Standard Life Investments

Through the Lens

Power to the People - Indian Equities

  • A new prime minister facing old challenges
  • Gujarat – a proven model for change
  • Powering towards a brighter future

Following Narendra Modi’s landslide victory in the Indian elections, the hard work is about to start given that he finds himself Prime Minister of a country where 300 million people live in poverty. Having campaigned using the state of Gujarat, where he was Chief Minister, as a shining example of what could be achieved, he now has to act decisively to make headway into a fairly challenging list of reforms.

One of his main actions to date has been to tackle the power supply by creating three ministries; coal, power and renewables. This is important as the majority of the country does not have a consistent supply of electricity and more than 800 million people lack clean cooking facilities (i.e. they use biomass for cooking) according to the International Energy Agency.

Fortunately, Modi has a proven track-record of reform in this area. When he became the Chief Minister of Gujarat in 2001, the state had a 500 megawatt demand-supply short fall; 10 years later this had become a 2,000 megawatt surplus, which was then exported to other states, generating an annual profit of $93 million. The creation of a reliable grid required revenue, this was achieved in part by setting up ‘police stations’ which recorded 100,000 cases of power theft. Importantly, he also refrained from using subsidies, identifying that consumers were happy to pay for electricity, if there was a continuous supply. Ultimately, Gujarat became the only state with 24/7 three phase power for all its villages.

At present 68% of India’s electricity is produced using coal, generating a third more emissions per kilowatt hour than greener sources. Failure to address this could result in India becoming the largest source of carbon emissions. Modi has already instigated a solar power program and in time, once the national grid is strengthened, there is scope to harness the potential of wind and hydropower to alleviate the strain on regions with the greatest power deficits. Although this is currently an area that is under-developed, it offers huge potential.

One company we hold in our portfolio and monitor with interest is The Calcutta Electric Supply Corporation (CESC), which should benefit from government initiatives in the power sector. At present CESC is the third largest power company and operates in the only state where the State Electricity Board makes money. The company has operations from coal mining through to the distribution of electricity and additionally has four thermal plants, a solar project in Gujarat and a wind project in Rajasthan. Although the transformation in India will not happen overnight, changes in the sector are likely to provide scope for new projects. In the short-term, we are hopeful that the shareholder-return policy from CESC will improve and that profits will be invested into the core power business rather than its ancillary retail and property operations.

The scope for change is enormous and the political challenges considerable but without doubt, Narendra Modi has the power to start changing the shape of the world’s largest democracy.