Economic Highlights

New Delhi, 17 June 2011

Lagging Infrastructure

NEEDS POLICY REVIEW

By Shivaji Sarkar

The infrastructure sector’s performance, particularly power, is a major concern. Scandalously, despite new targets in every Plan, the power sector has never been able to achieve the Plan target.   

Significantly, the Reserve Bank of India’s (RBI) toughening of interest rates would not only further increase cost inputs for new projects but also might lead to an overall fall in the growth of different sectors owing to high input prices and rising financial costs. Worse, global uncertainties could also add to the negative sentiments, according to Assocham President Dilip Modi.

Moreover, not just power, overall roads, coal and ports also show huge backlogs.  Making matters worse buyers are already eluding the realty sector. Undoubtedly, costlier loans might lead to a further fall in demand.

This has spilled over to other sectors as well like the IT-related BPO. Though India’s IT sector has shown strong growth numbers, the BPO sector too remains a laggard facing rough weather as Europe and the USA continue to fight over what is now being termed as deep depreciation.

“In early to mid-2000s when large companies were testing waters in BPO, the incremental growth from a small base was huge. There are no similar observable growth drivers to restore past levels”, says a senior IT sector analyst. The figures suggest that the BPO industry growth would be around ten per cent against 30 per cent, the industry witnessed prior to the slowdown. And the industry is not expected to do better in the next couple of years.

More shocking, the highway programmes remain behind target. In 2010, it performed at a slower rate than in 2009.

The next biggest shortfall is being seen in the shipping sector. It is carrying around 8 to 10 per cent less. This means a large workforce remains un-utilised. This speaks volumes also in terms of exports. Despite some increase it has not reached the pre-crisis level. An obvious fall-out of the trend is seen in the performance of the ports. Undeniably, the global slowdown in trade is affecting the port sector.

Clearly, this is not an easy situation. The Government naturally has to take the flak. But it is time for the Administration to come out with a white paper on the performance problems of various sectors. The blame can be apportioned on the Government. But the present scenario calls for brain-storming. With a rising population, surging inflation and fall in demand at national and international level, the solutions are not easy to find.

However, the Government has to move beyond the tightening of monetary policy through RBI. Curbing inflation now needs a multi-pronged strategy. It also calls for a re-look at freeing the food market. There has to be a combination of a free market with a strong Government intervention system. Labour too needs Government protection which remains the only regulator.

Undeniably, these steps are necessary to boost the morale of the people and the industry. Given that industrial growth would be possible on a combination of factors --- increasing demand, stable job scenario and confidence of the industry that its investments would add to production and sales and not losses.

In this scenario any wonder that the power and coal sectors growths are stymied. As these are high capital-intensive areas raising finance is becoming costlier and impedes the process of implementation of projects.

True, the country has remained short of power through decades. The Ninth and Tenth Plans could not add targeted capacity. The Tenth Plan’s capacity addition was only 21,080 MW. Even the 11^th Plan is not expected to achieve the target of 78,700 MW. The target has been revised to 52,000 MW but might achieve a little more than the revised Eighth Plan target of 39,000 MW.

Pertinently, the Centre blames the States for the abysmal power situation. The States blame the Centre as power is in the concurrent list. Technically both are supposed to share the blame. But largely the Central power companies are managing the scenario.

The peak shortage, the gap between demand and supply, through 2010 was almost 11 per cent. The losses due to transmission and distribution over the decades have remained around 30 per cent. It means no revenue is received for 30 per cent of power generated. But the power companies do not bear the losses. They make it by increasing tariff.

But higher tariff also has its problems. Despite a poor power scenario, many States do not purchase electricity from Central companies like the NTPC as they are unable to afford the tariff.

Thus, a bogey is floated to increase the power tariff by propagating that Indian consumers pay far less for a unit of electricity than countries which are richer. States former Union Power Secretary Razdan, “We have to start thinking like a developed country”.

A good argument, no doubt but not based on realities. The developed countries do not have more than two to three per cent losses on transmission. Their cost of production is higher as labour wages are higher. On the other hand, Indian power companies’ pay far less wages and their other overheads are much less. If they could restrict transmission losses, they would be able to sell power at a much lower rate. 

Consequently, power rates in Indian conditions have to be maintained at a low for the growth targets to be achieved. As higher rates are detrimental for the industry and domestic consumers. It adds to inflation and hampers growth.

With power largely being thermal the sector has problems with the Coal Ministry. There is a serious shortage of coal. At the end of 2007, the shortfall in coal supply was 35 million tonnes. It is to rise to 83 million tonnes by 2012, when the 12^th Plan is slated to begin. But the thermal sector grew at a mere 3.03 per cent. States the 2011 Economic Survey, “Shortage of domestic and imported coal affected thermal generation”.

Additionally, the Environment Ministry action declaring 35 per cent of forest area in nine major coal-mining zones as “no-go” areas has led to stoppage of mining in 203 blocks with a potential capacity of over 600 million tonnes. Said Union Coal Minister Sriprakash Jaiswal “this ban could affect power generation of about 130,000 MW”.

Yet another problem is that of the Coal Ministry’s banning the private sector from selling coal other than meeting their captive needs for power and steel generation. In fact, had there not been a slowdown in completing power projects, the gap between capacity and production would have increased.

In sum, the infrastructure sector calls for an integrated approach and a total policy review. The present slowdown is a temporary phase. This is the time to build-up capacity and give the country a competitive edge and ensure low pricing mechanism. ----- INFA

(Copyright, India News and Feature Alliance)