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Impact of Global Slowdown on Indian Power Sector, Shri R V Shahi, Former Power Secretary,, Ministry of Power

Just one year back, everything in the Indian economy, and particularly in the infrastructure sector, was moving well on track and all the ingredients and parameters were giving highly positive signals. This was following the highest ever GDP growth of more than 9.5% in the year 2006-07, which set the tone for a sustained growth rate of average 9% for the whole Plan period. In fact, growth rate of double digit also started getting mentioned. It was a unanimous conclusion that if such a high growth rate has to be achieved, every aspect of infrastructure, in adequate measure, will have to be in place. It is well established that the existing Infrastructure, Electricity, National Highways, State Roads, Railways, Airlines, Ports etc. are adequate just to support a growth rate of 6 to 7% in a comfortable manner. The moment the economic activities are attempted to be pitched to a level to correspond to a growth rate of 9 to 10%, severe stresses and strains become visible. In fact, transportation and electricity start appearing as the most difficult hurdles inhibiting the desired levels of activities. These ground realities have led all concerned to conclude that for 9 to 10% of economic growth rate, infrastructure sector will need substantial augmentation. It is precisely for this reason that for the Eleventh Five Year Plan the projected capital outlay for the infrastructure sector is as large as US $ 500 billion. Within the infrastructure sector almost 50% of the capital outlay is estimated to be for the power sector, and rightly so because it is this most important input which can make or mar the outcome of the Eleventh Plan economic growth.

Fortunately, in view of several Policy initiatives, the developers and investors have become quite positive towards the power sector in last three to four years. A large number of projects have been taken up. Many of them are already under execution, many of them are in the pipeline and are awaiting certain statutory permissions and clearances, and in cases of many others, developers have been making preparations for project reports, land acquisition etc. In the last three years, what has been seen is the overwhelming response. Industrialists and businessmen engaged in almost every sector of economy - Steel, Fertiliser, Petrochemicals, Automobile, Cement, Real Estate etc. have become keenly interested in developing power projects. This time the interest is significantly different from the one we witnessed during early 90's. The developers are more serious and, given the required support from the Government for the inputs that only the Government agencies can provide, most of them, if not all of them, may take up - in fact they are doing - concrete project development and capacity addition programmes.

For about a year, all our Policy Planners kept emphasising that our economies are decoupled from the US economy and therefore the effect of slowdown may not affect Indian growth story. As a matter of fact, even the US Authorities were only admitting that it was just a slowdown and not a recession. It is only in last few weeks that there is a clear admission of the depth of problem when the whole world has seen three of the largest five Banks of the U.S.A. totally collapsing and the remaining ones also under serious financial crises. Even the bailout package of as large a size as 700 billion US $ has failed to make the market players feel anywhere near being satisfied and respond positively. Many of them have said that to bring the economy on track in the U.S.A. the bailout package will have to be many times more. After a few weeks of the required admission of the gravity of the situation in the U.S.A. resulting in the Government interventions, similar problems had to be treated in the European countries, which again were saying that effect on them would be less than severe. It is only couple of days back that it has been agreed that it is not just a slowdown but really a recession in the U.K. Bailout packages in European countries of the order of a few trillion dollars have been planned.

In the last few weeks, all the important political functionaries of the Government of India, including the Finance Minister and the Prime Minister, have stated that India cannot remain totally insulated from the impact of global slowdown. While we were talking in terms of 9% plus growth six months back, 8 to 9% growth three months back, we have now started talking in terms of growth rate of 7 to 7.5%. Considering the fact that most of the developed economies of the world are faced with much sharper declines in their growth rates, as low as in the range of 1 to 2%, also considering the gravity of the global recession which has now emerged as the strongest recession in last sixty years, even if we are able to maintain a growth of 7 to 7.5% it would be a highly creditable achievement.

India can do it. Many of us have held this view, and we carry conviction about it, that even if Indian economy is not decoupled from those of large and developed economies, even if it is not insulated totally from their impacts, it is a fact that our economic development is primarily dependent upon domestic consumptions and domestic infrastructural development. What India did not do, and perhaps could not do, in last two to three decades, like China could achieve, could be the most important propeller to develop our economies now, on a pattern that (a) promotes domestic consumption on a sustained basis, in next three to four decades and (b) take care of all those areas of infrastructure which we have failed to develop in last many years. These two aspects alone will create avenues and opportunities which will be good enough to provide the economic growth of the type that is being talked about, i.e. 7 to 8% in next one to two years when we would experience the impact of slowdown and than we get back to plus 9% growth when the slowdown effect gradually fades away and we also add to our growth with global linkages like exports etc.

Development of infrastructure - National Highways, State Highways, Rural Roads, Electricity, Ports, Railways etc. - on well structured programmes of medium to long term nature, in each of the sectors, along with targeted activities, will lead to creation of massive needs for Cement, Steel, Construction Materials, Plant and Machinery etc. which will lead to spur in all areas of economic activities, leading, in turn, to the projected growth. This is, however, easier said than done. It will require a well co-ordinated and orchestrated set of Schemes, Programmes, Government Policies, Incentives, Government Support including handholding by various agencies, to deliver the targeted Projects and Schemes. It will require proper prediction of likely loose ends and constraints, with required solutions for them. Quite often it has been seen that our attention on fine points of Policies and Programmes are more intense and serious but where we normally miss the wood for the trees is in the finer aspects of implementation strategy.

Taking power sector as an example - and this approach may be equally applicable to other sectors - let us see what really needs to be done so that the tempo and momentum of activities is not only maintained but is further pitched up. Even if we are able to pursue and ensure what is already on ground, and in the pipeline, we would have achieved what we wish to. We will cover Power Projects, Transmission Projects, Coal Mines Development, Rural Electrification Programmes, Augmentation and Modernisation of Sub-Transmission and Distribution Systems of Town and Cities, and commensurate Production Programmes of associated power equipment manufacturing and of materials like Cement and Steel.

Nearly, 60,000 MW capacity of power projects are in construction at various stages. Most of them are targeted to be commissioned during the current Plan. Following steps will be necessary for projects already under execution:

  1. We need to take all possible steps that any slowdown in delivery of equipment and supplies of other materials are avoided at all costs.

  2. A monitoring mechanism to see that any constraint to achieve this is appropriately addressed, will be necessary.

  3. While there are many other physical constraints which project developers and equipment suppliers are normally aware of. Such constraints need to be addressed by them.

  4. In the present context of impact of slowdown, a major problem that may be faced, and has started being faced, is in relation to regular and smooth flow of fund, so that each stakeholder in the supply chain is able to meet his target in time.

  5. This will require timely interventions by the concerned Government agencies. An exclusive Cell in the CEA/Ministry of Power could be set up. This should keep itself abreast of the emerging developments and be sensitive to taking appropriate remedial actions through interventions of Ministry of Power.

  6. Role of Power Finance Corporation and Rural Electrification Corporation will be very crucial in this regard. They together may interact, on a regular basis, with other financial institutions and banks and take steps to solve the liquidity problems of developers and other stakeholders in the supply chain. An arrangement, which was set up, by the Power Ministry in 2004, viz. Inter Institutional Group (IIG) consisting of Senior Representatives of Banks and financial institutions and Ministry of Power may be reactivated so that this task could be accomplished by this Group.

  7. For the projects already under execution, some feedback is available that timely release of funds by the lenders has started surfacing as a matter of concern. It may be recalled that in early 2007 when the Reporate was being increased and also the CRR (Capital Reserve Ratio) was enhanced, many of us did point out that effect of reducing liquidity in the system might create adverse impact on growth rate. The efforts of taming inflation by reducing liquidity in the system through instruments like Reporate increase and CRR increase have to be appropriately balanced with the needs for availability of larger amounts of funds in the system so that economic and industrial activities do not slowdown. It may be relevant to recall that in March 2004 the Reporate was 6% and CRR 4.5% and most of the economic parameters were in good shape. During the period 2007-08 and more so in 2008 major increases were effected, with adverse consequence on growth and not much positive impact on inflation. Fortunately, the realisation within RBI and the Government, in the last one month, has led to substantial changes that have been effected. If these reductions had been effected just six months back, perhaps the results would have been much more favourable. Within last one month the steps that have been taken include reduction in CRR from 9% to 6.5% (October 11, 2008), to 6% (October 25, 2008) and further to 5.5% announced on 1st November, 2008.

  8. The latest announcements by the RBI on 1st November, 2008 include the following:

  • Reporate cut by 50 basis points to 7.5%.

  • CRR lowered by 100 basis points to 5.5%.

  • SLR reduced by 1% to 24%.

  • Scheduled Banks to get special refinance facility upto 90 days.

  • Banks allowed to raise funds from RBI to provide liquidity support to NBFC's.

These measures are likely to lead to availability of additional funds to the extent of 1,60,000 Crores - Banks to get for onlending, Rs. 40,000 Crores on account of CRR cut and Rs. 40,000 Crores - Banks have options to sell Government securities in view of reduction in SLR.

  1. In order to ensure that smooth flow of fund is available for projects under execution some of the other steps that may be considered include providing funds from foreign exchange reserves, tapping the Provident Fund and Pension Accounts Fund and the long term funds available with Insurance Companies.

  2. While public sector companies may not have difficulty in providing for the equity portion of capital cost for these projects, a number of private sector companies may be experiencing difficulty in view of a different equity market now. It may be necessary that PFC, REC IDFC etc. open up their portfolios to consider such projects on merit and see that for want of flow of equity by promoters, good projects are not allowed to slowdown.

The above steps would go a long way in ensuring that the projects already under execution do not suffer delays. In addition, there is a reasonable pipeline of a number of projects which will not only boost demands for different types of equipment and materials but will contribute significantly towards the overall growth. Besides, these projects will also accelerate the pace of capacity addition in the later half of the Eleventh Plan and in the Twelfth Plan. Problems of these projects are somewhat different from the problems likely to be faced by projects already under execution, as mentioned above. Steps needed in respect of the projects in the pipeline are outlined below:

  1. In respect of coal based power projects alone, there is a long list of requests for over 30,000 MW capacity. Most of the developers are seriously pursuing these projects. They have already initiated actions for land acquisition, environmental studies, studies on transmission systems etc. Many of them are prepared to develop these projects even if long term Power Purchase Agreements are not finalised, because they see that there is an advantage in trading power in the market. Fuel linkage for these projects is emerging as a major constraint. In some cases, even water linkage is creating some uncertainties. Environmental clearances and permissions for use of forest land, in any case, have always been issues of concern for the developers. In order that these projects take off, the IIG Group of the Ministry of Power, as mentioned above, could provide most needed support and assistance.

  2. In the initial stage of six to eighteen months, the fund requirements for these projects could be comparatively small proportions of the total capital cost. Many of the promoters would be thinking in terms of entire equity contribution by them, while many others would need equity support even in the initial stage. Here again, such financial institutions which have portfolios for equity investments may consider getting into these projects so that they move forward. It needs to be appreciated that when the outside equity market (FII's and others) have become somewhat reserved and many of them have withdrawn or are withdrawing, it is only the domestic capital market which should come forward to support. These organisations, particularly the large ones, may be in a better position to tap equity funds even from external markets.

  3. As regards financial closure for these projects, the ground rules may need to be revisited, so that the exercise for loan negotiations proceeds rather than being discouraged right in the beginning. Conditions precedent for loan negotiations and for loan disbursements may need to be revisited in the light of the developments that we are faced with.

Government funded Schemes, such as APDR and Rural Electrification, should move fast and funds may be made available without delays. As it is, in both these Schemes, we lost about one and half years due to policy changes. These two Schemes also make their own contribution on growth rate in electrical manufacturing sector. Besides, both these programmes have major role in bringing about reform in the power sector.

The suggestions made may go a long way in mitigating the current problems in the power sector expansion programmes. Time is of essence. On the critical path of project management whatever months we lose, we lose forever and accordingly whatever months we gain we gain them in terms of getting these projects early on stream with all their consequential benefits. Similar approach for other sectors by concerned administrative Ministries and Departments will maintain the tempo infrastructure development, which, in turn, will lead to securing the type of economic growth rate, we are now aiming at, even during this slowdown period, as mentioned above. Good probability for such a growth exists if the actions are planned around domestic consumption and domestic infrastructural development as outlined in this paper.