Author: cpradmin

Date:
8th July 2022

Speakers:
Mr Preman Dinaraj, Chairperson, Kerala State Electricity Regulatory Commission
Dr Ashwini K Swain, Fellow, CPR
Ms Arkaja Singh, Fellow, State Capacity Initiative, CPR
Dr Abha Yadav, Associate Professor, IICA and Director, FOIR

Read the background note here.

Conversation summary:

Chairperson’s engagement with the electricity sector

The term ‘regulator’ often conveys a negative connotation. It gives the impression that an organization will regulate everything and make things difficult (in a market). The audit department (my parent department) as well as the income tax department are viewed as necessary evils. I was lucky that I spent around 20-22 years outside the department and with the Government of India. I have also worked with the UN High Commission for Refugees, looking after the Great Lakes operation in East Africa, also with the Republic of Mauritius for 5 years, and the Government of New Zealand for 2 years. This probably pulled me out of the (traditional) regulatory framework. Typically, the KSERC is considered a very friendly regulator by the regulated entities (distribution licensees, power producers, even average consumers who come with complaints).

The KSERC has three Consumer Grievance Redressal Forums in different parts of the state. The state electricity ombudsman is also within our ambit. Generally speaking, in Kerala, the manner in which grievances are addressed has been satisfactory to a large extent.

I ventured into the power sector by accident. At one stage I was the Director (subsidy) of the Ministry of Food, looking after the Food Corporation of India. Obtaining a lateral shift within Delhi was a difficult (task). The Department of Atomic Energy at the time was looking for someone who could work on contracts, so I moved into this department as a Director. They initially gave me a choice between continuing as a Director in the Ministry (which is based in Mumbai, Maharashtra) or as General Manager (contracts) in the Nuclear Power Corporation. The latter seemed more attractive because at the time, the Director of a department (this was a department which was also a ministry) did not get a car whereas the General Manager (contracts) did.
Choosing this role turned out to be a wise decision because the intricacies of contract, the contracting law, disputes, redressal forums, and generally, the type of cases one comes across in (the field of) contract are unique.

After two years in this role, I was promoted. At the time, the negotiations for the Kudankulam-I and II contracts were in progress. These were intergovernmental agreements between the Government of India and the Government of Russia. I was the principal negotiator on behalf of the Government of India. At this point, I moved into the Board as Director, Personnel and Industrial relations, however, I had to carry on the job of continuing negotiations. There was a great deal of satisfaction that I was able to see the first concrete-pour as part of this project. At present, this project is generating 2000MW of electricity. It is a cheap source of electricity, at around Rs. 4.12 per unit. It is a baseload station, which means power is available 24×7. It is also a reliable, green power that does not damage the environment.

Mandate of the SERC

The establishment of the SERC flows from Section 86 of the Electricity Act 2003 which clearly and elaborately delineates the role of the SERCs. (These commissions) are essentially entrusted with central generating stations and central transmission units. They do not get into the distribution sector.

The problems in the electricity sector are (in fact) being faced by persons concerned with distribution. This is where the average consumer comes into the picture. Electricity is a very sensitive topic; governments are formed and sometimes even fall on the basis of electricity pricing. Free electricity has also been offered at the time of elections. Without getting into the political context of electricity distribution, the manner in which electricity regulators work in the states is akin to trapeze artists. There is certainly a safety net because regulators cannot be removed from their jobs. However, the pressures, demands, and expectations faced by state regulators are tremendous. The interests of the public which pays for services have to be balanced with the interests of a group of consumers who get subsidized services (for example, extra high-tension consumers). Apart from this, the policy direction of the state government has to be taken into account.

Subsidy is often easier said than availed. Subsidies are promised but there is always a shortage at the time of giving money. One also has to maintain financial viability as far as the distribution licensees are concerned. In Kerala, which is a small state, there are 10 distribution licensees, and two “deemed distributors” i.e. the railways and the military engineering service. Conflicting interests exist, and the regulator has to carry out this balancing to ensure that nobody, including the regulator collapses (under such weight). The regulator has a highly politicized sensitive role and it is quite easy for things to go wrong.

Structure of KSERC

SERCs as per the Electricity Act have a Chairman and two Members. Interestingly, the legislation does not say that only persons from the power sector or those with technical expertise are eligible. As per the Act, persons from engineering, management, law, etc. are also considered eligible. This is a very wide net and in essence, serves to bring in people with experience. Since these are practically end-of-life postings, it is very important at this stage to put in people who have the requisite experience, apart from qualification, and further, someone who can manage this (specific kind of) work. The biggest challenge as far as the state (regulatory) commission is concerned is the reactionary part – challenges are quite a common feature but not very easy to overcome.

Each (state) regulatory commission has their own organizational structure. At the Forum of Regulators, we are now trying to envisage a standardized model structure which we could use for at least the bigger regulatory commissions. As far as the north-eastern states are concerned, there is a resource constraint, and maybe even the number of cases and the quantity of work is relatively low. For the bigger regulators, however, like Kerala, which has 10 distribution licensees, there is a big work-load.

KSERC has two Directors and a Director (legal). There are three verticals now. The legal vertical is headed by the Member (legal) – we call him a consultant because he is a retired Additional Special Secretary from the government with about 38 years of experience in framing of laws and regulations, and interpreting them. Three persons work under the Director (legal). The technical vertical is headed by the Director (technical), who is a Deputy Chief Engineer from one of the utilities – in this case from Kerala State Electricity Board. Here, there is (scope for) a conflict of interest. Therefore, one of the first things we do is to orient the joinee specifically to ensure that once they have left an organization, past approaches can be unlearned and the regulatory approach is learnt. Without this orientation, the role of the regulator will get constrained. Under the Director (technical), we have a Joint Director, two consultants, and electrical engineers.

We are currently trying to venture into making market-appointments. In a recent commission meeting, we took a decision to not take persons on deputation since we need to have in-house talent which is oriented, nurtured and developed. Otherwise, there is going to be a fallback as far as the system is concerned. The job market is fairly difficult. Going from the post of a Director into a Member in the commission is fairly difficult. There is a logical reason for this – a person who has solely been in the regulatory framework, unfortunately, does not have any direct exposure. It is advantageous to be involved with electrical and mechanical systems. If persons constrain themselves within the regulator, they will only be exposed to cases and regulations which come up before them.

The initial appointments that are made are for consultants, who are electrical engineers with a B. Tech. degree and have 3-4 years of experience. The commission pays about Rs.35,000 – Rs.40,000 with a 10% raise every year. If in our evaluation system, someone is found to be not delivering, in spite of all the hand holding, the person will run into difficulty and be asked to leave. However, there have been very few instances of such kind. In fact, people have gone on to join the National Thermal Power Corporation Ltd. and other power companies. Some of them have mentioned that working at KSERC has been advantageous.

Key functions and considerations for KSERC

Beginning with tariffs, we have a Multi Year Tariff (MYT) framework. Such a framework provides some sort of stability (for a period of 5 years) in order to encourage investment and give people some element of certainty. Kerala has recently announced the MYT for 2022-23 till 2026-27, but interestingly we have only brought out the tariff for one year. This is because what normally happens is that if you give the regulated entity a tariff for five years, the management of the entity thanks you and that is about it. Compliance with the regulatory framework does not happen because the entity has given whatever it had to for five years.

Secondly, in Kerala particularly, we place a lot of importance on efficiency. If the system is able to function in a way that betters the norms, then the extra gain is shared between the distribution licensees and the general public in a 2:1 ratio. However, if the entity is inefficient, we ensure that the inefficiency is not passed on to the consumers. If the entity exceeds the normative values we check into why that has happened, and if it is not found to be reasonable we ensure that this is not passed on to the consumer. This is one of the principles of tariff setting to ensure that optimum efficiency is achieved.

It is also important to ensure that quality power is delivered because entities can always save on cost. This occurs when entities do not undertake regular maintenance or do not replace equipment when necessary. This is why we ensure that repair and maintenance is not compromised. If we find that there is a significant fall as far as repair and maintenance expenditure is concerned, we immediately ask for reasons, and if we find that it is not satisfactory we give a direction saying this should be set right within a given time frame.

The second part of our job involves framing regulations or subordinate legislations, from which the tariffs flow. The original legislation is the Act. Thereafter, the KSERC has the powers to make rules, regulations or orders whereby the role expected of a regulator can be fulfilled in a free, fair, and independent manner.

The regulation-making process (followed by the KSERC) is as follows:

1. Regulations are framed.
2. Regulations are pre-published, i.e. they are put on the commission’s website. In instances where these are not too large, they are even published in newspapers.
3. Public hearings are held; these are usually well attended. As many as 300-500 people attended the most recent set of hearings held before the finalization of the MYT for the next five years. This is also a forum (for the public) to let-off steam. Several good suggestions, criticisms, and recommendations are noted.
4. A stakeholder consultation process is also held.
5. Once both sets of consultations (with the general public and industry stakeholders) are over, the commission sits down to frame regulations.

The Electricity Act gives the KSERC both civil and criminal jurisdiction. Further, the Chairperson in Kerala has been given the rank, status and benefits of a judge. Hence, the order so issued is termed a quasi-judicial order. (In my opinion), there is nothing quasi about it – it is a judicial order. Any challenge to it lies before the appellate tribunal. The only ground on which a regulation can be challenged is that due process was not followed in framing it. If it has been followed, there is no way that the court would intervene – we have witnessed this in multiple cases.

The third aspect of the regulator’s job is consumer grievances. We already have the Consumers Grievance Redressal Forum (CGRF) and the electricity ombudsman. If somebody does not carry out an order, beyond these two there is remedy under Section 142, which is basically non-compliance. Once someone files a petition claiming non-compliance, the commission looks into it.

Balancing market development and consumer protection roles

Kerala has achieved 100% electrification. Even the most far-flung hamlet has been electrified and to a large extent we have ensured there is supply. Electrification and supply are two different aspects. There is no point in saying that a little bulb worked for two hours and then there was no power for the next one week. This is where the quality of supply regulations come into the picture. There are specific norms for how long it should take for electricity to be restored, fines to be imposed, etc. People are very active (in the state) – they file petitions and even represent themselves.

The second aspect is the disconnect between the interests of consumers and those of distribution licensees. The use of electricity in farming – which in Kerala is mainly cash crops – is less than 2%, so it is quite minor. Domestic consumers dominate the total number of consumers in the state which stands at more than 1 crore consumers. Non-domestic consumers (low tension, high tension, and extra-high tension) account for only around 28-29 lakhs, out of the total. Actual consumption of electricity is up to 150 units on an average, for domestic consumers. The first 40 units are free for Below Poverty Line (BPL) families and certain other identified groups like the tribal population. The next 50 units are charged at Rs.1.50 per unit. Thereafter, there is a telescopic weighted slab system. So practically about 200 units per month for 85 lakh domestic consumers are highly subsidised. The actual realisation is about Rs.5.73 while the average cost of supply is in the range of Rs.6.80+. This revenue gap is made up from subsidizing consumers, but in Kerala there is not much of industrialization; so if you start taxing industries very heavily in terms of energy costs then they would run out. Hence, we ensure that by-and-large they remain within the +/- 20% range. Currently, they are 103% in the present tariff.

It is also our endeavour to see that the average cost of power supply comes down. We try to control this by ensuring that wasteful expenditure, unnecessary manpower and power purchase costs are reduced. The good news is that the KSEB has made, what we call, a regulatory operating profit. To be sure, their balance sheet does reflect a loss of Rs. 600-650 crores, although this is much less compared to the loss burden of Rs. 3000-3500 crores that they had 5 years back. Regulatory operating profit means that compared to the norms when the KSEB is regulated, they made a profit of 70 crores this year.

The mandate from the state government is to ensure quality, reliable power with 24×7 supply, and ensure that it reaches everywhere. The KSEB has been very efficiently fulfilling this task, as have the other suppliers. The other nine suppliers cater to specific groups, for example, Info Park caters to computer-based industries. There is a special economic zone, and the two municipalities supplying power – Munnar where Tata Tea has become the main consumer, and Thrissur municipality. Subsidy, in this context, is cross-subsidization. For example, the ‘subsidy’ for the 12,000 BPL families does not come from the state government, it is cross-subsidized. At the same time, the commission has to ensure the financial viability of the distribution licensees because without them there is no supply. Hence, the cross-subsidisation has to be reliable, reasonable and affordable. In Kerala, the cross-subsidizing groups are heavy industries. While commercial entities are taxed slightly more, the norms are relaxed – there has been no noise around the tariffs we came out with two weeks back.

The average increase has been in the range of Rs. 35-40 p per consumer. This comes to about Rs.45 a month for 80 lakh consumers, and 150 units per consumer. Now if you look at the Consumer Price Index (CPI) – Wholesale Price Index (WPI), where we do a weighted average of 70:30 between CPI and WPI respectively, the average inflation in the last three years (the last tariff revision given to KSEB was in July 2019) is 19.8% whereas the average increase we have permitted in the latest tariff revision is 6.7%. But even with 6.7%, by distributing this tariff increase across the board except the free consumers, we have ensured that KSEB is getting approximately Rs. 1000 crores more. Their balance sheet has a loss of Rs. 600-700 crores vis-à-vis contribution. This is going to be the first step in turning the KSEB into an operational profit entity from a loss-making one. Its accumulated loss is about Rs. 9000 crores, so the next task is to wipe this out.

Consumer participation in the regulatory process

Let me give you a concrete example. When we were floating an amendment to the Renewable Energy (RE) Regulations, the KSEB had a proposal to use gross billing rather than net billing. Usually, consumers are eligible for net billing for up to 1 megawatt. Wherever there is a facility for banking, if 50 units are produced and 40 units are consumed, then the consumer can bank the remaining 10 units. At the end of the year, the billing adjustment can be done.

For an overall net export there is an average power purchase cost and for a net import you pay for it. When the proposal came up, the KSERC was initially inclined towards it but there was public opposition. The main opposition was simple and logical – the Government of India (Ministry of Power and Ministry of New and Renewable Energy) was encouraging the setting up of rooftop solar, under a subsidy scheme called Surya, wherein for up to 3 kilowatts there is a 40% upfront subsidy deductible from the price paid to the installer, and between 3 and 10 kilowatts, there is a 20% subsidy. So, on the one hand the central government is trying to subsidize and incentivize the scheme. and on the other hand, the KSEB wants gross billing. Someone had even done the calculation and pointed out that an average consumer, due to his net import, gets between Rs.100-150. It was not worthwhile for distribution licensees to dip into the pockets of 2,00,000 consumers just to take out Rs.150 each. This was an important contribution from the public.

Similarly, when we brought out the RE regulations, multiple issues were aired, such as not fixing a time-frame for when the grid will be connected and metered after the system is energized. When we held public hearings, people came and said the time-frame in this instance should not be more than 7 days. This was debated and now we have restricted it to 6 working days. Additionally, there is a sentimental aspect to democratic decentralization such that the average person gets to air their grievances in public forums.

Unbundling of the electricity sector

At the time when the Electricity Act was being passed, the Kerala government said that they do not want a trifurcation of power companies. However, from a regulatory standpoint, the (then) chairperson of the commission had insisted that there should be three separate vertically unintegrated units. Thus, even though the KSEB has both generation and distribution functions, they have separate accounts as far as the regulator is concerned, though they may integrate for balance sheet purposes. The KSEB calls them Standalone Basic Units (SBUs) – so there is a separate SBU for generation, SBU for transmission, and for distribution. As such, we get our accounts in three separate audited accounts.

I do not know if an integrated model is the best but one advantage it has is that talent flows across. If somebody is in the transmission business their entire life, they do not get exposure beyond that sector. However, in KSEB, there is cross-transferability as far as the officers and staff are concerned. Due to different verticals, everyone gets a chance to work everywhere and there is knowledge dissipation.

Federal aspect of regulation – mechanisms for coordination and cooperation

I will talk about two dimensions – (i) the regulated-regulator interaction, and (ii) the regulator-policy maker interaction, where the policy maker is the government of the day. The legislature gives us the policy, whereas the regulator engages in formulating subordinate legislation.

There is a need for the commissions to cooperate and talk to each other. This is where the Forum of Indian Regulators (FOR) comes in. FOIR meetings are quite heated – there is a lot of discussion and difference of opinions but these discussions are very elaborate. Every decision of the FOIR is thus thoroughly considered.

The relationship between the regulator and state government is tricky at times. Section 107 and 108 empower the union and state governments respectively to give directions to the commission. For instance, they will direct us to reduce the tariff by 50%. They have invoked this power twice in my tenure. The first approach here is to tell the minister that they cannot do this since tariff-setting is not their job. Depending on the person (and their advisors), the minister may or may not listen. If the minister does not listen, it is a personal call to defy. The chairperson’s job is not (typically) at stake. Further, there are at least two or three decisions of the appellate tribunals and Supreme Court which hold that directions under Section 108 are in the nature of recommendations – if the commission feels that the direction does not fulfil the requirements considered essential by it, it can reject the direction. We have done this in a polite fashion, after explaining our stance, and said that before issuing directions they should consult us since there is no need for confrontation. The state government in our case has been very cooperative. (At present), we have one of the best electricity ministers who understands things and does not interfere. This helps a lot, depending on the personality of the people involved. There is no day-to-day relationship or coordination between the central government and state regulators, however, there are meetings where the regulators are up-front in stating their points of view.

On the point of certain resources like coal being owned by the central government and reliance of states on these resources leading to tensions, every power purchase is governed by a contract between the generating company. So, strictly speaking, there is no scope for the central government to interfere in the day-to-day functions of the company. Secondly, the supply of electricity to a distribution licensee like the KSEB is again governed by a contract. In my experience at least, the central government cannot interfere with the supply of power since it is governed by the power purchase agreement. Thirdly, there has been (some) conflict but fortunately Kerala did not have any thermal power plants, or else there would have been some difficulty because coal import, coal allocation, and prioritisation would have come in. In Kerala, we consume approximately 24,000-25,000 million units annually, of which 30-35% is produced in-house and most of it is hydel, with a very small contribution from solar (rooftop solar and a few solar plants) and a not very significant contribution from wind power. While we did not come into conflict, there is scope for it in the broader framework, and my suggestion is to talk to the concerned persons. When a distribution company talks to the generator, the former is in a relative position of weakness since the generator can cut the former off. Here, the support of the regulator might be useful.

Views on a nationally integrated market for electricity

While the concept of one nation one price is excellent, one has to talk in terms of uniform electricity pricing at the level of the generator. Many of the new plants are more expensive and sell at rates higher than older, depreciated plants. If you mill these together there will be a net reduction especially for the large generators. So before thinking about single pricing for electricity we need to think about a single generational pricing.

Secondly, the conflict between the Ministry of Power and SERCs is pertinent and has come up for discussion before the FOIR. This is especially because an order of the Ministry of Power, even if under Section 179 of the Electricity Act, is an executive order and not subordinate legislation. As such, it does not have to go through the pre-publication process. Even if it did, it cannot count as subordinate legislation, since it is clearly defined who can make subordinate legislation. On the other hand, every regulation, rule and order of the commission is subordinate legislation, done for and on behalf of the concerned legislature (here, the Parliament). This conflict is being discussed (in) the FOIR. In the last one year, the stand has been that if you cannot implement something, do not implement but avoid a confrontation. If and when the matter becomes an issue, the courts can decide whether an executive order or a subordinate legislation takes precedence. I think this issue will play out in the long run and probably be settled by the courts.

Role of the regulator in the energy transition

Kerala does not have any thermal plants, so to that extent we are relatively far from the fossilization effect and its impact on climate change. 30% of power sources in Kerala are hydro and all the new plants are either wind or solar based. We will not have the problem of retiring older thermal plants – we had two of them, one was a BSES plant that retired in 2012 and a NTPC plant in Kayamkulam where they have put up 82 MW of floating solar power (over 200 acres of backwaters) – 40MW is already being produced. The commission-determined rate is Rs.3.16.

Regarding the role of the regulator, there is a proposed amendment to the Electricity Act to de-license distribution. I anticipate that the major private players will concentrate on urban areas, which will place the SEB under a lot of stress since it does not distinguish between consumers based on the urban/rural criterion. De-licensing will disable the regulator from stepping in and ensuring a level playing field. If there is no requirement for the licensing of distribution companies and if as a matter of right they can utilize open access then that is going to be a very big challenge. It will lead to many disputes which will affect the sustainability of every SEB. This is a big challenge.

Kerala is yet to comply with the Renewable Purchase Obligation (RPO). After much deliberation, the KSERC had given a RPO target lower than the MNRE target but that was also not fulfilled. However, in the last three years, this situation has turned around. Kerala is now expecting about 1000MW of rooftop solar. They have contracted for 800MW of wind, solar and other renewable sources, and they are thinking of setting up another four generators in Idukki to generate another 850MW. Complying with RPO may not be a problem for Kerala in the near future. Even Tamil Nadu is in excess of its RPO because they have got a huge element of wind, and Karnataka too in terms of solar and hydro power. Similarly, Telangana and Andhra Pradesh will not have a RPO problem. The issue is going to be the effect on the transmission system especially with reference to maintaining the frequency. This has been discussed at the FOIR. The technical committee has been addressing it, suggesting various solutions like having a spinning reserve to ensure that frequency is maintained at all points of time. The challenge is that no one wants to offer their plant as a spinning reserve, especially the hydro ones, since they can come on stream at the shortest possible time. Secondly, everyone wants the benefit but does not want to offer their backyard. Hence, some solution needs to be hammered out between the states regarding where spinning reserves can be set up and how costs are to be borne.

Demand Side Management (DSM) is a function for the concerned utility. Kerala has been doing this to some extent. The actual challenge of DSM comes in during the peak hours, which in Kerala is from 6 pm – 10 pm. We have not agreed to the demand of increasing it to 5 pm – 11 pm. We have excluded domestic consumers, and for others we have already installed TOD meters.

Now, with the introduction of the smart meters, we would expect that the high-paying consumers at least install them. There was a proposal to install smart meters throughout the state on an operational expenditure model and the company had said that the cost would be about Rs. 140 to 142 per consumer per month. This is a big difference compared with Rs. 7 which is currently being paid by the consumer. So, while we welcome smart meters, it has to be implemented phase-wise. It has to begin with the higher paying consumers. In fact most of the higher paying consumers, especially the high-tension industries, who are on TOD, have been demanding that the electricity pricing should be on the basis of voltage. They should be willing to spend money on smart meters now. According to them, their TOD meters will need some software change to address this issue. We are however hoping to slowly move into smart meters and that DSM will be managed by the distribution company. There will be several incentives and disincentives in terms of DSM to ensure that there is not too much peak load.

Interface between the KSERC and projects like Smart City

I am really confused about the concept, purpose or mission of smart cities. There is no exchange of information between the commission and the electricity board because the essence of any distribution licensee is the licensing area – whatever we are now trying to do is well within these smart cities. For instance, in the case of KSEB, any capital expenditure over Rs. 10 crores requires the approval of the commission. So, if any of these smart city projects exceeds the Rs. 10 crores investment – which I estimate it will – there will be some interaction with us. For instance, in Thiruvananthapuram, the smart city project has started trenching. The city has cables (telephone, ethernet) all over the place and nobody has a map, so you do not know where to begin and where to dig. They are trying to trench and this is a facility for everyone, so there will be a user charge which will either get charged by the corporation or the smart city project. This is going to cost more than Rs. 10 crores. KSEB has filed a position saying we are doing this under the smart city project. As far as funding is concerned, I believe some funds are flowing from the smart city project, some from either state government’s or KSEB’s funds. Wherever in the pricing of tariff, if anything comes free either by way of a grant or of a consumer contribution, it is not allowed as part of the tariff. For other smart city projects, they have unfortunately not been doing well and are running at a huge loss, as is the electricity business. They have not got what they anticipated, perhaps because of Covid etc, but things are not looking good.

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 – West Bengal

The West Bengal Electricity Regulatory Commission (WBERC) was constituted in January 1999, under the Electricity Regulatory Commissions Act, 1998. It later came under the purview of the Electricity Act, 2003. The WBERC regulates the generation, supply, transmission, and wheeling of electricity (wholesale, bulk, and retail) 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 WBERC 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).

These comments are being submitted in response to the ‘Notice for Public Consultation’ dated 30.06.2022 issued by the Ministry of Environment, Forest and Climate Change (MoEFCC) inviting comments/ suggestions on proposed amendments to the Air (Prevention and Control of Pollution) Act 1981 (Air Act).

The regulatory framework governing air quality in the country needs to be reformed urgently. Significant parts of the Indian population are exposed to air quality that does not meet the National Ambient Air Quality Standards. This crisis of poor air quality is neither urban-centric, nor seasonal, and its impact on public health is staggering. Apart from respiratory and cardiovascular diseases that are commonly associated with air pollution, it is also associated with diabetes, cardiovascular disease, adverse birth outcomes, and ocular conditions, and emerging evidence shows it may lead to other adverse health outcomes like dementia and neurodevelopmental disorders.

Many aspects of the regulatory framework need to be reformed or strengthened to appropriately deal with the nature and scale of the air pollution crisis. One of the key aspects is the ability of the regulatory agencies to enforce the law. Their failure in effectively doing so – evident from the poor quality of air experienced in most parts of the country – is attributable to various factors including institutional constraints, poor monitoring capacity, misalignment of statutory objectives and stated policy goals, and flawed legal design. The proposed amendments are limited to only one factor – the design of the Air Act in terms of punishments for offences.

To the extent the proposed amendments introduce monetary penalties per se for certain offences under the Air Act, the amendments are a welcome move. However, in our opinion, the proposed amendments need to be withdrawn and reconsidered for primarily two reasons: first, they are legally untenable due to excessive delegation of essential legislative functions; and second, the proposed regulatory framework, that will include Adjudicating Officers with the power to impose financial penalties, does not appear to be well-equipped to deal with violation of the law and its impact. Apart from this, there are several errors and inconsistencies in the proposed text which make its implementation problematic.

Our comments are divided into three sections. Section I discusses why the proposed amendments are legally untenable; Section II discusses why the proposed institutional framework will not reduce violations of the law; and section III lists some of the errors and inconsistencies in the text of the proposed amendments.

You can access the comments here.

The State Capacity Initiative at the Centre for Policy Research (CPR), the Forum of Indian Regulators (FOIR) and the Indian Institute of Corporate Affairs (IICA) organised the following talk in the ‘Know Your Regulator’ talk series:

‘Know Your Regulator’: Mr Debasish Panda, Chairperson, Insurance Regulatory and Development Authority of India

In Conversation:
Mr Debasish Panda, Chairperson, Insurance Regulatory and Development Authority of India
Dr KP Krishnan, Honorary Research Professor, CPR
Dr Abha Yadav, Associate Professor, IICA and Director, FOIR
Dr Rohit Chandra, Assistant Professor, School of Public Policy, IIT Delhi and Visiting Fellow, CPR

The briefing note can be accessed here.

Conversation summary:

Problems that IRDAI was set up to address

The evolution of the insurance sector in India has three distinct phases –
1. 1938 – 1956: In the pre-nationalisation era, small and medium-sized insurance companies operated under the Controller of Insurance. This period is marked by considerable dissatisfaction among policy holders for not getting their dues on time. This was also a time where many mergers and liquidations took place. There were no clear regulations to protect policyholders.
2. 1956 – 2000: This era is marked by nationalisation. The Life Insurance Corporation (LIC) was nationalised in 1956 and subsequently, five non-life companies were nationalised in 1972. While policyholders’ interests were better protected in this era, growth was slow and there was little choice for consumers because of a rather monopolistic market consisting of four or five public sector companies.
3. Post-2000: The Malhotra Committee was set up and recommended a series of reforms for the insurance sector. IRDAI was given shape during this time. Initially, it was a purely regulatory body and at some point, based on Parliamentary committee recommendations, IRDAI was also assigned a development mandate.

In the era prior to liberalisation, there were several issues concerning policyholders and the slow growth of the sector. Specifically, these issues included a limited choice of products, costly products, low awareness and customer dissatisfaction regarding claim settlements. There were also issues with respect to the lapse of policies; term plans were not encouraged. In addition to these, there was also a limited spread of rural and welfare-oriented insurance.

The supply side was marked by a lack of competition because a lot of items were under tariff. In general, the lack of market discipline was witnessed. Professional standards in underwriting and risk management were not set. The aforementioned issues did not enable the sector to grow in an anticipated manner.

The IRDAI was set up with a clear mandate to protect policyholders and to ensure an orderly growth of the insurance industry. The liberalisation era witnessed the re-entry of the private sector alongside the public sector. Foreign Direct Investment (FDI) was allowed in the insurance sector. Companies also began listing during this regime. With such interventions, a number of companies came into the insurance market. In general terms, this is how the sector evolved.

The insurance industry also supports the economy in a huge way. The Assets Under Management (AUM) pump fuel into the economy by putting these resources into productive instruments for growth and development, promoting trade and commerce and promoting infrastructure development in the country.

Regulatory method: elements of executive, adjudicatory and legislative functions

Executive functions: Section 14 of the IRDAI Act casts a duty on the authority to regulate, promote and ensure orderly growth of the insurance and reinsurance business. This is done through a host of regulations. The Authority also issues directions, master circulars and guidelines. Through these means, the industry is regulated in an orderly manner, making sure that it is always in a position to honour the commitment made to citizens/constituents. The Authority also plays a supervisory role, as part of which it keeps a watch on the risk profile of insurance companies including whether they have maintained requisite solvency at all points of time, where the risks are sitting on company balance sheets etc. Crucial aspects such as these are constantly monitored through either an offsite mechanism or an onsite examination. It is through such mechanisms that the Authority tries to ensure the financial soundness of the company and its market contribution.

The IRDAI is also empowered to register and regulate the insurance entities. Once registered with the IRDAI, insurance entities are free to operate in the market, i.e. sell their products and service their clients. The Authority also approves changes in the shareholding, to make sure that risk is not concentrated in the hands of a few. The Authority also allows the issuance of other forms of capital other than equity or shareholders’ own money. The appointment and remuneration of the CEO and other corporate governance-related matters are handled by the IRDAI. This ensures that the entities are regulated in a proper manner.

Adjudicatory functions – Section 14(2) of the IRDAI Act empowers the regulator to adjudicate disputes between insurers and intermediaries or between the insurance intermediaries. It also provides powers to adjudicate and impose penalties, if required.

Legislative functions – The government frames the rules under the Act, whereas the Authority can frame regulations, as mentioned previously.

Role of the Central Government

The Central Government determines the policy framework, the broad guidelines and decides the sectoral focus that it wants. It is in charge of the statute and amendments made to the statute from time to time, depending on the needs of the citizens and the markets. Rules under the statute are framed by the government. It also appoints the Chairperson, other members and part-time Directors of the Authority. There are mechanisms where the Authority works closely with the government, for instance, the Financial Sector Development Council (FSDC), which is chaired by the Union Finance Minister. All the regulators are part of this forum, and inter-regulatory issues or issues that a regulator needs to flag before the government secretaries of the concerned ministries are discussed. This is an important and responsible committee which looks at issues pertaining to regulators including inter- regulatory issues.

Organisational structure

The Authority has a Chairperson with five full-time members and four part-time members. The city of Hyderabad is the headquarters for the IRDAI. It has two regional offices, one each in Mumbai and Delhi. There are close to 250 officers working in IRDAI. The Authority also has the flexibility of adding more personnel who may be recruited directly from the market at the level of assistant managers, through an all-India competitive examination and through an independent entity agency. There are officers in levels such as assistant managers and executive directors, who go up in the hierarchy through written examination and interviews. They also gain marks for the qualifications acquired through their course of service in the Authority. The Authority has professionals with wide-ranging experience, with qualifications in actuarial sciences, chartered accountancy, cost accountancy, law, engineering, technology and management. I think the organisation is rightly sized at present, but maybe as we go along we will add more layers of domain experts as required.

How IRDAI fulfils the objective of consumer protection

The essence lies in ensuring adequate access, affordability and fair value of insurance products for, both, prospective and existing policy holders. This has to be supported by necessary awareness, guidance and seamless servicing of claims. The third is a 360-degree framework which would include insurance, multiple distribution channels and service providers, academic institutions, data repositories and a network of ombudsmen (for speedy redressal of grievances). All of the aforementioned are in position to facilitate access, to service insurance and claim settlement process of the policyholders. The Authority has also framed the Protection of Policyholders Regulations, in 2017, which is applicable to all insurers, distribution channels and intermediaries, other regulators, and to policyholders. The broader objective of all this is: (i) policyholder-centric governance; (ii) fulfilment of obligations towards policy holders; (iii) best practices of sales and services of insurance policies in order to protect policyholders’ interest. Through these regulations, we have asked insurance companies to mandate a board-approved policy which would include the steps they are taking to enhance insurance awareness, service parameters including the turnaround time for settlement of claims, procedures they have established within their companies for expeditious complaint resolution, and the steps taken to prevent mis-selling and unfair business practices. They have also been mandated to display the service parameters and turnaround time prominently on their website for the benefit of consumers. The Authority also prescribed that certain essential data be provided in the insurance prospectus, for a prospective policyholder to read it and understand the scope of the benefits, the extent of insurance cover and the exclusions, policy conditions, and contact details of the insurer in case of the need for correspondence.

There is a concept of a free look policy, where the consumer can opt-out of the policy if it does not work for them. For a refund of the premium, the consumer can opt-out within 15 days if the policy was obtained physically, and can similarly opt-out within 30 days if it has been obtained online. Barring only the adjustments made for risk premium, and expenses such as medical tests or stamp duty, the consumer will receive a full refund. In case of a delay in refund, there is a penal interest of 2% above bank rate which the insurance company pays to the policyholder.

Nature of complaints made to the IRDAI

Generally, the complaints would be regarding settlement amounts being less than expected, mis-selling, delay in claims settlement, operational details about the policy etc. A host of such issues come up before the IRDAI from the policyholders. The Authority has now asked insurance companies to appoint grievance redressal officers. We are toying with the idea of having an internal ombudsman within the organisation, because a grievance redressal officer will have limited capacity to deal with complaints, whereas an internal ombudsman will perhaps be given a greater responsibility to settle the claim taking into account the policyholders’ complaints.

The IRDAI has also set up a portal called the Integrated Grievance Management System (IGMS), that acts as an interface between policyholders, IRDAI and the other entities (insurance companies and intermediaries). All complaints are registered in this System, and then sent to the insurance companies, after which the latter takes appropriate corrective action. This System is being analysed in detail, and we want to bring in data analytics to understand the number and nature of complaints, companies and their locations. Data analytics will help us identify the root cause of complaints and also take immediate corrective action.

We are also trying to revive the IGMS, which we now intend to call Bima Bharosa. This portal will be a more dynamic one and shall take care of customers’ needs in a time-bound manner. It will also take feedback directly from the customer, which helps in further improving the system. Thus, in the next couple of months we should have a more robust redressal system.

Key players in the insurance sector

The key stakeholders in the insurance ecosystem are insurers, policyholders, and intermediaries (about 40 to 50 lakh agents and entities). We periodically interact with all of them. We are trying to introduce an institutional arrangement to make these interactions more frequent, so that we understand the pain points that the industry is facing. The focus is on reaching out to every citizen in the country. The goal is to have a fully insured society – in order to do this, we are doing a gap analysis, trying to understand the current capacity and the number of additional companies and the capital to be augmented to existing players, whether distribution channels are working properly, their productivity, whether we need more technology-based solutions etc. All of these are on our drawing board. We are working to increase insurance penetration not only in terms of number of policyholders, but also the number of new policies issued.

Aspects of the insurance business that need regulatory scrutiny

The Authority has two roles to play: (i) a developmental role, where we need to ensure that insurance penetration, density and reach grows; and the (ii) regulation of financial soundness and market conduct of companies. We are trying to balance both such that the insurance sector grows in an orderly fashion.

Regulatory supervision is exercised on all relevant aspects – financial soundness, prudential norms, valuation of actuarial liabilities (existing and future), matching capital requirements, maintaining solvency at all points of time (since one does not know when the risk is going to unfold). All these aspects are factored through our prudential norms. How do we do this? This is done through onsite and offsite supervision, monitoring and overseeing various periodical returns and submissions that the insurance entities provide to the Authority, inspections (onsite) by a team of officers from IRDAI, regulatory actions wherever required (through issuance of directions, advisories, show cause notices and imposition of penalties).

As far as investment of assets (aggregated through policyholders’ money) are concerned, the IRDAI has a set of regulations on how such money is to be invested – some of this is in the statute and some are in the regulations we issue. Together, these give us an insight into how insurance companies are doing in terms of their investment returns, solvency, capital matching with the business they underwrite.

Regarding the governance issue, positions like CEO, CFO, Chief Actuarial Officer, Chief Distribution Officer, Chief Risk Officer, are critical in addressing the issues that we are concerned with. Currently, the IRDAI uses a traditional method of looking at risk factors – we are trying to move towards a risk-based supervision framework which will be enabled by technology. Within the IRDAI, we have created a vertical which is working on mission mode and engaging with industry so that we move hand-in-hand. We are also trying to move away from the factor-based method of considering solvency, towards a risk-based capital framework. There are countries which use a risk-based capital regime. We have a dedicated vertical working on this, engaging with stakeholders and building the technology required for this. The risk-based supervisory framework is expected to be ready in six to nine months, and the risk-based capital regime is expected to take two to three years’ time.

Challenges faced by IRDAI in regulatory enforcement and possible solutions

Enforcement is required when compliance is not up to the mark. Currently, a lot of supervision is compliance-based, but the risk-based supervisory framework is a much more potent tool. We have a lot of rule-based regulation here – with the industry maturing, we want to move away from rule-based to principle-based regulation. The principle gives bandwidth to the insurance companies and other stakeholders to operate within that framework. The regulator then does not need to specify each and every thing. For example, until now, every product to be launched by the insurance company needed prior approval of the regulator. We have now done away with it because the industry is mature and knows what price to set based on actuarial calculations (done by actuaries who are certified by the IRDAI). We have asked them to have a board-level policy for product certification – this will create internal checks and balances. After this, the regulator will obviously monitor how the product behaves in the market and what traction it gets, what complaints it receives on the product, and so on. As such, consumers have more choice now since companies can come up with more innovations and launch their products on-time without being delayed by the regulator. All health and non- life products do not need prior regulatory approval, except for the category of small ticket policyholders. For life products, we have given away all term-policy covers. Prior approval is still needed for long- term savings and pension products, but this will be further liberalised.

Through technology, a lot of offsite enforcement and monitoring of deviations can be done. We are also looking at newer tools. For example, through the IGMS website, which we now call the Bima Bharosa, we will get a lot of feedback on whether compliance is happening despite the regulations being in place. Thus, this newer regime that we are moving towards will see a lot of issues being resolved through the use of technology and data. Data is crucial for (i) proper pricing, which will give consumers better choices; (ii) processing of claims; and (iii) designing products that are more personalised. In order to address this, we have a repository or transactional data bureau called the Insurance Information Bureau (IIB). This is not optimally functioning, hence we are focusing on reforming the body into a professional body comprising people with the requisite background and expertise (for instance, a chief data scientist, a chief technology officer, CEO and so on). This body is probably going to be industry-led, with the regulator having an oversight function – because this data is most useful for the industry for appreciating and processing claims, which ultimately benefits the customer. This service should also come up in the next few months.

Professional organisations that IRDAI regulates

Typically, we do not regulate these organisations, but there is some kind of an oversight – otherwise, these are all self-regulatory bodies.

The most important one for us is the Institute of Actuaries in India because actuarial sciences is critical to insurance. It is a self-regulatory body but we have a representative on the Board who tries to bring up issues faced by the insurance sector. Some time ago, the insurance sector was struggling to find actuaries, but with efforts taken through IRDAI representatives and adequate steps taken by the government, there is now a reasonable supply of good actuaries in the country. In fact, a host of young people who joined IRDAI as engineers or management graduates have now acquired the actuarial qualification.

We are also closely associated with the Institute of Chartered Accountants of India (ICAI) and the Institute of Company Secretaries of India (ICSI). There is another professional body called the Indian Institute of Insurance Surveyors and Loss Assessors (IIISLA) which we associate with. As far as the councils are concerned, the General Insurance Council (GIC) and Life Insurance Council (LIC) are represented largely by insurers and other stakeholders (some nominees are from IRDAI and some from the government). These bodies are expected to take up issues concerning their respective industries, stakeholders and policyholders. While these two councils have existed for years, we discovered a lack of professional approach to bring up issues. We have recently met with the Chairpersons of the bodies and asked them to bring in more experts and knowledge partners so that they not only look at issues faced by the insurance companies in the country but also learn from international best practices. These councils can come up with papers to the IRDAI on a continuous or periodic basis so that we as a regulator are alive to the problems faced by them and can take care of them in a manner serving the larger interests of the sector. We are working to make these councils more professional, vibrant and robust so that they can complement and supplement our efforts and be responsive to the needs of the industry. The councils have already started that process – I recently saw an advertisement for a CEO with market-driven salary.

Capacity building in IRDAI

Every organisation needs some amount of capacity building since market trends change over time and new market instruments emerge. With the advent of technology, these challenges will be greater and we need to be alive to that. At IRDAI, I would say that we have a good amount of expertise in finance, actuarial science, management, technology and risk management, however, capacity augmentation and development is a continuous process. We have a series of programs for capacity building by way of training of people within the country and abroad to acquire domain expertise. We make it free of cost for people to acquire the requisite skill set. At the same time, we mandate some of the training that people must undergo. We are trying to build capacity in four areas– (i) risk-based supervisory framework; (ii) risk-based capital regime; (iii) human resources; and (iv) IFRS and IndAS.

Emerging technologies in the insurance sector

I recently met more than 200 players in the Insurtech world in Bangalore – there were interactions, presentations and roundtable discussions, and this ecosystem is raring to go. At IRDAI, we have already developed a regulatory sandbox mechanism where the proof of a concept is being allowed to be tested on the ground. We have found that the regulatory sandbox has certain shortcomings, for instance, currently, an applicant can only apply in two cohorts. We are revamping the system to make it a continuous process. Earlier, we allowed applicants to test their product for up to six months, now we are proposing to expand that to three years particularly for life products. Thus, we are working on a dynamic regulation that shall come up in the next few days. With new insurance technology coming in, we need to build capacity to regulate them in a manner that they do what they ought to do in terms of market conduct.

Finally, we are looking at allowing smaller players in the market. The penetration of banking in this country has happened through differentiated players. Similarly, for insurance, we are looking at micro-insurance players – niche players and regional players – coming into the segment. This will entail amendments to the Act, to allow companies with lesser capital to enter. However, it will help us with the objective of insurance penetration in unserved and underserved areas in the country.

Consumer protection issues and how IRDAI is addressing them

The IRDAI is reviewing existing systems, and trying to make them more responsive and robust. We are working on root cause analyses, on bringing in other forms of technology like robotic process automation, and so on. We are running a hackathon (shortly) where we will state these problems and how to resolve them using technology.

Bima Bharosa portal will become more vibrant, robust, responsive and take care of many issues. For the ombudsman mechanism, we have tasked the responsibility with an insurance ombudsman committee, where we have experts being led by a former Additional Chief Secretary level officer from the IAS. We are also contemplating an internal ombudsman within insurance companies.

We are trying to make disclosures furthermore in the larger interest of the policyholders. They ought to have more information to make a choice of what kind of policy to buy. Claim servicing and settlement is also something we will focus on very closely as far as turnaround times are concerned. All of this will need to happen on a technology platform. Hence, we are mainstreaming technology and incentivising adoption of technology in our regulations (which is expected to be out in a month’s time). The policyholder remains at the centre of our framework, and we are working to ensure that grievances do not arise, even if it means changing the terms of policy.

Views on regulatory convergence and a larger reform of the financial sector

The FSDC will be a very useful forum. One example of a common regulatory issue is the KYC. There is no need to reinvent the wheel each time when the same KYC can be used by all regulators. I believe a new mechanism is being contemplated by the Department of Revenue – e-KYC Setu – a bridge between me, the customer and the UPI. The Central Registry of Securitisation Asset Reconstruction and Security Interest of India (CERSAI) is another repository that has all the data. There is some element of concern with regard to the Prevention of Money Laundering Act (PMLA) where the last user of the CKYC data will have to update the information with regard to residential address, etc. which actually amounts to redoing the whole exercise once again. This is a concern that we will try to address in the next FSDC meeting. With the advent of new technologies, we should be able to take care of problems faced by the customer, whether they buy a financial, banking or insurance product. This forum is going to be important in addressing these concerns.

In terms of the reform of the financial sector, the IRDAI wants to move from rule-based to principle-based regulation. We have already delegated the product certification to insurance companies, and are considering some other things that the regulator currently does that can be delegated to the companies. We are looking at mainstreaming technology, a risk-based supervisory framework, risk-based capital regime, IFRS – these are some of the new reforms we have initiated and are trying to take forward.

We are also looking at value-added services to be incorporated in insurance. For example, a person aged around thirty five years would be reluctant to take health cover since they do not expect to go to the hospital in the next ten-fifteen years. Insurance companies can offer them services to make insurance attractive to this population segment – for example, offering a yoga membership, gym membership, an annual check-up, free ambulance service to their parents or nursing services – all of this should come in the bucket of value-added services.

The reason why insurance companies do not do this now is because the legal framework does not have clarity on this. As such, we need to carve out a space for these services. Further, a lot of capital will be required for companies to provide value-added services along with insurance because the same solvency norms will apply to them. If we can provide for them to set up a joint venture or a subsidiary and charge a fee for it rather than charging a premium, more people will be attracted to buying these kinds of insurance products. IRDAI is working on providing the technological platform for insurance companies to be able to provide these services.

Major disruptions that IRDAI is envisioning – the future of insurance sales

Technology is going to be the major disruptor. Everyone has to adapt to this sooner or later. We are nudging insurance companies to come up with a technology-backed insurance platform that they can create or their own or co-create or partner or collaborate on. A large number of players that want to enter the insurance sector are coming in with a technology solution. For instance, I found a crop insurance idea interesting – a parametric kind of insurance based on technology. Similarly, in the case of health insurance, for outpatient charges, there are concerns about frauds but a couple of players with technology solutions have already filed their applications on this subject.

Technology will be the enabler that allows reach to thousands of people at a point in time as opposed to the traditional agency network that only allows reach of two-four persons in a day. While we still need the agency network and some of the other traditional channels, we are nudging them to go down the technology route. Standalone digital players are now coming in, niche players have started filing applications, and as we go along, there will be a larger number of players backed by technology and end-to-end solutions. I expect them to come up with solutions that will compete with each other in terms of turnaround time for settlement of claims. Thus, technology would be the biggest disruptor and enabler in terms of customer satisfaction and reaching out to millions of people.

The key focus areas for us are as follows: (i) every life in this country must be insured – nobody should die without life insurance; technology will be crucial to achieve this goal, (ii) property insurance – people at the bottom of the pyramid (lower income segments and those who are calamity-prone) should be able afford property insurance cover, (iii) micro, small and medium-sized enterprises should be insured because there is a lot of potential in covering business risks and hopefully we will come up with solutions for this.

We constantly engage with the industry and have institutionalised bi-monthly meetings with insurance companies and other stakeholders, and open houses on the 15 th of every month. This is how we are looking to take care of disruptions.

Balancing public sector and private sector insurance

I think the market is so huge, innovations are so large and the scope is so broad that there is plenty of room for both public and private insurance to operate within the system. At IRDAI, we are completely agnostic about whether insurance offered is public or private. We want robust players with more capital so that they can underwrite more. The IRDAI has made the entry of new players absolutely seamless now – in a span of two Board meetings we are nudging them to come up with their final submission so that we can hand them a registration certificate to operate. In the past one and a half months, we have had more than twelve new applicants who want to start their own entity for insurance in India.

Financial independence of IRDAI

Financially, we are self-reliant. We do not need as much money to operate, but we put to good use whatever we have.

Risk profiles of individual entities

The risk-based supervisory framework and the risk-based capital regime are going to be game changers.

Balancing the commercial/market-related aspects of regulation with the more procedural aspects

The IRDAI is comfortable in balancing the expectations of the government, the public, the industry, the intermediaries and the professional organisations that are operating in this ecosystem. I view the regulator’s role here as one of a big facilitator apart from its supervisory role Some issues on which I plan to engage further with the industry includes how to facilitate growth of the sector by 15-20% CAGR or more, how to bring our insurance penetration closer to the world average in the next 4-5 years and then the G7 average. These are the aspirations we have at the IRDAI. Additionally, work that is underway includes putting in place more robust frameworks as far as prudential norms are concerned. The FSDC mechanism is another important platform for us to sort out a lot of issues which are inter- regulatory in nature. The insurance sector has tremendous potential, a huge market, and an increasing number of investors are looking to enter the sector. The policyholders will end up with a better deal as we go along, replete with more technology tools, better pricing, better underwriting, better claim servicing and processing.

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:

• Can rural play “savior” again? Agricultural seasons and COVID-19 waves by Mekhala Krishnamurthy and Harish Damodaran 
• How ‘food’ has become the real social safety net in pandemic by Harish Damodaran 
• Where is food inflation headed? by Harish Damodaran 
• Has MGNREGS Helped the Rural Economy in 2021? by Yamini Aiyar, Avani Kapur and Harish Damodaran 
• Employment U-turn: Rural India is India’s main employer by Harish Damodaran and Yamini Aiyar 
• Carbohydrates to proteins and back: How dietary and cropping diversification seems to have gone into reverse by Harish Damodaran, Mekhala Krishnamurthy and Samridhi Agarwal
• Agricultural Households and Farming Income: An initial analysis of variations in income from farming and other sources among agricultural households in India by Harish Damodaran, Mekhala Krishnamurthy and Samridhi Agarwal 
• Mapping India’s Livestock Economy by Samridhi Agarwal and Harish Damodaran
• The Future of MSP by Harish Damodaran 
• Unlocking the Potential of Ganna Pradesh by Harish Damodaran

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.

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.

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.