Piped natural gas (PNG) in India: Not priced to displace electricity

In continuation of my previous post on piped natural gas, I found that Mahanagar Gas charges Rs.33/m^3 for natural gas. The energy content is 8500 kcal/m^3 or 35.56 MJ/m^3. This corresponds to 10 kwhr i.e. 10 units. In the units of electricity pricing, then, this gas is priced at Rs.3.3 per unit (i.e. $0.066 per unit). This is slightly cheaper than electricity but not by much. I'd have expected gas to be cheaper than this. This isn't a pricepoint at which one can obtain a big shift from electricity to NG. It is more convenient than shipping bottles around, but that's about it.



For a comparison, in Los Angeles, the price of gas works out to $0.036 per kwhr while the price of electricity is $0.132 per kwhr. That is, piped electricity is 3.667 times costlier than piped gas. It makes you wonder about what we're doing wrong with natural gas in India.

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Residential water heating and the rise of the gas-fired economy

When electricity distribution networks fall into place, people start using electricity for everything. Heating, air conditioning, cooking, etc.: electricity is the supple path to all applications. Electricity is conveniently accessed at home, but at a system level, there are problems. Electricity is typically made in big facilities, primarily by burning coal or gas. It is then inefficiently transported to the home. Coal has the worst carbon footprint. Given the domination of coal in Indian electricity production, electricity consumption in India is highly carbon intensive.

Gas delivered to the home is a superior alternative, but this requires gas distribution to the home. A brand-new distribution infrastructure needs to be built, for delivering gas to the home. Once gas is at the home, it can be used for cooking and for heating. To the extent that this is done, it reduces the carbon footprint of residential energy consumption. And, given the way the world is going, gas delivered to the home is likely to be significantly cheaper (per joule) when compared with electricity, even without a carbon tax. (Question: Does someone know the price per joule for residential electricity versus piped gas in India?)

When we think about global warming in India, the dominant impulse is to say to the rich countries "this is not our problem; you guys loaded up the atmosphere with CO2, you guys fix it". While this approach has strengths, it is also important for India to find low-carbon paths to development. We have a problem in having a highly coal-fired economy. We also have the malleability in having the bulk of our energy system of 2050 having not yet been built out: this gives us choices about what should be done. In contrast, most rich countries have less room to maneuver. Policy decisions in India will determine whether cities develop energy-efficient mass transportation systems (such as the Delhi Metro) or not; in contrast, there is no possibility of Los Angeles or the Bay Area developing a good transportation system.

I suspect that gas is likely to be India's low-carbon bridge to renewables and nuclear, exactly as it will be for the rest of the world. From this perspective, we need to start looking for market-based channels to do more on building the gas ecosystem. One interesting litmus test that we can use is the number of households where one sees gas-fired water heating. 

This requires distribution networks for gas, and then households have to switch from electric ovens, water heaters, stoves to gas-fired equivalents. In India, a few cities are now starting to have gas distribution to the home. In time, households should increasingly build up the capital stock of gas-fired appliances, motivated by the superior pricing of gas.

And this gives us an illustration of India's malleability. The CMIE household survey shows that at present, 5.5% of households in India today have one or more geysers (this is for the quarter ended June 2011). For these 5.5% of households, there is the question of junking the existing capital stock and shifting over to a gas-fired appliance. Presumably the differential pricing of electricity versus gas will justify such a shift for the household, but for India, it is a waste when there is such destruction of capital stock. Far more interesting are the remaining 94.5% of households. We should be doing things today, so that over the next 25 years, when 94.5% of India's households will buy a geyser, they will go towards a gas-fired heater rather than an electric one.

From this perspective, I was surprised to see a sales flyer of a small company -- P. K. L. Ltd. -- talking about a gas-fired water header:

This was news, atleast to me. I have never seen a gas-fired water heater being sold to a household before in India. I walked over to the Croma website and they don't have one. Similarly, all the water heaters at ezone are electric. Amusingly enough, the P. K. L. Ltd. website also does not talk about a gas-fired water heater. So either this is vapourware or their website is not updated. Do you know any firm selling gas-fired water heating for homes in India, and do you know any home that has one?

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Pakistan, India, MFN: What are the implications?

For once, I am pleased at how India played it: India gave Pakistan MFN status way back, in 1996, without getting into the silliness of reciprocity. A hallmark of professional competence in international trade is the idea of unilateral liberalisation: Even if another country is silly enough to have barriers against us, we should not have trade barriers against them. Removing barriers against India's globalisation is a favour to us, regardless of what it does to anyone else. India often gets into cul de sacs by obsessing on reciprocity - e.g. we won't open up to imports of agricultural products because the Europeans won't. We won't allow foreign banks to operate in India because some other countries have barriers against the operations of Indian banks. And so on. But for once, in this case, our guys seem to have played it right (and way back in 1996, too!).



And now, we have a nice next step: Pakistan will give India MFN status. What might happen next? Here are some conjectures:

1. At present, there is significant Indo-Pak trade; it merely gets routed through Dubai. Once Pakistan gives India MFN status, the entrepot trade that was going Bombay -> Dubai -> Karachi will go Bombay -> Karachi. This is bad news for Dubai and for individuals and firms which are invested in the future of Dubai as an entrepot centre. Trade data should show a fairly sharp decline in India's exports to UAE and a fairly sharp rise in India's exports to Pakistan.


2. There will be a boom in shipping, communication and trade serving the direct Bombay -> Karachi route. Similarly, the ports of Gujarat will do a lot of business directly to Karachi.


3. At first blush, little changes: the goods that used to go via Dubai would now go directly to Karachi. Another dimension is the cost of the middleman in Dubai, which would be eliminated. To a reasonable man, these changes add up to small numbers. But a recurring theme in economics is the extent to which apparently small frictions loom large. The removal of fairly modest frictions matters a lot for business activity. So when the cost of shipping goes down by roughly 3x, even though the cost of shipping may be small in absolute terms, this would have a big impact on trade. 


4. Important dynamics will now set in amidst firms in Pakistan. Firms that compete with exports from India will suffer. Firms that consume imported inputs from India will thrive. Creative destruction will take place; resources will shift from one group of firms to another. Exporters will be better able to export to India, both because of access to cheaper labour and capital that's freed up by firms that die owing to import competition, and because of improved competitiveness that comes from cheaper raw materials. Exports from Pakistan to India will go up significantly through this movement on import liberalisation.


5. Large Indian and Pakistani corporations will look much more seriously at the opportunities that lie just beyond the national border. Over time, human capacities and human networks will build up on both sides, supporting cross-border operations. This will take time to ripen, but when it does, the effects will be large. A good fraction of global trade is intra-firm trade, so it's very important to have large firms of both countries having operations in both countries, in order to get growth of trade. But for this, both sides have to do more on capital account liberalisation through which firms will expand operations across the border.


6. The biggest gains in India will be in Gujarat, given the myriad ports in Gujarat which are a short distance away from Pakistan. But in the future, if road and rail links open up, then there are big opportunities in Punjab also. Wouldn't it be nice to have a NHAI style road running from Ahmedabad to Karachi, and from Amritsar to Lahore?

To the extent that we're merely rerouting trade, bypassing Dubai, this will impose no new stress on ports and airports in Pakistan. But to the extent that new trade is created - as I expect it will (and as argued above) - then new work will be required in Pakistan on enhancing the capacity of ports and airports. I would personally be surprised if the effects are not large. In other words, this initiative will need to be followed through by new work on infrastructure in Pakistan.

In the intuition of economists, there is a gravity model in the affairs of men. Proximity and low transactions costs are incredibly important. The natural opportunity for India to grow international integration on all dimensions (goods, services, people, ideas, capital) lies in our immediate neighbourhood. India's connections into the region are shockingly below those seen for all other large countries. Doing better on connections with Pakistan would be a nice step forward.

Consider a product like cement, which is ordinarily considered a non-tradeable. Transportation of cement is so hard, there isn't a unified national market even within India. There are a series of regional markets. But even in this, modifications of transportation have mattered greatly. E.g. when Gujarat Ambuja came up with the innovation (back in the mid 1990s) of sending cement from Saurashtra to Bombay, by sea, this was a very big deal. By that same logic, cement from the coast of Saurashtra can go to Pakistan (or vice versa, depending on who produces at a lower price).

We should not see trade in goods in isolation. All dimensions of globalisation are intimately connected to each other. It is not possible to have mode of internationalisation (trade in goods) without having the others. To do more trade in goods and services, we need more movement of people. Ergo, the silly visa restrictions that both countries impose on each other need to be eased. Finance follows trade: So where trade in goods and services leads the way, bigger financial integration will follow with trade financing, cross-border banking, payments, purchases of information, operations of multinationals and FDI, INR/PKR currency risk management, and investment flows. More will need to be done on investment guarantees, export/import trade financing, etc. Conversely, if all those elements are blockaded, then trade in goods and services will not blossom.

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`The Quest' by Daniel Yergin: A great job but we need more

I recently read Daniel Yergin's fascinating book The Quest. It's a panoramic view of the global energy industry. For me personally, many parts were familiar territory. But many parts were new to me, and the overall integration of the story was valuable. I encourage every non-specialist (like me) who is curious about energy to read the book.



But I was left thirsty for two more books.



The first book would be a more technical treatment of the same material.



I repeatedly found myself wanting more technical detail. The pollution from cars has come down by 99% between 1970 and 2010. How was this done!? New nuclear reactor designs are fundamentally safer than the reactors that got into trouble at Chernobyl or Fukushima. What are these designs and why are they fundamentally safer!? Hybrid cars give you much higher mileage than ordinary cars. What are the key innovations which make this possible and how much did each of these new ideas contribute? The oil industry is doing incredible things digging deep into the sea. What are these engineering challenges and how are they being overcome?



And so on. The Quest is a good book but the The Quest for Geeks would be a great book.



The second direction in which I was curious and unsatisfied was India. The book has roughly nothing about India. It talks a bit about about Suzlon and has some political stories about India's views in global climate negotiations. For the rest, there is nothing about India's energy industry. It would be great if a comparable panoramic treatment was done, focusing on India. Perhaps Girish Sant and/or Rangan Banerjee should embark on such a project.

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Project Tanzanite: Obtaining fundamental progress in the macroeconomics of developing countries

I was at a meeting in London recently, organised by href="http://www.theigc.org/">the IGC, on the subject of the
research agenda in macroeconomics for developing countries. This made
me think about how to make progress.

The US as the shared dataset for mainstream macroeconomics

All existing knowledge on macroeconomics is rooted in data about
the US economy. The US is seen as a canonical developed
country. Economists all over the world have treated it as a common
object of study, when building macroeconomics. It is a shared
dataset. Researchers and Ph.D. students routinely pull out a paper
from the literature, and replicate the results, as a first stage of
offering innovations: all this is rendered convenient by using the US
as a shared dataset. New work is generally obliged to demonstrate
value-add in the context of the US dataset.

The US works as a shared dataset because it has high quality
data. Good quality data starts right after 1945, because there was no
destruction within the country, hence the early post-war years are not
distorted by unusual reconstruction. There was a steady shift away
from dirigisme from 1945 onwards, but for the rest there has
been no regime change: events like the breakdown of communism or the
rise of the European Union or the Euro have not taken place.

In the US, a high quality statistical system has produced good
aggregative data. Organisations like NBER have processed this data
nicely to create datasets about the business cycle. High quality
datasets are available about households, firms and financial
markets. Household- and firm-level data has been nicely utilised to
obtain numerical values for parameters in macroeconomic models: why
estimate something using macro data when you know it using
gigantic and well trusted micro datasets? Finally, the major question
for macro today is the fusion with finance, and the US has nice data
for the financial system.

As a consequence, facts about the US are the shared dataset used in
all mainstream macro research across the world.

The insights developed in this literature, which has examined the
US economy, have been transported with fair success, into other
developed countries. Thus, this emphasis on the US as a common dataset
has delivered good results. As an example, the revolution in monetary
policy which was thought through by Friedman, Lucas, etc. was created
using US data. It has usefully reshaped central banks worldwide. US
data was essential for inventing inflation targeting, but inflation
targeting has worked well outside the US.

The major obstacle on building a macroeconomics for developing
countries

The major obstacle that interferes with doing macroeconomics in
developing countries is data.

India is a good example of what goes wrong. The standard GDP data
is in bad shape. The annual GDP data is deplorable, and the quarterly
GDP data that is so essential for doing macroeconomics is worse. The
IIP is untrustworthy. Put these together, and we don't have an output
series, really.

The BOP data is measured fairly well. Some href="http://nipfp.blogspot.com/2011/02/how-to-measure-inflation-in-india.html">plausible
inflation data is now starting to come together. The statistical
system run by the government does not produce seasonally adjusted
data [succor]. Given the
absence of the Bond-Currency-Derivatives Nexus, the bulk of data
about interest rates that is required is missing; policy makers are
href="http://ajayshahblog.blogspot.com/2006/08/flying-blind.html">flying
blind. The standard household survey (NSSO) is in bad shape: it
does not produce panel data, surveys are only conducted once in a few
years, and there are incentive issues about the front-line staff who
interact with households.

The large firms are observed using the CMIE database; the small
firms are not observed using the ASI dataset. The CMIE household
survey is starting to generate knowledge about households, but this
only got started a few years ago. While the CMIE datasets (on firms
and households) can be aggregated up to create many interesting macro
series, so far this process has only begun in a small way.

Faced with these problems, it is not surprising that little is
known, at present, about macroeconomics in India. We know numerous
important questions, and we know that we don't know the answers. The
roadmap to progress is often, though not always, blockaded by data
constraints.

Many such problems bedevil the statistical system in other
developing countries also.

Economists have complained about bad data in developing countries
for decades, and that hasn't changed things. And there is a uniquely
perverse problem. Incremental progress with a gradually improving
statistical system does not get the job done for us: By the
time a country gets to good institutions and thus a good statistical
system (e.g. Taiwan, South Korea, Israel, Chile), the country is not a
developing country anymore and is thus not a useful dataset for
studying the macroeconomics of developing countries. Chile has world
class databases on households and firms, but you can't extract
microeconomic facts using these datasets and use them in
calibration if your object of inquiry is the canonical developing
country.

A proposal

How can we make progress? I feel the first idea that we need to
agree on is that we do not need many developing countries to build a
great literature. We need a shared dataset, a lingua franca, a
replication platform, using which we will build a literature. We need
a country that will play the role, for the macroeconomics of
developing countries, that has been played by the United States in
conventional macroeconomics.

The second idea is that we should be a little more ambitious. We
should not merely sit around hand-wringing, complaining about a
problem that isn't going to solve itself. When scientists in other
disciplines identify questions that call for evidence, they write
funding proposals (sometimes running to billions of dollars) and
organise themselves to create those datasets. Could we do
similarly?

Specifically, imagine that we pick one canonical developing
country. It's got to be a typical developing country in most
respects. And, it should not be a conflict zone, it should have the
basics of law and order and physical safety so that operations can be
mounted in it. Christopher Adam of Oxford suggests that Tanzania is a
good choice.

Imagine that, the system of interest (a developing country) keeps
running, but it gets instrumented up to world class. In essence, we
try to place first world instrumentation into a third world
country. (To the extent that this data improves decision making in the
country, we would suffer from `Heisenberg' effects).

This will call for financial resources and, more importantly,
organisational capability. The physicists know how to organise
themselves to build the Large Hadron Collider. Most of the time,
economists do not organise themselves as laboratories or teams doing
complex projects. This will be a bridge that we will have to
cross.

As with the Large Hadron Collider, this is not a short-term
project. It is a project that needs to run for 25 years, in order to
generate a strong dataset.

At first, the project will generate useful facts for calibration,
drawing on household survey and firm databases. Gradually, as the span
of the time-series builds up, the full picture will start becoming
clear.

If this works, it can ignite a literature where researchers from
all across the world do replicable work off a common dataset. Perhaps
Tanzania could then play a role, for the macroeconomics of developing
countries, that is comparable with the role played by the United
States in mainstream macroeconomics.

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Fighting back inflation is cheaper when there is credibility: A numerical example

A few days ago, I wrote a blog post about India's inflation crisis. For five years now, in every single month, the y-o-y CPI inflation has exceeded 5%. Under these conditions, economic agents have little confidence that RBI cares about inflation. They are now reporting double digit inflationary expectations. Under these conditions, inflation will be persistent. By itself, inflation is not going to go back to the target range of 4 to 5 per cent. This blog post made certain qualitative claims about fighting inflation under two scenarios: when the central bank has credibility and when it does not.



I recently came across a fascinating paper which is about a similar situation: it is about the problems faced in Ghana recently, in fighting back an inflation. It gives numerical values which are interesting for us. Their inflation was a bit worse than ours - they were at 20%. But for the rest, this analysis illuminates what we face in India today. The paper is : A model for full-fledged inflation targeting and application to Ghana, by Ali Alichi, Kevin Clinton, Jihad Dagher, Ondra Kamenik, Douglas Laxton and Marshall Mills, IMF Working Paper, 2010.



Here is the main story. First, look at the projected trajectory for what happens to the short term interest rate and inflation under conditions of weak credibility of the central bank:

The nominal rate is required to go all the way out to 26%. Inflation responds slowly. It is projected to get to the target (with some overshooting at first) by 2016. The cumulative damage to GDP growth, in this process of exorcising inflation, works out to roughly 20 per cent of GDP. (This is the sum total of the output cost over all the years taken in wrestling this inflation down).



Compare this against the picture obtained when the central bank has high credibility:

This is much nicer story. The nominal interest rate starts out high (18%) but inflation responds rapidly and the interest rate can also come down rapidly. By 2013, inflation is at the target. The cumulative damage to GDP growth, in this process of exorcising inflation, works out to only 4% of GDP.



This difference is striking. Lacking credibility, the central bank has to force a total output loss of 20% of GDP, and they get to target inflation by 2016. With credibility, the job gets done three years sooner, and at a cost of only 4% of GDP of output loss.



This is an essential insight into our inflation crisis today. In the end, raising rates will get the job done. No matter how bad is the monetary policy transmission, no matter how deeply ingrained inflationary expectations have become, raising rates will ultimately deliver price control. The choice that we face is between being bloody-minded about it, or simultaneously undertaking RBI reforms which involve zero output loss, and improve RBI's credibility.

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Household behaviour that counteracts fiscal expansion

Suppose a government tries to boost demand in the economy by boosting the deficit.



A fascinating feature of the situation is: Households are not wood, households are not stones, but men. And being men, they will look forward, they will optimise. Households know that all government expenditure requries taxation: all that is achieved by running a deficit today is postponing taxes to tomorrow.



India's fiscal stance is now likely to lead to increased taxation in the future. We have a nice wide deficit today, but it's increasingly likely that fresh taxation will come up in the future.



A core feature of human beings is that we do not like to deal with fluctuations in our consumption. So faced with the prospect of taxation tomorrow, we are prone to cut back on consumption today.



Through this, when a government raises the deficit today, some of this effect is counteracted by households that pull back on expenditure. Raising the fiscal deficit is less expansionary than some would think.



Economists have a fancy name for this: it's called Ricardian Equivalence. This was originally thought up by David Ricardo, but made famous by Robert Barro. It is one of the many ways in which forward looking households are of essence in thinking about macroeconomics. "You are not wood, you are not stones, but men; and being men, you will optimise".

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