint position between Russia – a longstanding politico-military legacy partner – and the West – a rising partner in an increasingly multipolar context. It has also generated renewed interest in what India’s nonalignment policy, later repackaged as ‘strategic autonomy’, really means.

Beyond the broader normative debates, it is crucial to understand how the crisis can shape specific verticals of Indian foreign policy. Of these, India’s Indo-Pacific strategy is perhaps the most exposed to potential adversities. This is because of the dense convergence of various geopolitical interests in this region, which the crisis will inevitably mould in one way or another. For India, there is both trouble and opportunity in the Indo-Pacific horizon, depending on how agile or remiss its diplomacy is in the years to come.

Complications for India

So far, India’s Indo-Pacific push has been driven by a convergence of a host of favourable factors, including an appetite amongst Southeast and East Asian powers to strengthen relations with India and renewed pivoting by the US and EU into the region to balance a rapidly rising China.

But, as a “nonaligned” middle power that has warm relations with Russia and also an active border dispute with China, it does not have a geopolitical carte blanche in the Asia-Pacific. India’s Indo-Pacific push was always tempered by concerns of a Chinese counter-push; an unpredictable relationship with the West; and to a lesser degree, Russian apprehensions about a growing Western presence in the region. With rising concerns about a democratic backslide under Prime Minister Narendra Modi, India’s commitment to liberal international values – the cornerstone of its partnership with the transatlantic powers and their regional allies – is also coming under growing scrutiny.

The Russia-Ukraine crisis complicates these concerns.

First, Russia’s aggression against Ukraine, driven by a mix of geopolitical realism and political irredentism, could set an actionable precedent for aspirational big powers elsewhere. For instance, China could appropriate it to rationalise its own expansionism in the Indo-Pacific by framing it as a direct response to Western expansionism. This is even more so given that both Putin and Xi Jinping are leaders with strong revanchist-nationalist tendencies who want to leave behind a glowing legacy. Chatter around a possible replication of Russian aggression by the Chinese in Taiwan is already ringing loud in foreign policy and defence circles. Fears about China using the crisis to flex its muscles in the South China Sea (SCS) also loom large over concerned heads. The fact that following Russia’s invasion, Beijing announced an increase in its defence budget by 7.1%, announced military drills in the Gulf of Tonkin, and issued a navigational warning in an area overlapping with Vietnam’s Exclusive Economic Zone (EEZ), haven’t helped.

Earlier in March, the Chinese embassy in Manila dismissed speculations that Beijing would exploit the crisis to “bully smaller countries” in the SCS. However, Xi could definitely use this moment to shift the needle, even if marginally. Recently, Chinese Foreign Minister, Wang Yi, said that the “real goal of the Indo-Pacific strategy is to establish an Indo-Pacific version of NATO.” This wasn’t the first time Yi was comparing the Indo-Pacific initiative with the transatlantic security alliance. However, this time, the narrative is being pushed by Beijing with greater vigour – through both official statements and “unofficial” channels, such as state-controlled media and pro-Party academics.

In a recent interview with Global Times, Zheng Yongnian, Founding Director of the Advanced Institute of Global and Contemporary China Studies at the Chinese University of Hong Kong, Shenzhen, argued that “the prototype of an ‘Asian NATO’ has already taken shape” through the AUKUS, Quad, Five Eyes, and the US’ growing relations with Vietnam and Singapore.

Last year, India’s foreign minister, Dr S Jaishankar, had pushed back against the use of the term “Asian NATO.” But, Beijing has only doubled down on this under the shadow of the Russia-Ukraine crisis. For India, there is a deeper message in this – China may not put its neck out on supporting Russia, but it is closely watching the invasion and the West’s response, picking up critical hints and lessons on the way. These could ultimately help Beijing sharpen its own Asia-Pacific strategy. The Chinese are unlikely to undertake any major military action in the region in the near future – not even against Taiwan, as some scholars have convincingly argued. But, Putin’s Ukraine move sets a cautionary context for India and its Indo-Pacific partners.

Second, the Russia-Ukraine crisis throws up a normative challenge for India over the Indo-Pacific. When Prime Minister Narendra Modi laid out India’s vision for the Indo-Pacific at the Shangri-la Dialogue in 2018, he talked about forging a “free, open, inclusive region” built around a “rules-based order”, which upholds “​​sovereignty and territorial integrity, as well as equality of all nations, irrespective of size and strength.” The Quad has packaged itself on similar terms. However, when India refuses to explicitly condemn a large power unilaterally invading a much smaller neighbour, the irony of India’s liberal, normative persuasion in the Indo-Pacific becomes uncomfortably conspicuous. Add to this the dubious optics of a government that many in the West see as illiberal and authoritarian choosing to stay neutral on Putin’s belligerence.

Third, the raft of fresh Western sanctions on Russia is bound to hit its defence export markets, including in the IPR. As one Australian academic has argued, “with the war dragging on amid mounting human costs, Russia’s regional defence clients [in the Indo-Pacific], perhaps with the exception of Myanmar, may find it difficult to ignore Russia’s aggression — eventually forcing them to rethink their strategic engagement with Moscow.” A shrinking Russian presence as a prime arms supplier will most likely be replaced by a growing Chinese role in this domain, which would in turn strengthen Beijing’s geopolitical influence in the region. As per reports, China is already making its moves. Even in Myanmar’s case, as the recent meeting of the junta foreign minister with his Chinese counterpart in Huangshan shows, China is moving closer to the junta as Russian defence supply timelines hit a rough patch. A stronger China in the IPR, needless to say, isn’t good news for India – especially given that its own defence export capabilities remain in the bottom-tier.

Adapting to new realities

India is likely to weather the headwinds for now. There are two reasons behind this – the deliberate tweaking of its official narrative on the Russia-Ukraine crisis; and its growing weight as an Indo-Pacific power.

First, as Russia’s invasion progressed, New Delhi dropped the phrase “legitimate security interests of all parties” from its UN statements and began reiterating the importance of the UN Charter, sovereignty and territorial integrity. This was designed to anchor its relationship with the West to the shore, and there are early signs that the West and its regional allies are responding positively.

While US President Joe Biden recently talked about India’s “somewhat shaky” position on the crisis, a senior official from his administration, Victoria Nuland, later noted the “evolution” in the Indian position and the US’ willingness to work with New Delhi. This was followed by a highly-publicised 2+2 meeting between both sides, during which they mutually agreed to “promote a resilient, rules-based international order that safeguards sovereignty and territorial integrity, upholds democratic values, and promotes peace and prosperity for all.” Earlier, the Australian High Commissioner to India said, in very clear terms, that “the Quad countries have accepted India’s position.”

Second, the US, EU, Germany, France and Australia have all identified India as an indispensable bilateral and multilateral partner in their official Indo-Pacific strategy documents. For instance, the US strategy identifies India as a “​​like-minded partner and leader in South Asia and the Indian Ocean, active in and connected to Southeast Asia, a driving force of the Quad and other regional fora, and an engine for regional growth and development.” These were strongly reiterated in the recent India-US 2+2 meeting, following which the White House press secretary said that for President Biden, ties with India are “one of the most important in the world”.

The German “policy guidelines” predict that India “could become” the fourth largest economy after the US, Japan and China “in a few years from now”, and thus will continue to be a crucial Indo-Pacific power. The French strategy paper identifies a range of areas to work with India within the Indo-Pacific ambit – including defence, civil nuclear power, blue economy and HA/DR. The EU strategy identifies India as a primary Indo-Pacific partner for collaboration in the domains of trade and digital cooperation on emerging technologies, in addition to defence cooperation – all of which took priority during the recent visit of European Commission President, Ursula van der Leyen, to India.

In short, the West very much needs rising middle powers with direct stakes in the region, like India and Japan, to sustain its Indo-Pacific pivot. For New Delhi, this is an effective insurance against volatility triggered by moments of global crises such as the current one.

Avenues for progress

It would be a mistake to believe that the Russia-Ukraine crisis will have a linear effect on India’s Indo-Pacific push. It could both close and create avenues for India.

Russian actions are bound to stiffen the competition between the US, China and Russia in the Indo-Pacific. As its credibility and capacity to deliver weapons dwindle because of sanctions, Moscow will expand its attempt to earn the goodwill of ASEAN countries. China, as already explained, could posture more aggressively. In response, the US will double down on its outreach to the region, which would, in turn, sharpen the Chinese reaction. The net outcome would be a much fiercer big power jostle in the region. This is a situation that smaller ASEAN powers don’t want to get caught in.

Consequently, middle powers like India could now find greater space to mediate the geopolitical environment in the Indo-Pacific and provide alternative foreign policy pathways. While the return of big power politics might seem inevitable to many, the world is already too deep into its moment of multipolarity for that to happen anytime soon. Even the big powers themselves cannot ignore the importance of geopolitical decentralisation. Further, the recent security pact that China inked with the Solomon Islands, which permits Beijing to deploy boots on the island, shows that the West cannot ignore the diverse interests of small nations in the IPR if it wants to deepen its footprint and balance a rising China.

India needs to capitalise on this moment in a meaningful way. The best way to do that is to strengthen its horizontal partnerships with ASEAN and Pacific island countries in bilateral, minilateral and multilateral formats. For India, there really is no substitute for constructive engagement that is premised on facilitating people-centric, bottom-up development that targets social and economic sectors left out by large-scale Chinese projects. Expanding its existing Quick Impact Projects (QIPs) and High Impact Development Projects (HADPs) in Myanmar and other Mekong region countries into other countries in ASEAN and beyond is a good idea.

Further, deepening collaboration with other regional powers who already share regional complementarities with India, like Japan and Australia, could be a force multiplier in these initiatives. For instance, India needs to restart the Asia-Africa Growth Corridor (AAGC) initiative with Japan and potentially replicate the model in Southeast Asia. India also needs to internally encourage the Quad to expedite its supply chain resilience and COVID-19 vaccine initiatives.

Indian presence in the ASEAN region remains way less controversial and divisive than China’s. But, New Delhi is infamous for its lack of delivery capacity. This needs to change if India wants to position itself as an effective middle power in the region at a time of great geopolitical unpredictability. India, for now, would also need to resist the temptation to join security-centric collectives like the AUKUS. Doing so could strengthen the Chinese argument on the so-called ‘Asian NATO’ and also alienate ASEAN powers who remain wary of extra-regional security formations. That the Quad has slowly veered away from positioning itself as a security to a non-security arrangement is a positive development in this regard.

In all, India needs to keep its ears to the ground, as the Russia-Ukraine crisis unfolds. The Indo-Pacific is a high-stakes region and New Delhi has already made significant commitments to the concept. It cannot allow an invasion thousands of miles away to rock the boat at this crucial hour.

‘Know Your Regulator’: Mr. K.P. Bakshi, Former Chairperson, Maharashtra Water Resources Regulatory Authority (MWRRA)

 

Date: 29th March 2022

Speakers:

Mr K.P. Bakshi, Former Chairperson, Maharashtra Water Resources Regulatory Authority will be in conversation with Dr Abha Yadav, Associate Professor, Indian Institute of Corporate Affairs and Director of the Forum of Indian Regulators (FOIR) Centre at IICA, Dr Srinivas Chokkakula, Ministry of Jal Shakti Research Chair – Water Conflicts & Governance and Fellow, Centre for Policy Research and Ms Arkaja Singh, Fellow, State Capacity Initiative, Centre for Policy Research.

The background note can be accessed here.

Conversation summary:

Background to the establishment of the MWRRA

In the period around 1995-1996, the new political establishment in Maharashtra recognised that the state water resources department was not in a position to continue financing various ongoing irrigation projects. In order to raise finances for the sector, five irrigation corporations for the five river basins were conceptualised – one each for the Narmada, Tapti, Godavari, Krishna, and Konkan region. These corporations floated bonds for private markets and the general public to invest in. The funds so raised were then used to complete ongoing projects. Alongside continuing pressures to finance new projects, the World Bank stepped in for the Maharashtra Water Sector Improvement Project albeit with pre-conditions. One of the conditions was that the government had to set up a regulatory authority to ensure prudent use of funds. This led to the State Water Policy of 2003, the Maharashtra Water Resources Regulatory Authority Act and Maharashtra Management of Irrigation Systems by Farmers Act of 2005.

One-third of the reservoirs in the country are in the state of Maharashtra and water is a driver of economic development in the region. The establishment of the MWRRA in 2005 is a critical milestone in water sector development in Maharashtra.

The role of the MWRRA

The primary role of MWRRA is to figure out how to equitably and judiciously distribute limited water resources. The regulator needs to ensure that every user in each sector gets their allocation (as set forth by the Cabinet), has to recover charges, and minimise disputes. The mechanism to ensure this was that the MWRRA would set the tariff, the quantities to be allocated to each sector including users, and stop thinning of resources of the state government. The regulator must also prioritise projects such that the ongoing projects were completed first, especially those that were in the last leg of completion. Overall, the regulator undertakes the job of clearing projects sent by the state government, fitting these projects within the integrated water plan, and prioritising them. Further, the regulator also advises the government to raise awareness about water conservation, efficiency etc.

Regulatory independence

The creation of any regulator, including in this instance, a water sector regulator, is testament to the government’s preparedness to part with its powers and let another agency regulate and develop the sector. Further, generally, stakeholders do not have sufficient faith in the government to carry out regulatory functions. Their confidence is bolstered by the putative apolitical nature or independence of the regulatory agency. The establishment of regulators has not taken-off in the water sector as it has in several others. Now, however, the Union Government has stepped-up its focus on water resources, and with missions such as the Jal Shakti, many states are working quite actively on this. I am aware that states such as Meghalaya and Tamil Nadu are working actively on this sector, and others like Punjab and Haryana have already set up water sector regulators. Compared to older regulatory agencies such as the Telecom Regulatory Authority of India (TRAI), Tariff Authority for Major Ports (TAMP) or the electricity regulatory commissions at the state level, water regulators are fairly new. Further, water is a sensitive subject and can become a big political issue if handled incorrectly, therefore, these regulators have matured slowly.

The MWRRA Act itself has granted some level of independence to the authority. The selection process is such that the members and chairperson of the MWRRA is appointed by the governor on the recommendation of a committee headed by the chief secretary. The entire process is routed through bureaucracy, not elected representatives, for scrutiny of experience, eligibility and so on.

The MWRRA’s regulatory role

The government entities connected to water regulation are the 5 irrigation corporations, the Maharashtra Industrial Development Corporation (which has set up different industrial estates across the state), 27 municipal corporations, 289 municipalities (Categories A, B and C), all rural gram panchayats and zila parishads. Gram panchayats are individually regulated entities that have to adhere to the regulatory orders of quantities fixed for per capita consumption or amount to be recovered from each household. These are finally decided by the rural and urban development departments, but the broad tariff of bulk supply is decided by the MWRRA.

In the private sector, all industrial houses who directly draw from the reservoirs (bulk supply) are regulated by the MWRRA.

When I was in the MWRRA, we had proposed a fourth category of users (besides industrial, agriculture and domestic), that is, commercial establishments (water sports, clubs, swimming pools, IPL) where water is used for leisure or luxury. Commercial and industrial sectors are dominated by private players whereas most government institutions come under the domestic category.

Each river basin is supposed to have a river basin plan. The water allocation given by the tribunal for that particular river basin has to be used properly – hence the plan reflects the water received, water already being stored in existing projects and the remainder. The downstream areas are potential sites where the water can be stored. Based on such details, the river basin plan is drawn-up and the 5 water basin plans, together, become the Integrated State Water plan. This is the most important document for the MWRRA and the state government. Once approved, this document is referred to in the process of clearing projects. It sets the allocation for each category of use, and the projects which can be cleared (constructed or completed).

Awareness and participation of people/ activist groups/ unions in water sector development

There are competing interests that exist in this sector, and these precede the MWRRA. Thus, it is very difficult for the authority to set these right in a short span of time. For instance, the Godavari starts from Trimbakeshwar, goes to Nashik, Ahmednagar, entire Marathwada, then flows through Andhra Pradesh, Orissa and out. Before the setting-up of the MWRRA, there was an opportunity to set up many reservoirs. As a result, much of the water of Godavari was getting stored at Nashik. As a result, Jayakwadi and other regions in Marathwada did not get ample quantities of water. Thus, an inter-regional conflict started, with pressure from the Marathwada side to release water and pressure from Nashik to not release water. The MWRRA had stipulated that 65% of the reservoirs in both Nashik and Marathwada were to be filled up. Both sides fought this issue right up to the Supreme Court. Luckily, the dispensation given by the MWRRA was upheld by the apex court, because it felt that the resolution was judicious and equitable and that it was within the domain of the regulator.

There are also individual conflicts – well to well, farmer to farmer, taluka to taluka. These disputes come to the Primary Disputes Resolution Officer, who is normally a superintending engineer level officer of the Irrigation Corporation, and this order can be appealed before the MWRRA.

Many NGOs work in this field – Pani Foundation, Indus Water Institute, to name a few. These organisations feed information from the ground to the MWRRA, and this is helpful because the authority’s staff positioning is insufficient for it to be present in every part of the state. These inputs from NGOs help the authority in framing policies in a way that is acceptable to all stakeholders.

The MWRRA records all criticism, deliberates internally and accepts what it can, while more complex suggestions are kept aside for further consultation with the government. Criticism has helped the authority to mature and come up with policies that have not been challenged on too many occasions. Until May 2020, 60 disputes had come in since the authority’s inception and 38 were resolved. Save for the Jayakwadi case, none of them have been challenged in the High Court or the Supreme Court. This demonstrates people’s acceptance of the regulator’s actions.

How is the water sector different from other sectors in terms of regulation?

There are several distinguishing factors:

  1. Water is absolutely essential for every household and livelihood, whereas electricity, telephone and so on come further down the hierarchy of necessities. This also implies that we cannot tweak water tariff or quantity my huge margins.
  2. Electricity will only flow through the wires that are placed, but water will flow through anywhere depending on the gradient, which cannot be changed. Thus, water has a particular flow pattern that is not under the control of any authority.
  3. One can switch off the electricity line of a place, say because of non-payment of dues, but stopping water from a dam is not possible because there are several other pockets where water has to reach because they have duly paid.
  4. Water regulation is a new area. Many states have not even understood the concept of a water regulator, and states like Punjab, that have come out with a regulator, do not charge the agricultural sector yet. In Maharashtra, it has matured to the extent that farmers also pay charges.
  5. While water is a natural resource, the collection, distribution and management system for water has to be done by someone and hence there is a need for a tariff/ charge. People are starting to realise the importance of paying tariffs and paying them on time to ensure timely delivery of water.

Regarding tariff rates for bulk use

There is a process for deciding the tariff structure:

  1. According to the MWRRA Act, the tariff rates have to change/ be reviewed every three years.
  2. The benchmark is the last tariff rate. Depending on this, the state government projects the cost of escalation, maintenance, etc. and then the water tariff is increased in the industrial sector, domestic and agricultural sectors.

The industrial sector bears the burden of 60-61% (Rs. 600 crores) of the total revenue collected as per MWRRA tariffs, though their water allocation is 10% and they use only 4%. Around 300 crores is coming from the domestic users (district nagarpalikas, etc.), and 100 crores from the agricultural sector. There needs to be an effort to reduce the load on the industrial sector. The domestic sector’s share should be increased. The farming sector is highly stressed in terms of input costs, hence the MWRRA decided that farming sector tariffs will not cross 3% of the total inputs (this is a directive from the government).

With this broad structure in place, the tariff rates are then opened up for public comments. The MWRRA has now made a portal for this – earlier prominent actors (state departments, NGOs, MIDC, etc.) were invited for comments, but now everyone can provide comments on the portal and every comment will receive a response on how much of their feedback has been taken in and reasons for not accepting it. These comments are used in finalising the tariff structures.

Working with local bodies to reorient institutions

In the water tariff structure and policies it declared in January 2018, the authority put some restrictions on the Urban Local Bodies regarding discharge of used water. It suggested that such water needs to be properly discharged in the river or nala or the ULBs can sell it. Prior to 2018, the water treated by ULBs was discharged into the river and it again became the property of the water resources department. Earlier, the local bodies would treat water because of court orders, the state government or the Pollution Control Board. Now, there is a  big shift in that the ULBs are mandated to treat water but they become the owner of the treated water. This is because the MWRRA said that whatever the body treats becomes its property. Earlier, the water resources department earned revenue from the freshwater, and again after the local bodies discharged the treated water, the department earned revenue from the use of the treated water. Now, the local bodies sell the treated water, with the MWRRA adding a condition that when the body sells it to a farmer it shouldn’t exceed 65% of the freshwater cost. This is because, if the treated water was priced the same as freshwater, the user would not be incentivised to buy the former. For industries, the MWRRA permitted the local bodies to mutually decide with the industry on the cost of the treated water; there was no cap. If the industry finds that taking freshwater from a distant reservoir is more expensive than taking treated water from the local corporation, it will prefer the latter. The local authorities could also come to a mutual arrangement where the pipelines could be laid so that the industry could further treat the water to bring it to the required purity.

The Commissioner of the Aurangabad Corporation considered this a good revenue-generation option. The 2030 Water Resources Group from the World Bank, in Maharashtra, worked with farmers to convince them to take the treated water. The farmers were incentivised because this assured supply of water, not dependent on rainfall. Additional incentives were that the water was rich in content and costs were lower. The laying of pipelines was agreed to be done by the municipal corporations as well as the farmers themselves. Thus, because of the Commissioner’s initiative and the 2030 Water Resources Group conceptualising and pushing for this, Zalta became the first village to take treated water from the Aurangabad Corporation.

Powers of the MWRRA

Executive functions of the MWRRA include clearing projects, monitoring whether the authority’s orders are being followed, receiving feedback from users and the public about the orders. As for the legislative functions of the MWRRA – in the past 3-4 years, the MWRRA has been requested by the state government to frame rules because of paucity of time of state’s officers but also the expertise of the MWRRA. After the authority drafts the rules, it is opened for public comments and then sent to the government for final acceptance. The MWRRA also drafts the regulations, which are then sent to the state government for acceptance. In terms of adjudicatory functions, so far, 38 disputes have been resolved in the last 3-4 years, as compared to 11 in the last 11 years. Awareness is also gradually spreading. Earlier, the authority needed visibility in the districts but now people are considerably more aware that the MWRRA is the go-to authority regarding water tariffs, etc.

MWRRA’s quasi-judicial power (equivalent to civil court): [Dr. Warghade] The first petition before the authority was against the government body with respect to the privatisation of one of the dams. The regulator could assert its power, in a first for a regulatory body, by asking the government body to withdraw the Expression of Interest for the privatisation process, and by taking up the role of vetting revenue of any such future privatisation projects. This makes MWRRA as a peculiar and independent regulatory body. [Mr. Bakshi] The Code of Civil Procedure gives the MWRRA power to seek information and presence of senior officers, and to go for prosecution in case of default. The MWRRA of course has never gone for prosecution because the relationship with the dept would be jeopardised. Generally, the department and the regulator have maintained a complementary relation.

Role of the State Water Council and Integrated Water Resource Management Plan

The river basin plans are prepared by expert committees and then integrated. It finally goes to the State Water Board, which is headed by the Chief Secretary, and Secretaries of the water resources department, finance department, planning department, and the Command Area Development Authority. They examine it to see if the plan will work for the next 10-15 years and then recommend it to the State Water Council, which comprises the CM and nine ministers. The Council gives its final approval. This is an effective mechanism. For instance, when the Godavari plan was made and sent to the Council in 2017, the Council objected to only one point – in the upper side of Nashik, the state water plan prohibited small reservoirs and village tanks. The expert committee, headed by me then, had made this recommendation because it found that there were already many reservoirs upstream and if village tanks were permitted then no water would reach Jayakwadi and downstream. The State Council however said that it is too stringent, and that although the area had big reservoirs the villagers needed small tanks. Thus, the State Council formed a study group for this aspect and approved the rest of the plan. On the basis of the Godavari plan, the Krishna, Narmada and Tapti plans were prepared and integrated.

Composition of the MWRRA

MWRRA has a chairperson and four experts – one each from law, economics (water economics/development economics), engineering (dam construction/water construction/maintenance/water flow/evaporation/losses), and the field of groundwater. The engineering expert is usually a former Secretary of the Irrigation Department, the law expert may be anybody from the field, the economics expert comes from academia (former professors who have taught water economics and agriculture), whereas the groundwater expert is usually a former employee of the Union/State government or ex-member of the Groundwater Survey and Development Agency of Maharashtra.

The administrative structure is headed by a Secretary, independently appointed by the MWRRA, but the practice has been that someone from the government is posted on deputation for 3-4 years and then returns to the government. Below this level, there is the permanent staff, contractual staff and consultants who come from the water sector and help with a specific project or for a survey, impact study, creating a portal etc.

I think the state government should think of merging the administrative staff of all the regulators – registrar, finance officer, administrative officer, clerks – and create a hierarchy. This was a proposal we had made to the state government. Otherwise, if you are in one regulator’s office, with hardly 10-15 employees, there is hardly any scope for growth.

Dynamic between MWRRA and the state department regarding scope of function

The history of water resources departments across the country will reveal that they are construction-oriented – construction of dams, maintenance of canals, release of water and in certain states, recovery. Use efficiency, water conservation, micro-irrigation were not issues in focus for water resources departments except for CADA in certain years.

In Maharashtra, the MWRRA and the state dept complement each other’s’ efforts. This is due to a few reasons:

  1. The department realises that the MWRRA approves/ blocks projects on technical grounds and not for political reasons.
  2. The MWRRA also needs inputs from the field that the department provides.
  3. The department understands that reasonable projections, if accepted by the authority for the purposes of revenue collection, would allow it to generate monies which it otherwise would not be able to collect.

Way forward for the MWRRA, issues and challenges

  1. Groundwater development: The Groundwater Development Act was passed in 2009 but it took a long time for the water supply and sanitation department to frame the rules. While they have now been framed, the final comments are yet to be decided and the rules are to be notified into existence. The State Groundwater Authority was merged with the MWRRA but nothing has been done from the authority’s side because the enabling provisions have not yet come. There are critical areas in Maharashtra where water has been overdrawn and unless it is regulated now, the situation will only worsen. The MWRRA has so far only given some instructions to the Groundwater Surveys and Development Authority (GSDA). The GSDA has selected certain wells and is studying the groundwater recharge and use. There are about 35000 wells in the state that are monitored for recharge and withdrawal. If recharge is more than withdrawal, it is good but if the withdrawal is more, it is critical. If the recharge is very low and withdrawal very high, like in cash crop areas, it is highly critical and needs to be stopped. There are pockets in the state that have been identified as sensitive, and GSDA has been working in this area. The GSDA has claimed that in some of these wells the water level has gone up by 1 or 2 meters, which means that their control has been effective.
  2. Real-time data collection: The latest position of water storage in every reservoir, on a daily basis, needs to flow to the MWRRA and to the state department so that they are in a position to do the releases properly and avoid flooding in the downstream areas. For example, the Sangli floods could be avoided if there is real-time feeding of data so that one can prepare in advance for inflow of water. Real time feeding and management of data is not here yet. The MWRRA is supposed to procure and disseminate data to the district or state department authorities who store and release water. This is an important aspect that has not been done yet. Such a situation has arisen not due to budgetary allocations, which is often more than sufficient for MWRRA (at some point the authority even thought of returning the money because it was not able to spend all of it). The constraint was the time available to the authority – when it really thought of real-time data it had only one year left for conceptualising, tendering, etc.
  3. Water loss in the drinking water sector (theft, no revenue) and evaporation loss in reservoirs (too much surface area): There are no rules or studies on this, however, flatly 20% is taken as evaporation loss. This may be incorrect. One needs to study the problem and prescribe methods to curb the loss. The regulator has not been able to do much in this regard.
  4. Measurement: In South Australia, there are arrangements to release the desired quantity of water in your field irrespective of the physical presence of the person. This system of measurement and release is absent in India.

Cost-related issues

There are three kinds of costs: economic, development, and subsistence related costs.

Economic cost of 1 cubic meter of water is much higher in Maharashtra than in Odisha or Bihar. This is because the GDP conversion of 1 cubic meter of water in Maharashtra is very high compared to those states. Thus, we cannot get to an ideal economic cost immediately.

Development cost is the cost from construction of dams, maintenance, staff payments, all other incidentals. In a robust arrangement of the state government, we should have been able to recover the development cost at least.

Finally, there is the subsistence cost, below which the department cannot survive. Currently, recovery is at this level. We are nowhere near the development and maintenance cost, and the economic cost is out of question. The aim of the regulator is to gradually move towards the development cost.

In relation to drinking water supply, whatever cost is recovered from the household has to go for maintaining service standards, purity of water and supply at proper timings and in proper quantity. This is absolutely essential. What has happened is that despite the entity having enough water for the city, the arrangement or terrain is such that if the downstream areas keep getting more water beyond the slot given to them, while higher levels are getting water. Urban and rural local bodies have not addressed this problem, but now they are considering ways to fix the supply arrangement.

Commodification of water

The MWRRA always thought that if you give water as an input to a company for producing bottled water, the cost increases by many times. The input cost of water for bottled water was thus kept quite high, compared to the input to other industries.

The metering system was envisaged by the authority but the government wanted some time since they were not in a position to implement it.

Ensuring accountability and prevention of mismanagement of financial resources

The MWRRA has made provisions for water accounting. There are water accountants and auditors at the state level and levels below as well. There is the thinking that water auditing and budgeting should become part of the activities of MWRRA and there should be trained auditors. Once this is in the public domain, there is pressure on the entity to bring improvements. If you put the water audits in the public domain, half the job is done – people will hold the entity accountable, neither the state government nor the regulator need to do much.

Urgent climate action is critical to sustainable development, suggests new IPCC report

While emissions in the last decade were the highest in human history, many emissions reduction opportunities are available at low cost, and emission reductions and development can both be realised by shifting development pathways, says a recently released report from the UN Intergovernmental Panel on Climate Change (IPCC).

Among the IPCC Report’s authors are three researchers from the Delhi-based public policy think tank, Centre for Policy Research (CPR): Prof. Navroz K. Dubash, Coordinating Lead Author for Chapter 13 (‘National and sub-national policies and institutions’), co-author of the Summary of Policymake0072s, and Professor, CPR, and Adjunct Senior Research Fellow, Lee Kuan Yew School of Public Policy, National University of Singapore; Prof Lavanya Rajamani, Coordinating Lead Author for Chapter 14 (‘International Cooperation’), co-author of the Summary for Policymakers, and Visiting Professor, CPR, and Professor of International Environmental Law, Faculty of Law, University of Oxford; and Parth Bhatia, Contributing Author for Chapter 13 (‘National and sub-national policies and institutions’) and Associate Fellow, CPR. They are among 14 Indians who have been involved in developing the report.

“The unavoidable reality is that human emissions over this past decade have been the highest in history. Limiting warming to 1.5 deg C is out of reach without immediate and substantial short term measures by 2030, in addition to longer term efforts to reduce emissions to net-zero,” said Prof. Navroz Dubash.

“This Report is a sobering reminder of how much we still need to do to prevent dangerous anthropogenic interference with the climate system,” added Prof. Lavanya Rajamani.

The Working Group III (WGIII) report is the third report of the IPCC’s AR6 assessment cycle, with two previous reports on ‘The Physical Basis’ (WGI) and ‘Impacts, Adaptation and Vulnerability’ (WGII) released in recent months. WGIII focuses on climate change mitigation. The WGIII report is co-authored by 278 authors from 65 countries, has 354 Contributing authors, and is approved by 195 governments.

Prof Navroz K. Dubash on March 25, 2022, amidst the two-week approval plenary of the IPCC WGIII Report. Photo by IISD/ENB.

The Report suggests a broadening in how we look at the relationship between development and climate action. “Development choices about urban, energy and land systems shape can shift development pathways toward sustainability. And, because of growing impacts, sustainable development isn’t possible without accelerated mitigation and adaptation. Climate and development can no longer be seen as separate issues – development decisions are climate decisions, and vice-versa,” Prof. Navroz Dubash said.

However, bringing climate and development together is challenging, and has potential consequences, such as changes in employment as well as new opportunities such as sunrise sectors. The IPCC report therefore goes beyond scenarios and pathways to spell out concrete approaches and options to address climate change in conjunction with development.

“By discussing global experience with laws, institutions and policies, the Report lays out what it will take to build a ‘climate-ready state’” said Prof. Navroz Dubash. “Many countries have developed dedicated knowledge bodies and coordination bodies, with good effect.”

There is also good news on the policy front, Dubash added. “Globally, emissions could be reduced by more than 25% by 2030 at under USD 20 tCO2-eq, with a further 25% at under USD 100CO2-eq.

These options span a wide range of opportunities across energy, land, buildings, transport and demand shifts. For countries with growing emissions, it is also important to be attentive to whether new investments will lock-in high emissions.”

The Report also suggests a rethink of the way in which countries approach climate policy-making.

“A ‘policy package’ approach is better able to support sectoral transitions, such as toward low carbon transport and decarbonised electricity, than individual policies, while stimulating job creation and promoting equity,” said Parth Bhatia, Associate Fellow at CPR. “Stimulus packages that were put in place by countries in response to COVID represent the kinds of opportunities when climate goals can be achieved alongside other important development goals.”

Prof. Lavanya Rajamani on March 25, 2022, amidst the two-week approval plenary of the IPCC WGIII Report. Photo by IISD/ENB

The news on the international front is more mixed. “While there is evidence that international agreements like the 2015 Paris Agreement are working to enhance national target setting, policy development and transparency of action and support, there are significant shortfalls in the availability of support which will make it increasingly challenging for developing countries to implement current commitments and take on more ambitious national contributions over time,” noted Prof. Rajamani.

“Financial flows are a factor of three to six below what is required by 2030 to limit warming to 1.5 or 2 degrees Celsius, and closing this gap is particularly hard for developing countries,” added Prof. Dubash.

This Report pays far more explicit attention to equity and justice – internationally and domestically –than previous IPCC mitigation reports. “The report recognises that equity remains a central element in UN climate negotiations, despite shifts in understanding of differentiated responsibilities of countries over time and challenges in assessing what is a fair contribution of different countries,” stated Dubash. Moreover, “attention to distribution of emissions and impacts within countries also affects social cohesion and the acceptability of climate measures, suggesting the need for explicit attention to equity and just transitions in national and local policymaking,” Prof. Dubash said.

Important Links

Access a summary and the full report online: https://www.ipcc.ch/report/ar6/wg3/ 

About the Centre for Policy Research (CPR)

The Centre for Policy Research has been one of India’s leading public policy think tanks since 1973.  CPR is a non-profit, non-partisan independent institution dedicated to conducting research that contributes to the production of high quality scholarship, better policies, and a more robust public discourse about the structures and processes that shape life in India.

The Initiative on Climate, Energy and Environment at the Centre for Policy Research (CPR-ICEE) aims to stimulate an informed debate on the laws, policies and institutions shaping climate, energy and environmental governance in India. For live updates on our work, follow us on Twitter, or email us at climate.initiative.cpr@gmail.com

About the IPCC:

The Intergovernmental Panel on Climate Change (IPCC) is the United Nations body for assessing the science related to climate change. Every seven years, the three IPCC working groups publish a new Assessment Report (AR).

 

Know Your Regulator: Special Edition on Water Authorities in Maharashtra and Punjab

Briefing Note: The Maharashtra Water Resources Regulatory Authority (MWRRA) and the Punjab Water Regulation and Development Authority (PWRDA)

Setting the context for regulating water

The Maharashtra Water Resources Regulatory Authority (MWRRA) is the first independent statutory regulatory authority in the water sector in India. The MWRRA Act was enacted in the year 2005 and the Authority was established in the same year. The creation of MWRRA marked a significant shift in how water resources were managed in the state. Following the establishment of MWRRA, a number of states including Arunachal Pradesh, Uttar Pradesh, Kerala, and Gujarat enacted laws for the establishment of independent water regulators. The operationalisation of these state regulators, however, has been slow. Recently, the state of Punjab constituted the Punjab Water Regulation and Development Authority (PWRDA) under the Punjab Water Resources (Regulation and Management) Act of 2020. PWRDA is the newest addition to the club of state-level water regulatory authorities in India.

In India’s federal organisation of powers relating to water, it is a State subject (Entry 17 of the State list) in the Constitution of India, subject to the powers of the Centre under Entry 56 (regulation and development of interstate rivers) of the Union list. Largely, the narrative around water governance is dominated by the constitutional provisions related to inter-state water disputes and their resolution under Article 262. However, the focus of State-level water regulatory authorities is on intra-state management, and on ensuring efficient, equitable and sustainable use of available resources within the State.

Water stress puts lives and livelihoods at risk. Limited avenues of water supply coupled with an ever-increasing demand place India amongst countries with ‘extremely high’ levels of baseline water stress.[1] Ground water is severely over-drawn leading to its depletion throughout the country. Surface water in the form of rivers, lakes and streams is also under stress. Although water scarcity is a huge concern, India’s water resource challenges also extend to the quality of available water resources. The Composite Water Management Index of the NITI Aayog confirms that only around 28 per cent of India’s water resources is utilisable.[2] Due to such conditions of stress, inter-state contestations for water, related to, both, water share and quality are surfacing often.

Prolonged water stress can adversely impact public health and economic development. The country’s approach towards Water Resource Management (WRM) assumes great significance in this context. Undoubtedly, prevalent water stress and risks are an outcome of the WRM strategies pursued so far. India’s approach to WRM has essentially relied on the paradigm of supply augmentation.[3] As such, public irrigation development remained the focus. This approach is fraught with its own set of issues – outcomes included regional inequities in irrigation development, and less than desirable results from significant public investments in construction of dams and physical works. Simultaneously, private investments in ground water irrigation increased.

Scope and Design of Water Regulation in Maharashtra and Punjab

MWRRA and PWRDA are statutorily tasked with managing and regulating water resources in their respective states. The Authorities are expected to ensure the ‘judicious, equitable and sustainable’ utilisation of water resources. A significant difference between the two State Authorities is that while groundwater management falls under the purview of the Punjab Authority, the Maharashtra Authority’s role in relation to groundwater is limited. A separate statute, namely, the Maharashtra Groundwater (Development and Management) Act, 2009 lays down the framework to manage and regulate groundwater in the state. This statute also establishes a State Groundwater Authority and District Level Authorities to implement statutory provisions.

The MWRRA Act focusses principally on the management of water from the state’s irrigation projects: there are five such major projects run by Irrigation Development Corporations, which are referred to as ‘River Basin Agencies’ in the Act. The Act covers these River Basin Agencies and ‘water entities’, which include individual water users, water user associations et cetera. It envisages a multi-level structure for determining water use, which includes allocations between ‘categories of use’ (such as agricultural, industrial, drinking water etc.), and ‘entitlements’ for water users from irrigation projects. Following recent amendments in the Act, allocations between categories of use are determined by the State Cabinet and are applicable uniformly to all the River Basin Agencies in the State. The role of the Maharashtra Authority is to make regulations which set out criteria for issuance of entitlements, priority of water distribution during periods of scarcity, and to ensure equitable distribution at all levels of irrigation management. River Basin Agencies issue entitlements to water users on the basis of these regulations.

The Maharashtra Authority is required to make regulations for setting up a water tariff system based on the principle of full cost recovery of operation and maintenance charges. The Authority has the power to adjudicate disputes between River Basin Agencies and water users. In addition, the Authority has a range of executive functions, including to administer, monitor, enforce and supervise its orders, directions and regulations, and to review and clear water resources projects proposed at the sub- basin and river basin level.

Groundwater is one of the main focus areas of the PWRDA Act. The Punjab Authority has control over groundwater extraction installations, to approve the setting up of new ones, and to set conditions and restrict the use of existing installations. Users drawing groundwater are required to register their structures with the Authority. In terms of the Act, extraction of groundwater for drinking water use is exempt from these restrictions and control. Further, under the draft guidelines issued by the Authority, extraction for domestic and agricultural use is also presently exempt from restrictions and control.

The PWRDA Act also provides for setting of tariffs for water supplied to industrial, and commercial users. In this role, it covers all ‘entities’, including any person or organisation or authority, and including local bodies, boards, government corporations and departments that supply water for industrial and commercial use. Charges for supply of water for drinking, domestic and agricultural use by these entities are however outside the purview of the Authority and are meant to be as per policy set by the State Government.

The Punjab Authority can also issue directions for the optimal use of surface water, and provide advice to the State Government in relation to canals and surface water, but it has relatively little direct influence at present in relation to surface water. The Authority also has power to administer, monitor, implement and supervise its regulations, directions and orders.

Both state laws provide for Integrated State Water Management Plans, to be made by the State Water Board (in the case of Maharashtra) and the State Government (in the case of Punjab), and in both cases to be approved by councils headed by the Chief Minister. The powers and functions of respective Authorities are meant to be exercised in conformity with these Plans. They also provide for considerable influence of their respective State Governments over the affairs of the Authority, including to approve regulations and to issue directions. The State Governments also have influence in financial and operational matters.

Both authorities are headed by a Chairperson. While MWRRA requires 4 expert members, PWRDA requires 2. In addition, the former engages 5 special invitees (one from each river basin agency) of which at least one should be a woman. The latter has an advisory committee comprising the chairperson and 5 experts.

Issues and Challenges

Economic transitions, and the shift to privatization has been commonly seen as the rationale for setting up regulatory agencies, such as for electricity, telecoms and pensions. In other cases, regulatory authorities have been set up to establish standards, norms and terms of engagement for businesses, such as in real estate, food and for financial products. The case of water authorities does not follow these trends. Large scale privatization of water resources is absent in India, and not envisaged in the foreseeable future. The problems of the sector are the sequencing of policy and institutional reforms, and perhaps the depoliticization of this reform process.[4] However, while overcoming political uncertainty was the rationale for the setting up of water authorities, there is still a considerable role for state governments in the affairs of the regulatory authorities.

Moreover, reforms envisaged for the water sector are complex and politically difficult. There are strong equity and developmental considerations, and strong interests around existing allocations and use. Ironically, much of the existing practice relating to irrigation and water use in the states has been set up through government subsidy and support. The Maharashtra law is quite ambitious in that it takes agricultural use into its ambit. In Punjab, on the other hand, groundwater is a much more salient issue, and presently the State Government has only limited influence over its extraction and use. The law therefore is quite ambitious in that it seeks to establish state control over groundwater, although at the moment this extends only to industrial and commercial extraction. Long-term outcomes are however likely to be dependent on how states and regulators are able to work together to facilitate stable transitions.

Continue reading “Know Your Regulator: Special Edition on Water Authorities in Maharashtra and Punjab”

‘Know Your Regulator’: Mr. Supratim Bandyopadhyay, Chairperson, Pension Fund Regulatory and Development Authority (PFRDA)

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 fifth event in the series was Mr. Supratim Bandyopadhyay, Chairperson, Pension Fund Regulatory and Development Authority (PFRDA).

He was in conversation with Dr KP Krishnan, Former Civil Servant and Dr Abha Yadav, Associate Professor, Indian Institute of Corporate Affairs and Director of the Forum of Indian Regulators (FOIR) Centre at IICA.

Mr Praveen Kumar, Director General and CEO of the Indian Institute of Corporate Affairs and Ms Arkaja Singh, Fellow, State Capacity Initiative, Centre for Policy Research made introductory remarks.

Date: 21st January 2022

The background note on PFRDA can be accessed here

Conversation summary:

What were the problems that PFRDA was set up to address? How did it address these problems?

Serious conversation around the pension system, particularly the common pension system, started in mid or late 1990s. There were two reports – one by OASIS (Old Age Social and Income Security Project) and another by a High-Level Committee headed by Mr. B.K. Bhattacharya (senior civil servant) – that pointed out that the current defined benefit scheme is becoming unsustainable. The growth in pension bills, especially after factoring in defence pensions, were taking away large parts of revenue for both central and state governments. The political will of the leaders at the time enabled them to undertake strategic reform in the pension sector. Another thing that happened was the increase of 2 years in retirement age (58 to 60 years) in 1998.

The moment you go from an unfunded to a funded pension system (which is the basic difference between the earlier and the current system) – there has to be certain regulations, rules on fund management so that the benefits of employees are protected.

When we were planning this shift, we also thought about the unorganised sector, retail customers, and so on. So at that time, even though we started with the central government, and now all but two state governments have joined. Thereafter, we opened up to retail segment in 2009 and then to corporates as well. Today, the net addition from government sector has come down for obvious reasons while there is growth in contributions from the retail segment, corporates and unorganised sector. Hence, the purpose for which the PFRDA was set up is being fulfilled to a great extent, and unless we have platform to see that all subscribers, fund managers, data keepers are integrated, the purpose wouldn’t be served – hence we have ensured data security and robust connectivity between all intermediaries.

The PFRDA is a unique system because we work with 5-6 intermediaries, each of whom do different jobs. For example, pension fund managers only offer fund management service but don’t keep data. The PFRDA has a big role in ensuring the system works seamlessly and robustly.

Has PFRDA been pushed into a narrow box of looking after NPS, and should EPFO and other sectoral issues be brought under the PFRDA’s jurisdiction?

The birth of PFRDA was under some kind of a conflict – if you look at the pension sector, pension was already a part of IRDA’s domain and insurance companies are selling pension for over six decades. But pension is too serious a business to be left to different segments and regulators. There should be a single-point focus for pension.

Concerning gig workers, we had some discussion around a universal pension scheme, which has now received a mention in the Code on Social Security, 2020. This needs to be notified soon since gig workers really need pension today. Atal Pension Yojana is doing quite well, with 7 million new customers joining this year. While we are expecting around 10 million, the number we are actually looking at is 460-480 million, which is the number of people in the unorganised sector looking for some kind of old-age support. The question is: how do we reach out to them? There are self-managed superannuation products that don’t come under any regulator’s ambit. They get income tax approval and manage on their own. So we do not know whether contributions are made regularly, whether employee’s benefits are protected and if they get the right kind of payouts. So, in the long run, it will be prudent to place pension as a whole under one regulatory body.

Organisational structure of PFRDA

PFRDA is headed by a chairperson, and has three whole-time members (finance, economics, law). The board also has three part-time members, usually senior government officials nominated from the Department of Financial Services, Department of Personnel and Training, Department of Expenditure, and so on. We are supported by employees, all in the officer cadre. Currently our strength is 75-76 people, and we are in the process of recruitment. In two years’ time, we plan to have around 130-140 people, because certain activities like pension-related research, and we need separate inspection teams. We need presence in other regional centres, starting with Mumbai.

PFRDA currently has no independent or private members, but the  PFRDA Act does not prohibit this. The three part-time members can be anybody, including experts in their fields.

Regulatory method: elements of executive, adjudicatory and legislative functions

PFRDA has all three functions: legislative, executive and adjudicatory.

Under Section 52 of the PFRDA Act, we make regulations for all intermediaries – pension fund managers, central record keeping agencies, trustee bank, NPS trust (trust structure that manages the assets on our behalf).  The executive part is that we go for registration of entities, supervise and monitor their performance, audit and inspect them, determine their fees and charges. Through those inspections and monitoring systems, if we find breaches in regulations, we adjudicate under Section 30 of the PFRDA Act. We have the power to call for all their records, and if we find a breach we can impose penalties.

PFRDA has independence in these matters. Most of these decisions are with the board – the board is the final authority in this. The central govt comes into the picture to the extent that the benefits of central govt employees are concerned. For instance, three years back the government decided on the recommendation of the 7th Pay Commission to increase their contribution from 10 to 14%. Further, PFRDA has no say in the CCS and NPS Rules, which comes from the Department of Pension and Pensioners’ Welfare. Apart from this, the government does not interfere with PFRDA’s independence in the above-listed functions.

Main features of the terms of engagement set by PFRDA between savers and the sellers of pension products

NPS is a given product, pension fund managers manage funds on our behalf. Points of presence (POPs) are distribution channels of this given product. PFRDA tries to ensure that there is transparency in the system, to ensure that whoever comes into the system will know what the costs are like. NPS is probably the lowest cost financial product not only in the country but possibly in the world as well. We can say this because we engage with many international organisations of pension supervisors. IOPS looked at our overall cost structure and told us that we were outliers. We’ve also looked at lowest cost jurisdictions across the world and we are far below them. So we give low cost benefits, lots of information and data and lot of flexibility to the customers.

One important thing that came out in the High-Level Committee report was the issue of portability: govt employees who had not rendered a certain number of years of service wouldn’t get pension, and wouldn’t be able to transfer this either. The biggest advantage that the current system has is portability. Regardless of whether you are in the govt or private sector or on your own, you will have your unique account. You’ll just have to pay Rs.1000 annually to keep the account alive.

On the issue of sustainability, we aim to make the operation of intermediaries sustainable. At regular intervals, we look into their cost structures. For example, we have rationalised the cost structures of central record keeping agencies. Now we are looking at the cost structures of POPs. In order to take NPS and APY to the masses, we are telling POPs now that they can induct individuals into the system as well. In April 2021, we rationalised the fund management charges of the pension fund managers because they were running into losses. We have had 3 new licenses being granted for pension fund managers since then (we had 7 earlier). So it’s fair play between subscribers and service providers.

Who are the key players in this system beside the employer, employee and pension fund? What is the role of state and central goverments?

Each job in this system is done by a group of experts.

  • For example, we currently have 93 POPs – these are banks, NBFCs, and so on.
  • We also have retirement advisors, though this hasn’t gone quite well. Now we are going into individual players in the distribution market.
  • Central record keeping agencies (CRAs) keep the data of the customers, instruct banks (through which the money flows in) on which fund manager the money should go for investment. They are the central piece of the system. We currently have three – Protean E-Gov Technologies, KFintech and CAMS (they will start operation from next month).
  • We have a single trustee bank – Axis Bank – that manages the entire fund, right from the POPs and customers, to the pension fund manager, based on the direction of the CRAs.
  • Pension fund managers: There are 7 active ones and 3 licenses have been recently issued, so in the next 3-4 months they’ll be up and running.
  • Annuity service providers: Today, in the Act, the only way of exit is through annuity. You can take back 60% of your corpus tax-free and 40% has to be converted into annuity. This conversion process is tax-free of course, but the annuity is taxable. We have about 14 annuity service providers, all of them being IRDAI-conferred entities. We have been looking at other pay-out products as well, and it is part of our proposed PFRDA amendment bill. If it comes through, it will give a lot of options to the retiring public who are subscribed to NPS.
  • The nodal officers of governments are our intermediaries – they ensure that when the monthly salary is paid, the exact amount is deducted from the salary, and the contribution of the central/ state govt is added together and then sent to the system. Here, the biggest challenge we face is the delay: (i) not deducting in time; (ii) even if deduction happens, the money is not coming to the system in time. The system is very dynamic today: if you give the money today, it will get invested today itself; hence a delay of 20-30 days entails an opportunity loss. For the first time, in CCS-NPS Rules, a provision is brought in that if there is a delay there will be a penalty, including individual penalty. The proposed amendment bill also provides that the dues will be treated like any other statutory dues.

Justification for pensioners’ benefits being market-linked

Chairperson, PFRDA: The previous and the current pension schemes are not comparable at all. Firstly, no amount of contribution was required in the previous pension scheme. Secondly, retirement ensures a 50% replacement rate and is adjusted to inflation every six months, in the new scheme; recovery and wage rise with every pay commission also brings adjustments to old pension.

In a market-linked scheme, we monitor the performance of pension fund managers, we have strict investment guidelines with some scope for growth, and we ensure that they do not become too adventurous because these are retiree’s monies. Since 2009, we have managed the private sector as well, and over 13 years the CAGR under our equity scheme is 13.5%. Even corporate bond funds have given a CAGR of 9.72%, despite several corporate market events. The government bond performances are a little lesser, but that is around 9.3-9.4%, because the interest rates are hardening today. If you look over a period of time at blended return of an equivalent amount in equity, corporate bond and govt securities, it will still be over 10%. We have benchmarks in place and ensure that pension fund managers work close to them, and if there are huge deviations we hold them accountable. Financial markets have volatilities in the short term, but over a period of time we ensure that the right kind of securities are chosen for subscribers and they get a sizeable corpus.

Dr. KP Krishnan: This discussion takes us to the knife-edge job of the regulator, it is not the regulator’s job is not to ensure good returns to the subscribers but to ensure no malpractices and that the regulated entities act according to the prescribed behaviour, and a lot of the risks are to be taken by the informed investor. What you have brought out nicely is the difficulties in a pension situation where the choices are not necessarily exercised by the investor, so there is a dilution in the role of the investor, which then is performed by various actors.

On the issue of early withdrawals and annuitisation of the pension corpus: individuals tend to be less concerned about building a long-term corpus for themselves than society is.  How much of this should be done by the regulator and how much of this should be done by educating the public and letting individuals take a call?

The biggest challenge with annuity is that once you enter it you are stuck for a lifetime, whatever the rates may be. Whatever we see today are fixed rate annuities. There is no variable annuities in the market; it does not move along the interest rate scenario. Currently the annuity rates are varying between 5-6%, and this is normally for those asking for annuity and after death for the corpus to be refunded to the nominee. In Indian psyche, 90% people go for this – they feel that after they die it is their duty to give the corpus to close ones, regardless of whether they need it or not. They choose to trade off higher annuities for getting the money right after death. This is a big challenge in the system today.

So far as exits are concerned, the biggest complaint against NPS is that it discourages early access to the funds. But after considerable deliberation, we now allow three times partial withdrawal (25%) for the same reasons that EPFO allows – for construction of house, marriage of children, meeting medical costs, and so on. Beyond this, we do not allow withdrawal because as we have seen with EPFO, early access being freely accessible leads to depletion of corpus, culminating in a situation where a person gets no corpus on retirement. Since the system is for old age security, a substantial part of the corpus should be left at retirement.

The ideal view is that individuals have different instruments for different goals – NPS is not ideal for instance for medical costs or housing, but in a developing country there will be competing claims on limited amount of savings. In this context, what is the NPS doing for greater education of its customers?

PFRDA has training agencies in place and are involved in online training. For annuities, retirement and related matters, we have annuity literacy programs. For the last 2-2.5 years, we had around 30 sessions, with physical sessions before the pandemic; in Patna for instance, we had 300 people inside the auditorium and 500 outside. People have asked if they can contribute post-retirement. Now these sessions are conducted online, where 70% of the session is dedicated to audience questions. We also bring in pension annuity service providers, CRAs, fund managers.

Apart from this, we are trying to create an industry body. The NPS trust is already trying to do that, by bringing together fund managers, CRAs, POPs to create awareness.

We are trying to have a resource person -like concept that SEBI also had, who will go around and talk about pension in general.

I also believe that pension, health insurance and life insurance should be taken together. By contributing to NPS, the corpus may go up but the person and their family are not protected – hence, it has to be a combination of all these things. I strongly believe that different regulatory bodies like IRDA and us should work together towards a common forum through which we can educate people about these things.

During my 35 years in the insurance industry, pension has never been a top seller – ultimately if someone is really insisting on a pension will the insurance company sell it. No agent or advisor will actively talk about pension – but pension is one of the very important segments but everyone should be talking about.

There are changing demographics, people have longer lives and fewer babies. Is this the context for necessary focus on the issue of pensions? Has this transition happened?

The life expectancy at birth in India is close to 69 years now, and life expectancy at 60 is another 18-20 years; female longevity is 2 years more than male longevity. So we have to start quite early to think about longevity. We do a lot of industry sessions with CII, FICCI and so on – and we get questions, mostly from people in their 40s and 50s, about how much they need to accumulate in 10 years’ time for their post-60 life. In most situations we see that it is too late by the time they are starting; but we encourage them to start anyway. NPS in that sense is a very flexible system, where a person can contribute just Rs.1000 a year to keep the account alive, when they have restricted cash flows, and when they have higher cash flows they can contribute more and secure what you need at the end of your life. Regarding replacement rate, take for instance, IT graduates aged 25 years having a salary of Rs.30,000 a month with an annual increment of 8%, with inflation around 5% – and they depend only on the mandatory benefits of provident fund and gratuity – their replacement rate will be around 25% of their last earned salary. This cannot be adequate given the biggest cost incurred post-60, i.e., medical costs. Morbidity experience – the quality of life after 60 or 65 –  entails huge costs as the pandemic has shown us. This is why we need to be prepared since the longevity issue will catch up with us in a big way.

Now we have opened it up for the retail and corporate customers to continue after 60 years till the age of 75 years – they are free to close it any time in between and take their 60% money and go for annuitisation of 40%.

Regulatory capacity of PFRDA – staffing, technical expertise, etc.

The year 2021 was a turnaround year for the PFRDA since it became financially independent. We now run on regulatory fees and did not take a single budgetary grant to run our operations. This maintains our autonomy to a great extent. This helps us in recruiting people of our choice, improving our IT infrastructure and so on without depending on govt support. We have also set up a small fund to have our own office building.

We do not have any monetary constraint with regard to recruitment of capacity building and of experts. In our latest recruitment, we recruited actuaries for the first time, with the long term purpose of NPS being only one of many financial instrument with which the PFRDA will be working. Between 2004, when we were established, and now, NPS has changed its structure and shape quite a bit, since we added many flexibilities, but we need other kinds of products as well. The first thing we started, that was also given in the statute, is the Minimum Assured Returns Scheme (MARS). This again is very difficult in a market-linked scheme but we hope for the first basic product to be available in the next 6-8 months. It will look into many aspects – the moment you bring in the concept of assured returns in a market-linked scheme, we have to look at the solvency aspect of fund managers. Currently, I give them a fund and they give a certain kind of return net of their expenses. But if they are asked to give a certain kind of finite return regardless of market conditions, the concept of solvency comes into play – they have to be adequately capitalised. Once MARS is successfully implemented, we’ll be looking into other kinds of products. If the PFRDA amendment bill allows us to go into exit-related products, we’ll look into that – we have in mind a systematic withdrawal plan as an alternative to annuity.

Apart from actuaries, we are recruiting chartered accountants, cost accountants, company secretaries, economists, statisticians (for research), and so on. Our report from BCG, our consultant, looks into several aspects like operation of NPS trust, entire HR aspect of PFRDA and the areas that PFRDA should look into, kind of personnel PFRDA needs, and revamping of PFRDA’s IT infrastructure. This is a one-year project and these things are on the agenda.

Sources for principles, technical expertise and establishment of norms

We depend on three sources –

  • looking at other financial sector regulators and their best practices;
  • international practices – everything can’t be imported and immediately applied here, but we are working on that. For example, we are engaging with other countries on how they’ve made systematic withdrawal plans work; feedback from customers, intermediaries – we work with many CPSEs (central public sector enterprises) that are shifting their superannuation funds to us; here too we get feedback on what their employees want.

‘Know Your Regulator’: Mr Navreet Singh Kang, Chairperson of RERA, Punjab.

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.

As part of the series, Mr Navreet Singh Kang, Chairperson, Real Estate Regulatory Authority (RERA), Punjab, was in conversation with Dr KP Krishnan, IEPF Chair Professor in Regulatory Economics, National Council of Applied Economic Research (NCAER) and Ms Arkaja Singh, Fellow, State Capacity Initiative, Centre for Policy Research. The event was held on 25 November, 2021.

Here is a summary of the conversation:

Why was RERA setup?

RERA is a relatively recently established regulatory authority but one that has made a significant impact on market conditions in the sector it regulates. It is seen as having set the rules of the game in what is a volatile and risky business (real estate). RERA is also unique since it is only India that has a specific Real Estate Regulatory Authority, and this is a unique Indian experience.

RERA was setup for a few reasons: to promote transparency about the promoters’ credibility; to provide necessary approvals to the promoters to start a project and lastly, to provide quick resolution through an adjudicatory mechanism. Before RERA, customers had to go to the consumer forum or to the civil courts to complaint against the promoters. The level playing field was a bit distorted and the allottee was at the receiving end of these issues. That was the trigger for bringing in this Act so that there is a focussed, dedicated agency to monitor these things.

How is RERA structured?

The RERA Act says that there needs to be a chairperson and at least two full-time members. There is an Executive Director, who is typically a retired or a serving IAS officer and then there are four teams: Legal, Finance, IT and Registration and Regulation. RERA subsequently added a Town Planning division so that an officer can look at the promoters’ plans. The town planning officer is supposed to investigate the promoters’ floor plans and find out if the plans are within the remit of the law.

RERA has a separate authority for adjudication headed by an Adjudicating Officer who is usually a serving or retired district judge. There was some lack of clarity between the role of the Authority and the role of the Adjudicating Officer, but the Supreme Court has clarified that the Officer decides only the quantum of compensation and cannot make a substantial determination of the rights of the parties. Complaints made by the parties should therefore be heard by the Authority. The Authority must pass the order that the customer will be compensated for by the promoter and the Officer will decide on the compensation.

At RERA, there is a balance between retired people from government and other people without the baggage of government. In the managerial level, there are 25% of people who were formerly in government employment, the rest are from the private sector. Every recruitment is only through an open advertisement with an objectively defined criterion. Initial recruitment and screening are done by a committee of managers and the educational qualifications is laid down in our regulations. Attracting and retaining talent has not so far been a problem at RERA Punjab. Although the organisation does not offer permanent employment, if someone has been with RERA for a longer time, they are promoted and a higher level of renumeration is given to them. In the present structure, the possibility that a person in the RERA staff could become qualified to be a member or chairperson had not been envisaged. However, it is perhaps time to re-look at the promotion system from this perspective.

Although RERA is not very different from a government body in some ways, it is autonomous and more flexible. RERA is more informal and faster than a civil court, but these courts have greater powers of enforcement than a RERA. For orders that the Authority cannot execute, the matter is taken to the civil court. In terms of compliance, when RERA passes an order on development, the experience is that there is reasonable compliance on ground. Even overall compliance has been much better after the Act came out, especially so for new projects. There are legacy issues but hopefully that is changing.

RERA’s regulatory functions

The RERA Act says that promoters cannot develop their projects without registering with RERA. When a promoter registers with RERA, she must submit disclosure documents including status of approvals, title of the land or property, financial status etc. and RERA will upload these details on the website for the benefit of a prospective customer. Along with this, the promoter agrees to comply with certain terms and conditions. This perhaps encourages a certain degree of voluntary compliance.

Additionally, RERA is a dedicated agency that provides adjudicatory mechanism for grievances of allottees. RERA is not a consumer forum for the real estate sector, but the body is a regulator that is focussed on balanced development of this sector. RERA aims to regulate and promote and is keen to ensure that both the consumers and the promoters’ interests are balanced. The RERA Act discusses ways to reset terms between buyers and sellers. For this reason, when there is a delay in a project, RERA encourages the promoters to finish the project and the Authority also brings the buyers and builders together and negotiates between them. However, the Supreme Court passed a judgement that the allottee has the right to ask for refund of the money “on-demand”.[1] Genuine home buyers usually stick to a project despite delays but there are a group of buyers who will go by the market rate and would want to get out of the project. But when the market is looking up, buyers prefer to stick with the project.

Transparency and creating a credible platform are very important in RERA’s regulatory strategy but classic textbook perspective on regulatory authorities include elements of adjudicatory, executive, and legislative powers. Where does RERA fit into that?

RERAs have the authority to make regulations, but rulemaking power under the Act is with the state government. RERA has framed sets of regulations in the past and is hoping to come up with more in the future. These are not only specific to internal processes like staffing, recruitment procedures and administrative processes for the promoters and the consumers to raise queries, but they also include substantial regulations that have binding effect.

Executive powers of RERA include powers to enforce these regulations that RERA makes, and to enforce provisions of the Act and the Rules. Like all classic regulators, RERA has some elements of all three functions of the state – legislative, executive, adjudicatory powers – combined into one body. On a theoretical level, this is fundamentally violation of separation of powers.

However, in reality there is not much scope for conflict of interest as the rule-making function is mainly with the state government. RERA’s regulations only fill in the gap. For example, when a RERA receives a complaint, there are regulations on how the complaints should be handled. RERA only has limited powers of regulation. Recently, RERA’s regulations that said that a single member bench of the authority can hear complaints was quashed by the High Court. The Supreme Court later reversed this judgement, but this shows that RERA’s regulations are scrutinised. There are limits to the Authority’s powers.

There are three spheres in which RERA operates: a) contract enforcement where RERA looks at the builder-buyer contracts b) grievance redressal for customers in the real estate sector 3) regulation of activities in the urban sector. But all these three spheres also involve other players.Urban is a very tightly regulated sector and there are multiple authorities (like the Urban Development Authority) who regulate this sector. Contract enforcement also has its own legal machinery.  RERA exists because the existing machinery is not working properly. While playing a regulatory role, the other development authorities also play a promoter role. Their entire focus is not on regulation. But RERA helps in converging focus on this sector, and the Authority shares suggestions to the development authorities.

From seeking permission to build on a land to ensuring that the papers are in order, a builder must run around multiple authorities. Will RERA help consolidate all these into a single window?

RERA does not have the power to do these things, but the Authority has suggested to the government that there needs to be more cohesiveness to the entire project.

RERA has powers to levee fees and retains the fee for upkeep of RERA. In government, this is prohibited. The fundamental principle of government is that it cannot retain the fee and only legislature appropriates the budgets for government body. In RERA’s case, is there a potential conflict?

RERA’s budget comes from the state government and the fees that RERA collects from promoters or agents is enough to run the organisation. Unlike Income Tax, the Act itself says that the fee will be retained as part of Real Estate Regulatory Fund. It also says that that fund will be used for meeting the day-to-day expense of the Authority and for the Appellate tribunal headed by a retired High Court judge. However, this fee is set up the government, and not by RERA.

On the other hand, funds collected through penalties levied by RERA are not retained by RERA, but go to the consolidated fund of the state. In this way, there are some checks and balances built into the system.

You (Mr Kang) were the first chairperson of the Punjab’s Real Estate Authority. How did the setting up happen?

Punjab was the third state in the country to set up the Authority. We started from scratch where we walked into the office of Punjab Urban development authority, and we told them that they should help us since they have constituted us as an Authority. We got a pantry and a room with a veranda for starters. We also got a personal assistant. We have changed locations since. Finding a place for the office, recruiting staff, formalising regulations, seeking government approvals for the administrative regulations we made. All this was part of the process of setting up a new Authority.

What is AIFORERA?

The All India Forum of Real Estate Regulatory Body (AIFORERA) is a registered society, a central body with a Chairman, Vice President etc. It is also a central coordinating body. Mr Kang has been an office bearer at AIFORERA for the last two years. It provides a very useful platform for the state RERAs to meet and there are usually quarterly meetings. AIFORERA collates all the orders passed by other RERAs, the body takes up issues with the Ministries and the members also help in research activities. It helps to have a common voice. Currently, AIFORERA is headed by the chairperson of Tamil Nadu RERA.

Are there measures to assess RERA’s successes?

AIFORERA has been hosting a web series every month where various stake holders including private sector developers, financing institutions etc participate. They have agreed that this has made an impact. There is no quantification yet but qualitatively, we know that the Act has made a difference. If there were to be external evaluation, one would need data and all that data (complaints received, complaints resolved etc). is out there in the public domain. This data can help evaluate RERA’s successes as well.

Regulation and Public Interest

From its inception to setting up, RERA has been a unique regulatory authority in the real estate space. There are many nitty gritty challenges here and not many want to engage with the details to understand regulatory capacity. For example, in the areas around Chandigarh, the relationship between the builder and the landowner is quite transactional, unlike in the rural areas where people are closely attached to their land. But several rural landowners and farmers have themselves become promoters. The development of the sector is dependent on the market cycles.

Regulation is part economy, part society and part politics. Regulatory purpose is ultimately in the public interest. The regulatory challenges at different parts of the country are very different for each RERAs although all the RERAs come under the RERA Act. RERA is not a consumer forum, and the Authority’s interest is to promote a balanced development of the sector. If the Act is implemented properly, it will be a big step towards ensuring this development. RERA Punjab is focussed on improving capacity and improving interaction with its stakeholders.

[1] Newtech Promoters and Develpers Pvt Ltd VS State of UP & ORS etc. https://main.sci.gov.in/supremecourt/2021/5013/5013_2021_14_1502_31099_Judgement_11-Nov-2021.pdf