Here's an interesting idea to increase the savings rate of Indians

A professor from a European University was amused, nay fascinated, to see the sump at my house and was very curious to learn all about it. I explained that we stored water in it. He asked why? “To pump it up,” I said. He asked: “Then what happens?” I answered: “We pump it down.” But suddenly the idea looked bizarre even to me. It seemed even more bizarre when I explained that the motor pump was kept in a locked cage.

For a person long used to running water all the time, the idea of storing water was obviously amusing. But this European colleague was truly shocked when he saw a huge power generator in my garage and an inverter in my kitchen. He began to compute the amount of money spent by individual households who needed to store water, generate electricity, and then store even that electricity in the inverter. His calculations showed that at half the investment the local government could have provided the same water and power to every household.

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Herein lies our tragedy. Water and power, both of which are taken for granted in developed countries, have become major areas of household investment in India - effectively eating into our savings. This is true not only for the middle and richer classes, but the poor too. Why should they buy plastic or metal buckets and pots if running water is available all the time? Due to these uncertainties, we have developed large vested interest groups like water tank mafias and power stealing goons.

Let us take a middle class household that owns its home. It needs a sump, an overhead tank, a motor, and other paraphernalia. It also needs an inverter that would need regular servicing with distilled water, etc. The capital cost (say, including equipment like fridges and ACs) of these would be a minimum of Rs 5 lakh. For people who live in apartments, the builder takes care of storage issues, but this cost is sure to be included in the apartment costs.

If, in a city like Bangalore, at the least 50,000 new houses/units are built per year, then at least Rs 2,500 crore is blocked in dealing with water and power issues. If we multiply this figure for 10 big cities, the costs (and resultant savings, if these are not required) could be around Rs 25,000 crore per annum. Also, there are 50 to 100 smaller towns where 1,000 to 3,000 new units may be coming up every year. Of course, the costs can be Rs 3 lakh in such locations. Taking 100 locations at 3,000 units per annum we get a cost (or saving) of nearly Rs 10,000 crore.

In all, if cities had proper power and water delivery systems, it would lead to annual savings of Rs 35,000 crore for the middle classes. This is not including the time saved by not having to store water or service the equipment needed for it. Not storing water also means not having to clean tanks, and lesser chances of water-borne diseases. Some of these benefits are clearly non-quantifiable. And remember, this is only the incremental annual cost for one year. It also does not consider already sunk costs which will not need additional maintenance and renewal.

In this calculation, we have also not included industries that use generators and inverters on a regular basis. That would easily be of the order of more than Rs 50,000 crore and so the total released funds could be nearly Rs 1,00,000 crore - which is a huge sum. If we merely looked at potential household savings, this would be money that could get invested in financial avenues like bank fixed deposits, insurance, pension funds, etc.

The nest government to be formed after 16 May should focus on really big ticket issues and not bother about spreading itself too thin by attempting to fix too many small things. Fighting on too many fronts will not lead it anywhere. Moreover, it needs to create an impact both in terms of voter psychology and generate employment. Power and water can be two of those big-ticket items.

As far as water is concerned, every state can be encouraged with funds to link up intra-state rivers. The inter-state linkages can be done later. Here again, institutions like an Inter State Council should meet may be once a month to start with and later once a quarter. Almost all inter-state issues should be discussed in this forum.

As far as power is concerned, investments can be made from domestic funds as well as global funds. All types of power are needed and, based on the experience in Gujarat, one can expand the solar network. All projects must be time-bound and if the global forces unleash the environmental lobby to stall growth, they need to be dealt with appropriately. For instance, the globally-sponsored agitation against the Kudankulam has led to time and cost escalations, with both the centre and state adopting the attitude of spectators. The new government will have goodwill in the first two years or so and hence it is required to show results during the period.

It can show results only in big ticket investments from the central government.

If water and power problems are completely sorted out - 24x7 quality power to all and water from pipes for all - it will make the new government extremely stable and popular. It will sort out many other issues since our people are entrepreneurial and business oriented. Give them water and power and they will take care of all other issues like education, health and industry.

The author is professor of finance, IIM Bangalore. Views are personal