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Moneycontrol Pro Weekender | The burning issue

The festive spirit is in the air. No wonder, the economy is putting on its running shoes despite the raging energy problem

October 16, 2021 / 10:07 AM IST
Representative image

Representative image

Dear Reader,

Belated Dussehra wishes.

The festive season is in full swing and this week saw a bunch of data that pointed to a strengthening of the economic recovery. The International Monetary Fund’s World Economic Outlook and the Reserve Bank of India’s Monetary Policy Report both projected solid economic growth for India in FY22 and FY23. Consumption also seems to be picking up, going by the increased spends in credit and debit cards.

Privatisation, governance reforms such as GatiShakti, asset monetisation, and a corporate sector with cleaned-up balance sheets should all provide a fillip to growth, as we had mentioned in our Panorama newsletter earlier this week. The economy is being opened up further as evident from the government relaxing restrictions for the aviation sector.

What can derail this strengthening recovery? A rise in prices when increasing demand clashes with a supply crunch.


Although the latest reading of consumer price inflation was a benign 4.35 percent, globally prices are rising for everything from cotton to food to crude oil. This is most visibly playing out in the thermal energy sector, not only in India, but around the world.

As the economy opened up, electricity demand in the first half of this year rose 13 percent from a year ago. Most of the increased demand was being met by coal-fired plants. The share of coal-fired plants in overall generation rose to 76 percent for the first half of FY22 compared to 71.6 percent a year ago.

However, the supply of coal could not keep up with this rise in demand because of a number of factors. Heavy rains in September hit coal production. Moreover, as the international price of coal too rose to record highs as China curbed its output to meet emission norms and some European nations switched to coal from expensive natural gas, domestic power companies became reluctant to use imported coal.

As it is, generators are facing a liquidity crunch because of delays in receiving payments from distribution companies (discoms). They are owed a whopping Rs 1.1 lakh crore by discoms. The liquidity crunch also means they are unable to pay coal suppliers; this is also one of the reasons – apart from lower energy demand due to COVID -- why electricity generators did not build adequate stocks of fuel before the monsoons.

Consequently, many Indian power plants are starved of coal. As on October 13, 112 out of 135 coal-fired plants had fuel stocks for seven or fewer days. These plants account for 83 percent of available capacity in the coal sector. As many as 92 plants, accounting for 69 percent of available capacity, have stocks for 4 or fewer days.

A severe power crunch that leads to blackouts can choke the urban growth engine.

What’s happening now?

Production and despatches are being ramped up. Coal supply to the power sector accounted for 85 percent of total deliveries in September compared to an average 81 percent for the first half of FY22. With even that proving to be not enough, Coal India has reportedly halted supplies to non-power users. This move is expected to be temporary but does pose a risk for sectors such as aluminium.

Apart from this, the power ministry has asked discoms to do periodic audits. While it might not do anything to solve the current coal crunch, it is a good move for the long term.

Some commentators have blamed the transition to renewables and green energy as the key reason for the current rise in energy prices – investments in augmenting the production of oil and natural gas have declined in recent years. But that could also be owing to the commodity price collapses seen in 2014-15 and 2020, points out the IEA.

That said, countries must wean off coal to meet climate change targets over the medium term. In fact, the IEA says that clean-energy spending must triple to curb climate change.

In India, companies in multiple sectors are making their moves to adapt to a less-carbon world. Over the last weekend, Reliance Industries made a series of acquisitions in the solar energy space, which underlined its ambitions in the renewables sector.

Similarly, Tata Motors said it had secured a Rs 7,500 crore investment from private equity firm TPG Group for its yet-to-be-named electric vehicle subsidiary. An added bonus: this EV play could spark a faster turnaround for its passenger vehicles business.

The week that has gone by also saw the beginning of the earnings season with a string of IT company results. While TCS had a soft quarter, Wipro and Infosys reported steady numbers, and Mindtree a blowout quarter.

Our independent research team also analysed the results of GM Breweries, Saregama, Krsnaa Diagnostics and Ramkrishna Forgings.

A good set of results could give further impetus to the markets rally or at least prevent a steep correction. It is especially important when the primary market is showing signs of fatigue. We also took a deep dive into the food colour industry and Info Edge, besides the pharma sector.

Other things we took note of this week include the Zee-Invesco dispute, the GatiShakti project which could benefit companies like KNR Construction, the Air India acquisition, the global minimum tax deal announced last weekend, and SEBI’s ban on oilseed contracts.

We also took note of the China situation (energy crisis, supply chain issues etc) here, here and here.

Last, while COVID-19 cases seem to have stabilised, it remains a big risk to the markets and the economy. Vaccination must continue to be a priority for the economic recovery to sustain.

Before signing off, I must recommend this piece by Tim Harford on the Nobel Prize economists.


Ravi Krishnan
Ravi Krishnan is deputy executive editor at Moneycontrol

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