Current Economic Statistics and Review For the Week Ended September 15

Post-independence, at the time of framing the Constitution, the subject of power development was placed in the concurrent list of the Indian Constitution as a joint responsibility of the states and the centre, empowering both to enact legislations in matters related to electricity. After the enactment of the Electricity Supply Act (ESA) of 1948, all state governments adopted the concept of vertically integrated units (VIU) for power utilities in the form of State Electricity Boards (SEBs).

In the First Five Year Plan (FYP), 19 per cent of the total plan outlay was earmarked for power development. Even though the power sector outlay steadily increased in absolute terms since then, its percentage share fell to 8.9 per cent in the Second FYP; it then rose in the subsequent plans to reach an all-time maximum of 20.1 per cent in the Sixth FYP, only to fall again in the Seventh (19 per cent) and Eighth (18.3 per cent). The share of outlay for the power sector in total plan outlay has fallen even further to 16 per cent in the current plan (Tenth FYP).

A vertically integrated structure of the electricity industry in independent India, laid down by the Electricity (Supply) Act of 1948, created State Electricity Boards (SEBs). For several decades since their establishment, the SEBs rendered yeoman service of expanding the electricity network across the country and extending power supply to earlier unconnected areas. The total installed capacity over four decades beginning 1957-58 to 1997-98 augmented at an average annual compound growth rate (ACGR) of 8.7 per cent from 3,223 megawatts (MW) to 89,090 MW in 1997-98. In the same period, actual generation increased at a rate of 9.45 per cent per annum from 11,369 million units (MU) in 1957-58 to 4,20,405 MU in 1997-98, and total sales of electricity increased at a rate of 9 per cent per annum from 9,345 MU to 2,93,479 MU. Out of the total installed capacity in 1997-98, 63.3 per cent was owned by the states, 30.7 per cent by the centre and 6 per cent was in the private sector.

Despite this seemingly impressive growth, there surfaced around the nineties innate inadequacies in the system[1] – deficient capacity, inability to meet growing energy and peak demand, spiralling transmission and distribution (T&D) losses, increasing tariff discrimination between user categories, etc. Over the years, the SEBs had not only become functionally incompetent but severely unsustainable financially, owing to their mismanagement and politicisation coupled with the economic inability to keep pace with technological developments. The poor financial and functional conditions of SEBs in the country have adversely affected power sector performance with bearings on the quantity as well as quality of power supplied in the country, on one hand, while on the other, have further crippled the already ailing state finances, jeopardising economic growth on the whole.

Though the State Electricity Boards (SEBs) were statutorily required to function as autonomous service-cum-commercial corporations, they became in effect agents of the governments to sub-serve the socio-economic policies of the state, and hence never felt the requirement to break even or to contribute to capacity expansion programmes. This unaccountability culture in turn led to gross inefficiency at all levels – technical, institutional and organisational, as well as financial.

The financial health of SEBs has been affected at every stage beginning at capacity creation and operation and maintenance till demand side factors that relate to tariff fixation and bill collection (Annexure 2). The situation has arisen out of the continuing, inherent non-viability in the pattern of operations of the SEBs. Several policy and institutional issues hampered the efficient functioning of SEBs in terms of technical performance, capital structure of SEBs, stipulated rate of return, tariff structure, etc (Table 1). For example, the policy decision of debt capital-based structure of SEBs causes a huge interest burden, thereby increasing cost of generation; or the 3 per cent rate of return (ROR) on capital base, stipulated since 1948, proves insufficient to generate the required resources for expansion, yet prevails till date and, worse still, the boards are yet unable to even earn this ROR (Table 2). Several factors that made fundamental business of the SEBs unviable (Table 3) and pushed them towards both insolvency and bankruptcy are listed:

(i) Given the use of the power sector as a political tool, respective state governments announced free power to various sections of consumers but were unable to provide full and timely cash reimbursements to the SEBs resulting in them facing continuous cash shortages, leading to default on their liabilities, particularly to CPSUs, banks and other creditors and a huge debt overhang for most SEBs.

(ii) As a result of free power and artificially suppressed tariffs, the cross subsidy available became inadequate to cover the full cost of subsidised supply. The ministry of power estimated the gap between revenue realisations and cost of supply to be as high as 110 paise/KWh, i.e. on an average a loss of 110 paise to the SEB for every unit of electricity sold (MoP 2002-03). (Table 4)

(iii) The power sector, characterised by vertically integrated, monolithic, government owned SEBs occupying monopoly positions in the entire business, suffered from lack of competition. Political leadership influences important decisions based on criteria other than prudent commercial and financial principles.

(iv) The patronizing policies of the state resulted in over employment, especially at the non-technical, administrative level. Overstaffing in SEBs resulted in poor accountability, low incentives for improvements and low productivity. Figures suggest gross overstaffing as much as about 9 employees per 1000 customers as against 3-5 employees in many middle income developing countries.

(v) Distribution stands out as the weakest link in the electricity sector in India; the official statistic of transmission and distribution (T&D) losses of 20-30 per cent, seem to be gross underestimates – with actual losses in some SEBs being well over 40 per cent and in some even above 50 per cent. (In 2004-05, the T&D losses for All-India were 32.5 per cent with wide disparities across regions and states, the north-eastern states being the worst performers and in other regions states like Orissa registering T&D losses as high as 57 per cent.) That is because SEBs dump their T&D losses under unmetered irrigation pump set (IPS) consumption. [The reason for unwillingness expressed by SEBs like those in Andhra Pradesh and Karnataka, to meter IPS consumption can be traced to this factor (Sant and Dixit, 1996)]. Further, a significant part of T&D losses labelled ‘non-technical’, are a euphemism for pilferage or forcible and illegal extraction of power, often carried out in collusion with the SEB staff or otherwise.

The errant functioning of the entire system was reflected in the rising, non sustainable overdues to CPSUs. The revenue realisation per unit of power produced has fallen much below the average cost of production and supply, resulting in all SEBs to run large current deficits, which, uncovered by budgetary subventions from the state government, surfaced as non-payment of CPSU dues as also defaults on other loans.

The declining financial viability of SEBs (Table 5a and 5b) made it difficult for them to borrow funds for investment purposes or to be able to provide credible power purchase agreements (PPAs) to private power producers. This not only led to delays in or inability for capacity additions in generation, transmission and distribution as well as upgradation of systems but also affected the performance of existing capacities. Further, non-payment by SEBs also constrains the ability of CPSUs to carry out expansion of capacity, and even threatened their financial health.

During the latter part of the 1990s, a dominant theme of the Indian economic policy discourse was power sector reforms which entailed setting up of independent regulatory commissions, unbundling of SEBs and eventual privatisation, especially in distribution. The Amendment of the Electricity (Supply) Act in 1991 was the first time when the private sector was allowed to be a generating company for the limited purpose of additional resource mobilisation in the power generation sector, in the wake of a serious financial crisis faced by the SEBs and the precarious position of central and state finances. Consequently a flood of hastily crafted fast track independent power producer (IPP) projects followed this amendment, but eventually the pace of the IPP programme slowed down when sovereign counter guarantees were pulled out and the reality of SEBs’ finances struck private producers. The developers found it difficult to access capital markets and lenders for financing their projects in view of the SEBs’ poor track record of meeting their payment obligations to their suppliers and creditors.

In 1998, the Central Regulatory Commission Bill of the union government put forth an ambitious project, inter alia dealing with issues of an independent regulatory commission, rationalisation of tariffs and private sector participation in distribution and SEBs restructuring that eventually at the time of enactment lost its flavour and a much less ambitious Act was passed, leaving the question of wide-ranging SEBs reforms to be dealt with by the state governments. Orissa was the pioneer state which enacted a comprehensive legislation for electricity sector reforms as early as in 1995 and later several other states, like Gujarat, Uttar Pradesh, Maharashtra, etc followed suit emulating Orissa’s model of reform, now popularly called the Orissa model (Annexure 3). However, the reform process was later slowed down and was nearly shelved in most states but as problems continued to mount the central government took fresh initiatives around 2000 which managed to push the reform process further.

In March 2001, a Chief Ministers’ Conference, viewing mounting dues of SEBs as a major impediment to overall power sector reforms, resolved to constitute an Expert Group to:

(a) recommend a scheme for one-time settlement of outstanding dues of the SEBs towards CPSUs as also the dues from CPSUs to SEBs[2] and

(b) recommend a programme for medium-term capital restructuring and reform of the SEBs, including the provision of Structural Adjustment Loans so as to enable them to tide over the present financial crisis, make them operationally viable and improve their credit rating.

The report submitted by the Expert Group, chaired by Montek Singh Ahluwalia, outlined a scheme for settlement of outstanding dues, linked to a mechanism that would ensure payment of current dues in the future. The recommendations of the Expert Group included a package of incentives and disincentives linked to commercial discipline and initiation of a process of reforms.

Achieving sound policies on distribution is widely understood to be the key constraint in the power sector. At the initiative of the ministry of power, almost all state governments have signed MoUs committing themselves to an agreed reform agenda under which they require to undertake distribution reforms in a time-bound manner, including setting up of a State Electricity Regulatory Commission (SERC), unbundling of state power utilities, metering of feeders and consumers, starting energy accounting and auditing, securitisation of outstanding dues of CPSUs, and promotion of grid discipline to improve both the quantity and quality of power supply. The MoUs were recommended to be made mandatory as a condition precedent, insofar as they related to the power sector, by the Expert Group to benefit from the one-time settlement scheme.

The process of restructuring of SEBs by unbundling generation, transmission and distribution activities into separate companies is already underway in many states. As of date, 24 States have constituted SERCs and 18 have issued tariff orders in the direction of rationalising the tariffs. A total of 13 States have unbundled/corporatised their power utilities, and 10 others are expected to replicate this shortly. Distribution has been privatised in Orissa and Delhi, and Uttar Pradesh has initiated the process by inviting Expressions of Interest for privatisation of distribution. Continued progress has also been reported on metering; at the feeder level metering has risen from 81 per cent of states in 2000 to 96 per cent in 2004 and similarly, the figure of 77.6 per cent of states metering all consumers in 2000 has risen to 87 per cent in 2004.

The Expert Group recommended a scheme for one-time settlement consisting of securitising the outstanding dues of SEBs to CPSUs and converting them into tax free state government bonds with a partial waiver. This was to be linked to commitments by SEBs for maintaining future current account dues, with associating penalties for non-compliance, and assured access to state governments’ funds for recovery beyond a point. The state governments were also expected to commit themselves to a programme of reform in the power sector with some defined milestones and associated penalties for non-performance, along with incentives for well performing states. The Group estimated that the amount to be securitised under this scheme would be about Rs.35,000 crore. The expeditious implementation of the scheme for one-time settlement was a necessary, though not sufficient, pre-requisite for the reform and restructuring of the power sector.

The scheme would help SEBs to concentrate on solving the formidable problem with regards to current deficit, that till unattended would not be financially viable for SEBs even after the one-time settlement. However, it would put them in a position where they could take corrective steps and reasonably expect to reach financial viability over a three to four year period, which would not be possible in the absence of a one-time settlement.

Considerable progress has been made in the settlement of dues payable by SEBs to Central Public Sector Undertakings (CPSUs) and the Railways through the one time settlement scheme. All state governments have signed the tripartite agreement envisaged under the scheme between the state government, Reserve Bank of India and the government of India. Of these, 27 States have issued bonds amounting to Rs 29,883 crore. The government of Delhi has securitised its outstanding dues by converting the dues into long-term advances of Rs 3,316 crore payable to the CPSUs concerned separately under bi-partite agreements, as they do not have the power to issue bonds (Economic Survey 2004-05).

Despite several shortfalls, the reform programme undertaken with regards to SEBs has accomplished certain objectives and a decisive turnaround has been achieved on some counts. The financial situation of SEBs has improved (Table 6) because old dues have been securitised and dealt with separately. Instead of most electricity boards being perennially bankrupt, at least 10 states have now become cash positive. This has been achieved because state governments have begun to pay the boards for the subsidies mandated by them. This direct payment, instead of indirect or non-transparent pay-back procedures, in itself is a welcome move, indicative of effective implementation of new laws on the issue. Additionally, threatened by denial of central funds in case of default, the boards have stopped defaulting on payments to power suppliers, creating a climate of greater assurance to private generators regarding payments on sale of power. This is a noteworthy development, which could prove supportive for increasing private sector participation in generation. The impact of SERCs, though limited, has also been a positive.

On the other hand, the state governments are facing the enormous challenge of making the new entities financially viable. They require massive external financial support both because of huge past liabilities as well as new investments for adding, renovating and modernising of generation, transmission and distribution capacities. Many of these companies would require investments as high as those required for setting up a new enterprise. The cost of turnaround of a sick SEB is huge. For example, the financial restructuring plan of Madhya Pradesh envisaged government support to the tune of Rs 10,000 crore and the costs of which have mounted further due to delay in government sanctions for the proposal.

The current reform strategy being pursued by SEBs in various states has been perceived by several critics as neither people friendly nor is it seen as likely to attract the much needed investments in the power sector, though they accept that the situation is worse in states where reforms are yet to be initiated. The argument in favour of unbundling was the pressing need for the creation of viable commercial entities that would lend themselves to efficiency improvements and privatisation. They point out that the restructuring based on the Orissa model ends with unbundling of the SEBs. Instead of competition in generation and supply as an engine for efficiency gains and tariff reduction, the model relies on an interconnected chain of monopolies with competition conspicuously absent. Thus, reforms have only tinkered with structure without incorporating and sound economies of regulation.

It has been argued that “..what matters really is the way decisions are taken.. no matter who makes the investment.. the clichéd opposition between public sector and privatisation needs to be refined..” [Ruet, Joel (2003)]. The case for privatisation takes as given the current inefficiencies and leakage of resources from the SEBs and does not factor in improvements that can contribute a great deal to investible resources. Yet, in the Indian context it is difficult to argue that what matters is not the ownership of assets but how decisions are made and implemented. The woes of the power sector largely or even primarily flow from the public ownership of SEBs. There has not been a single state in the country in which the SEB has been permitted to function with any degree of autonomy and independence for any length of time. Rare exceptions to this rule have been short-lived and more in the nature of aberrations. Therefore, the generally well accepted administrative reforms practised in other countries such as delegation of financial powers, creation of profit centres and strengthening of internal audit have not led to any significant success in India so far. On the contrary, they have at times been counter-productive since decision-making at the lower levels is much more prone to political pressures and ad hocism than at higher levels in the organisation as senior functionaries of SEBs are, at least in some cases, successful in resisting political pressures.

Administrative reforms can help up to a point and at the margin but the problems of the power sector are far too large and complex to be addressed only by such devices. But measures to turn around the situation are required on all fronts i.e. improvements in technical performance and managerial efficiency, including arrears collection and reduction in work force, tariff increases (Table 7a and 7b), especially agricultural tariff, etc. Additionally, capital investments necessary for upgrading and strengthening transmission and distribution systems, metering, automation, IT systems, etc in order to reduce unsustainably high T&D losses, are required, which will improve finances as well as enhance power supply at lower cost.

In India, the generation and transmission networks have been expanded in a planned manner using modern technology and software tools. Yet, the efficient operation and maintenance of the distribution system is hampered by non-availability of system topological information, current information of distribution components like distribution transformers and feeders, historical data, etc. Presently, worldwide research and development efforts are focused on issues related to more intelligent and cost effective automation in order to accomplish the objective of full-scale unbundling of power systems. SEBs in India ought to procure the new technologies and focus on research and development (R&D) in the following areas: power system communication protocol to achieve interoperability, communication system to make it commercially viable, intelligent remote terminal units (RTUs) and intelligent instrumentation systems.

It is important to stress that large scale privatisation is not possible without reform or delayed reform of the tariff structure. Instead of aspiring for private (domestic or foreign) capital investment in the power sector, the correct approach would involve identifying the present constraints that prevent the SEBs from generating adequate resources and in relaxing these, rather than attempting privatisation with these constraints in place. Secondly, the restructuring of SEBs can hardly be addressed without clarity on the role of the regulator and the strategy for regulation. Unfortunately this has not been actually realised by the central government. Thus, the role of SERCs is hardly clear for the state governments to go ahead with particular schemes including privatisation for restructuring.

As discussed above, SEBs developed inefficiencies and have been unable to meet the growing economy’s incessant demands of cheap, reliable and quality power. Even today, in many parts of the country electricity is supplied for less than 8 hours a day. The strength of any global economy is attributed to the existence of a flourishing infrastructure, power being one of the main constituents of infrastructure. In the foreseeable future, India’s GDP is expected to grow at a rate of 8-10 per cent; to sustain such an economic growth rate, the power sector will have to wriggle-out from the existing shortage conditions. For this, India would require an installed capacity of 350,000 MW by 2025, to meet its projected per capita consumption of 2000 MU by 2025 from the existing 578 units.

All this will have to be attained by adopting proper management systems that lay emphasis on efficiency, accountability and service to customers. The time at our disposal is limited, the country cannot afford to debate about utility of private investments; instead we should formulate such governance standards that encourage private investments. The government has to play the lead role of a facilitator to attract private investments. All the member constituents like the government, the regulatory bodies, various institution and private investors will have to coalesce in order to deliver cheap, reliable and quality power to consumers.

Das, Anjana and Pariekh, Jyoti (2000): ‘Making Maharashtra State Electricity Board Commercially Viable’, Economic and Political Weekly, Vol XXXV No 14 (April 1)

Dubash, Navroz K and Rajan, Sudhir Chella (2001): ‘Power Politics: Process of Power Sectro Reform in India’, Economic and Political Weekly, Vol XXXVI No 35 (September 1)

Editorial (2003): ‘Power Reform and Politics’, Economic and Political Weekly, Vol XXXVIII No 21 (May 24, 2003)

Godbole, Madhav (2002): ‘Power Sector Reforms: If Wishes Were Horses’, Economic and Political Weekly, Vol XXXVII No 7 (February 16)

Godbole, Madhav (2003): ‘Power Sector Woes: No Easy Answers’, Economic and Political Weekly, Vol XXXVIII No 36 (September 6)

Government of India (2002): ‘Annual Report 2001-02 on The Working of State Electricity Boards and Electricity Departments’, Planning Commission - Power and Energy Division

Government of India (May 2001): ‘Settlement of SEB Dues’, Planning Commission, Expert Group

Gurtoo, Anjula and Pandey, Rahul (2001): ‘Power Sector in Uttar Pradesh: Past Problems and Initail Phase of Reforms’, Economic and Political Weekly, Vol XXXVI No 31 (August 4)

Haldea, Gajendra (2001): ‘Wither Electricity Reforms’, Economic and Political Weekly, Vol XXXVI No 17 (April 28)

Kannan, K P and Pillai, N Vijayamohanan (November 2000): ‘Plight of the Power Sector in India: SEBs and their Saga of Inefficiency’, Working Paper No 308, Centre for Development Studies

Mathur, Dhiraj (2004): ‘Power Sector: More Sound than Light’, Economic and Political Weekly, Vol XXXIX No 34 (August 21)

Morris, Sebastian (2000): ‘Regulatory Strategy and Restructuring: Model for Gujarat Power Sector’, Economic and Political Weekly, Vol XXXV No 23 (June 3)

Purkayastha, Prabir (2001): ‘Power Sector Policies and New Electricity Bill’, Economic and Political Weekly, Vol XXXVI No 25 (June 23)

Sankar, T L (2003): ‘Power Sector: Rise, Fall and reform’, Economic and Political Weekly, Vol XXXVIII Nos 12 and 13 (March 22 and March 30)

Upadhyay, Anil K (2000): ‘Power Sector Reforms: Indian Experience and Global Trends’, Economic and Political Weekly, Vol XXXV No 12 (March 18)

(* This note has been prepared by Ms. Nilopa Shah under the guidance of Mr. Bipin Deokar)

[1] The nineties was a decade of reforms for the electricity supply industry the world over, which was till then characterised by publicly owned (except US), vertically integrated monopolies. Yet the driving forces behind the reform initiatives were varied in nature. The advanced countries were affected due to strong ideological commitments to neo-liberal economic ideas which associated economic freedom with political freedom; in the transitional economies of the former communist countries, following the collapse of the Soviet Bloc in 1989, there was a wide spread movement to restructure large, state-owned sectors, including electricity. In developing economies, like India, the driving forces underlying reforms were more real in nature i.e. severe power shortages and the need for private investment in the wake of acute fiscal crisis.

[2] As on February 28, 2001, the SEBs owed about Rs. 41,473 crore to various CPSUs and the Railways, consisting of Rs. 25,727 crore of principal amount and Rs. 15,746 crore by way of surcharge/interest on delayed payments i.e. over one third of the total dues. (Figures provided to the Group by the ministry of power.)

The central government has made it clear that it has no plans to cancel the Australian wheat shipments delayed by due to different interpretations of the contract term ‘zero tolerance’ weed seeds, pesticides and other material. About a lakh tonne of a half-million-tonne tender have arrived in the country and the remaining has been held up due to stringent quality specifications.

The State Trading Corporation (STC) has floated third tender for import of 3 million tonnes of wheat on May 18, 2006. The tender has got moderate response with only 8 companies have bid for 2.6 million tonnes by submitting bid both on a free-on-board and cost-and-freight basis. Australia’s AWB Ltd is the highest bidder offering to purchase the maximum quantity of 1.22 million tonnes at $210 a tonne c.i.f. and $175 f.o.b. The central government has designated 5 ports for the delivery of this consignment, which could involve 100 shipments and would be completed between July – October 2006 though the place of delivery has not been specified in the tender.

The government has decided not to give any further relaxation in the tender elicited for importing 3 million tonnes of wheat since the norms in the import tender, floated on May 08, 2006, have already been much more lenient than the first tender to import 5 lakh tonnes. These norms consisted of reduction in the performance bank guarantee to be submitted by bidders to 5 per cent from the earlier 10 per cent, acceptance of wheat quality certificates from accredited agencies other than government agencies, non-requirement for imported wheat to X-ray examination to detect hidden weevil infestation.

As per the forecast of India Meteorological Department (IMD), southwest monsoon 2006 is expected to arrive in Kerala on May 30, 2006 with a probable difference of three days on either side. National Centre for Medium Range Weather Forecasting (NCMRWF) has also predicted the same time period for the onset of monsoon in Kerala, which is 2 days ahead of its normal schedule.

The centre has removed a cess on agricultural and marine products to boost their exports by making them more competitive in the international markets. The agricultural and marine products together have accounted for 10 per cent of the country's exports at around $10 billion in 2005-06. The withdrawal of the cess would not have any revenue implications as the cess on agriculture and marine products together amounted to only Rs 110 crore annually.

The government of Tamil Nadu has decided to increase the eggs to be served at the state’s noon mill centres fro one to two a week from July 2006. The decision, apart from increasing off take, is expected to impact the open market price for shell eggs and this might result in average price going up by 5 to 6 per cent, thereby boosting the poultry trade in the state.

Standard Chartered Bank has plans to provide finances to companies involved in agricultural processing in a small way during 2006-07 and to scale it up in the coming years. The company had conducted a case study on apple industry and is expecting to initiate funding to agriculture processes and their supply chain management.

According to the Rubber Board estimates, natural rubber exports have posted a robust growth of 1,193.75 per cent during April 01 - May 12, 2006, with the country exporting 6,003 tonnes in the current financial year against 464 tonnes in the corresponding period last year on account of disparity in prices between India and other producing countries. On the contrary, imports have tumbled down by 100 per cent during the same period to 4,174 tonnes as against 8,237 tonnes in 2005-06. According to final estimates of the Rubber Board, while the total rubber imports have been 44,672 tonnes, total exports have stood at 73,830 tonnes in 2005-06.

A report by US Agriculture Department (USDA) has estimated Indian cotton production at 24 million bales in marketing year 2006-07 owing to higher planting. The report has pegged cotton consumption at 22.2 million bales on account of strong demand for textiles and expected low cotton prices, While cotton exports has been projected at 3.5 million bales, the imports are expected to be around half a million bales due to sufficient domestic supply.

INDUSTRY

The excise cut in the current budget for 2006-07 from 24 per cent to 16 per cent has failed to give much of a boost to the sales of small cars; sales of these cars have grown by 11.9 per cent in 2005-06, compared with about 8 per cent growth in sales for all passenger cars. This rise in the growth rate pales in comparison to the impact of the last excise cut on all cars from 32 per cent to 24 per cent when their sales jumped by 17 per cent in 2004-05 and for the first time the Indian car market clocked a million in annual sales. Industry watchers have commented that the reduction in the prices of small cars after the excise cut has been nullified by the rise in interest rates to the current 13 per cent from 10.5 per cent three months ago. As 80 per cent of the cars sold in the country are financed by lending companies, the rising equated monthly instalments do have an adverse impact. Secondly, the key states of Maharashtra, Gujarat and Rajasthan have raised the road tax by 1-3 percentage points.

The National Pharmaceuticals Pricing Authority (NPPA) under the new pharma policy scheme plans to call for cost-data from the top five formulators of each bulk drug and use it to set the price ceiling. The policy is likely to put the entire national list of essential medicines (NLEM) — comprising 354 bulk drugs — under the authority’s cost-based price control and would exert unprecedented pressure on the pharma watchdog’s infrastructure and manpower. At present, the NPPA conducts cost studies and sets ceilings for only 74 bulk drugs. Bulk drugs are basic ingredients which go into the making of formulations that are in turn consumed in the form of syrups, tablets, capsules etc.

INFRASTRUCTURE

Learning lessons from the Dabhol episode, the power ministry has announced that the Centre will not give any counter-guarantee for the upcoming ultra mega power projects or other ventures in the power generation sector. On the politically sensitive issue of free power to farmers, Mr Shinde has said that the Centre is against such freebies; though has asserted that if states want to implement such populist schemes, they will have to make allocation for the same in their annual budgets.

Petroleum and Petroleum Products

The Indian strategic oil reserve, a project conceived in 1998 and formally announced in 2003, has been facing hurdles on account of non-availability of land. Three locations had been earmarked initially for building storage for 5 million metric tonnes per annum (MMPTA) of oil at a cost of around Rs 11,200 crore over nine years. It has been decided to set up the reserve in Visakhapatnam, Mangalore and Udipi, storing 1.5 MMTPA, 1 MMTPA and 2.5 MMTPA, respectively, at each site. The process for acquiring 87 acres at the Mangalore site, considered the most suitable had begun around two years ago. However, the plan is stuck as this piece of land forms part of the 550 acres under acquisition for the ONGC-Mangalore Refinery and Petrochemicals Ltd (MRPL) expansion plan. The petroleum ministry is now examining the possibility of locating the facility within the proposed special economic zone being planned by ONGC-MRPL at Mangalore and Engineers India Ltd is working on submitting a detailed report on the feasibility of the strategy.

Import duties and domestic levies on liquefied natural gas are set to be cut so as to reduce power shortages and boost generation. While import duty is to be reduced to nil from the present 5 per cent, there is also a proposal to accord “declared goods” status to natural gas, which will result in states levying an uniform 4 per cent duty on gas. At present, states levy an average duty of between 5 to 15 per cent on it. This move will benefit Ratnagiri Gas and Power Ltd’s Dabhol project.

The government plans to upgrade a total of 225 power plants, both thermal and hydroelectric, at an estimated cost of Rs 12,404.062 crore. If the renovation and modernisation (R&M) scheme becomes successful, it will help generate an additional 12,263.31 MW in the coming years. The minister stated that 106 old and 57 comparatively new thermal power plants have been identified for the life extension (LE) scheme and the renovation and modernisation (R&M) works, respectively. The highest generation is estimated to be yielded from six Chandrapur (Jharkhand) DVC units, which add 780 mw additional generation capacity. The highest expenses will be incurred for Obra units (1-13) in Uttar Pradesh with an expenditure of Rs 1,400 crore and expected to generate an additional 210 MW. By investing heavily on renovation and modernisation of old power plants, the government is trying to achieve 34,024 MW generation target in the Tenth Five Year Plan. The government is aiming to add 62,000 mw in the Eleventh Five Year Plan, which can be further increased depending on the availability of gas at the right time.

The World Bank may take up coal-based power generation plants totalling to around 1,000 MW from amongst the plants identified by the Central Electricity Authority for retrofitting, a process that helps a power generation plant improve its fuel and energy efficiency. The Bank has firmed up plans to support a pilot programme and look for a global environment facility (GEF) grant of between $30 million to $60 million and also plans to supplement the grant with a loan of $150 million from the International Bank for Reconstruction and Development at around 4 per cent blended rate of interest.

The Coal Mines (Nationalisation) Amendment Bill to allow unrestricted private entry into coal mining, has been delayed since 2000 as the government is finding it difficult to push it through, given the staunch opposition from the Left parties. Hence, the government is, instead, moving towards using the captive mining route to increase private sector participation in coal mining. While the government took a decade since 1993 to allot 49 blocks, nearly the same number of blocks have been given for captive use in just two years and since May 2004, another 48 blocks have been allotted. Of the 97 blocks with 18 billion tonne reserves, more than half lie with private sector i.e. around 56 blocks with 7 billion tonne reserves have gone to the private sector while the rest have gone to central and state public sector units. The coal ministry’s stand comes at a time when it is gearing for fresh allotments; it has received 700 applications for the allotment of 20 coal blocks and 8 lignite blocks for captive mining. For the next phase of allotments, 51 new coal blocks with reserves of 9 billion tonne have been identified.

Cement manufacturers have agreed to cut prices by 5 per cent on all supplies to government projects and undertakings, faced with threats by the ministry of commerce, including a ban on exports. The cement manufacturers have assured the government that they would ensure adequate supplies to retailers in order to prevent any possible shortage and price increases and would also monitor supplies to retailers to ensure that there is no profiteering. The cement manufacturers association has commented that they would make new investments to enhance production capacity by 30-35 million tonnes over the next few years. The minister has added that the price cut on supplies made to the government would include supplies to central power, roads and highway projects. While there has been an increase of Rs 41 in the average price per bag since December 2005, the increase in Mumbai had been Rs 71, in Pune Rs 63, in Goa Rs 79, in Lucknow Rs 48 and in Delhi Rs 45.

The government is likely to allow foreign airlines, which currently cannot take equity in Indian carriers, to invest in Indian domestic air carriers in the forthcoming civil aviation policy. But the government may choose to limit the voting rights of foreign carriers holding equity in Indian airlines. It is also likely to raise the ceiling on foreign investment to considerably more than the existing cap of 49 per cent to which it had been raised last year from 40 in an effort to boost investments. however, that has not resulted in any inflow of foreign investment as investors see the present conditions as very stiff in terms of the structure of the board of a company and key management positions which are likely to continue. The proposed policy will also raise the entry barriers for new airlines, by upping the minimum equity cap to Rs 50 crore from the present Rs 30 crore. But the minimum number of aircraft that a carrier needs to operate in the domestic sector will remain at the present level of 5 aircrafts. Civil aviation ministry sources has said the policy had been forwarded to the Cabinet for its consideration and is being circulated amongst various ministries for their comments.

INFLATION

The annual point-to-point inflation rate based on wholesale price index (WPI) has marginally gone up to 3.96 per cent for the week ended May 6, 2006 from 3.59 per cent during the previous week. The inflation rate was at 5.67 per cent in the corresponding week last year.

The WPI in the week under review has increased by 0.4 per cent to 199.7 from 199 in the previous week (Base: 1993-94=100). The index of primary articles’ group (weight 22.02 per cent) has risen by 0.2 per cent to 195.8 from the previous week’s level of 195.4, mainly due to an increase in the price index of food and non-food articles by 0.2 per cent each. The index of ‘food articles’ has gone up to 198.6 from 198.2 in the previous week, mainly due to the higher prices of masur, bajra, jowar, barley, fruits and vegetables, gram and milk. The index of non-food articles has gone up to 177 from the previous week’s level of 176.6, due to an increase in the prices of soyabean, sunflower and copra. The index of ‘fuel, power, light and lubricants’ group (weight 14.23 per cent) has gone up considerably by 0.9 per cent to 319.7 from the previous weeks’ level of 316.8, mainly due to the higher prices of lubricants, aviation turbine fuels, naphtha, furnace oil and bitumen. Similarly, the index of ‘manufactured products’ group constituting the maximum of 63.7 per cent of total weight, has also gone up by 0.2 per cent to 174.3 from 173.9 in the previous week, mainly due to an increase in the prices of food products, textiles, paper and paper products and base metals.

The latest final index of WPI for the week ended March 11, 2006 has been revised downwards; as a result both, the absolute index and the implied inflation rate stood at 196.6 and 3.80 per cent as against their provisional levels of 197.5 and 4.28 per cent, respectively.

BANKING

In order to ensure transparency in banking services charges, the Reserve Bank of India (RBI) has asked banks to display and update, on their website the details of various service charges. RBI’s move is in response to the representations from the public about the unreasonable and non-transparent service charges being levied by banks, which indicates that the existing institutional mechanism in this regard is not adequate as mentioned in the annual policy statement 2006-07. Furthermore, the RBI has asked the banks to furnish information on service charges on various facilities such as no-frills savings bank account, remittance services through own or both or other banks, forex transactions, ATM facilities and credit debit card services. The central bank has asked to display the charges relating to above-mentioned services at offices/branches of respective banks. Also, the RBI has told all banks to provide the details of service charges presently applicable before May 31, 2006, which would enable the regulator to upload the information on the RBI website.

The RBI has permitted regional rural banks (RRBs) to undertake marketing of units of Mutual Funds, as agents. The banks have been asked not to acquire such units of Mutual Fund from the secondary market or buy back units of Mutual Funds (MF) from their customers. The bank holding custody of MF units on behalf of their customers should ensure that its own investment and investments belonging to their customers are kept distinct from each other.

The RBI has reinstated that the rate of interest on delayed remittances and double/excess reimbursement remains unchanged at 8 per cent.

FINANCIAL MARKET

Rathi Udyog Limited has tapped the market with its public offer, on May19, via 100 per cent book-building process with a price band of Rs 50 to Rs 55 per equity share; the issue closes on May 25.

Unity Infraprojects Limited has tapped the market on May 19 with its public offer of 3.4 lakh equity shares with a price band of Rs 651 to Rs 732. The issue closes on May 24.

Prime Focus will be tapping the market on May 25 with its public offer via 100 per cent book-building process with a price band of Rs 450 to Rs 500 per equity share; the issue closes on May 31.

Deccan Aviation Limited tapped the market on May 18, with its public offer of 24.5 lakh equity share in a price band of Rs 150 to Rs 175 per equity share; the issue closes on May 23.

Secondary Market

The market turned bearish as it witnessed the highest ever fall in its history shredding off all its gains in the past couple of months amidst extremely volatility on account of the global meltdown of metal prices, fear of further interest rate hikes by the Fed, possible change in the taxation laws on sale of shares for FIIs and increase in the margin call, which triggered a sharp fall in the bourses. For the week ended May 19, the sensex plunged tanked by a stunning 1346.50 points or 11 per cent to settle at 10938.61 and nifty dropped by 403.15 points or 11 per cent to close at 3246.90. Amongst the sectoral indices, the biggest loser was BSE METAL index with a decline of whopping 21.76 per cent, followed by BSE CG index at 13.26 per cent and BSE CD at 12.89 per cent.

The impending US Fed rate hike in June, mis-interpretation of the draft circular of CBDT with respect to FIIs and Lefts parties’ demand for re-introduction of long-term capital gain tax were reasons that prompted the FIIs to remain net sellers in the equity market. They were net sellers to the extent of Rs 2477 crore with purchases worth Rs 9956 crore and sales of Rs 12433 crore. Meanwhile, the mutual funds provided support to the market, as they remained net buyers in the equity market to the tune of Rs 2933 crore with purchases worth Rs 5609 crore and sales of Rs 2677 crore.

During the week the total turnover of the NSE’s F&O segment has increased to 202347 crore with a daily average turnover of Rs 40469 crore. The turnover in the stock futures instruments have declined to Rs 97229 crore from Rs 106300 crore in the previous week, while the turnover in index future instruments have increased to Rs 78782 crore from Rs 44129 crore in the previous week. Meanwhile, the open interest in the futures market has declined from Rs 44000 crore on May 10 to Rs 31000 crore on May 19.

Under regular auction, RBI has mopped up Rs 2519.20 crore and Rs 2203 crore through 91-day treasury bill and 182-day treasury bill, respectively. The cut-off yields for 91-day and 182-day treasury bill were 5.6539 per cent and 6.0960 per cent, respectively.

RBI has announced the sale of new 15-year government paper, on May 23,for a notified amount of Rs 5,000 crore through yield based auction using uniform price method.

Meanwhile, RBI has also fixed the rate of interest on the floating rate bonds, 2006 applicable for the half year May 22, 2006 to November 21, 2006 at 6.30 per cent. At the same time RBI has also fixed the rate of interest on the floating rate bond, 2014 applicable for half year May 20, 2006 to May 19,2006 to 6.20 per cent.

During the week, the call rates have traded flat around the reverse repo rate to close at 5.5-5.60 per cent on account sustained RBI intervention in the forex market, which has resulted into surplus liquidity in the market. The daily average outstanding amounts in the LAF (reverse repo) operations conducted during the week were Rs 60,900 crore vis-à-vis Rs 20,704 crore and Rs 12,074 crore for CBLO and call market, respectively. However, the gilts trading remained erratic throughout the week as the volatility in the US markets and global oil prices induced fears of a rate hike by the RBI in the near future. The weighted average YTM of 8.07 per cent 2017 paper has risen to 7.6714 per cent on May 19 as compared to 7.5902 per cent on May 12.

India Infrastructure Finance Company Limited would be commencing its Rs 10,000 crore fund raising programme through bonds and loans soon. The company will raise Rs 1500 to Rs 1700 in its first phase in June and the resources would be invested in sectors like power, port, road projects, and special economic zones.

The rupee continued its depreciating trend this week yet again as the currency lost almost 50 paise to end the week at Rs 45.55 per dollar. A sharp fall in the domestic stock market and a broad sell-off in other emerging market currencies weighed down the rupee movement. The trend continued throughout the week as the domestic stocks continued their downward drop and the Asian economies extended their losses. However, intervention by RBI, which bought dollars through state run banks, helped to curb the rupee’s fall as it ended the week at Rs 45.55 per dollar after witnessing a high of Rs 45.64 earlier in the week. Meanwhile, in the forward premia market, the premia has eased but remained volatile throughout the week as it tracked the spot rupee movement. The six-month annualised forward premia has eased to 1.04 per cent on May 19 as against 1.11 per cent on May 12.

During the week under review, in the commodity futures market, the rubber prices have traded strongly above the 10,000 levels due to spiraling spot prices on account of acute short supply in the spot market. Meanwhile, the spices futures showed mixed trend with the pepper futures trading weak, while jeera and cardamom has gained heavily due to healthy spot markets trends and speculative buying. During the week, pulses showed a weak performance before ending the week with a rally mainly due to technical recovery rather than fundamental support.

On May 18, Joint Asian Derivatives Exchange (JADE), a joint venture between the Chicago Board of Trade and Singapore Exchange has announced that pending approval from the authorities, its first Asian based commodity derivatives product to trade on the all electronic Exchange will be a natural rubber futures contract. The rubber contract will be based on a natural rubber grade called Technically Specified Rubber 20 (TSR 20) and is on target to launch in the third quarter of 2006.

CREDIT RATING

Icra has assigned ‘LA-‘ rating to the Rs 1,000 million optionally convertible debenture programme of L.G.Balakrishnan and Bros. Limited (LGB). The assigned rating reflects LGB’s dominant market position in the automotive chains industry, its well established and diversified client base across automotive segments and its improving liquidity profile following replacement of short-term debt with longer tenure instrument currently being rated.

Icra has an ‘A1+’ rating to the Rs 20 billion (enhanced from Rs 10 billion) certificate of deposit programme of Union Bank of India. The assigned rating takes into account the bank’s improving core operating profitability, its satisfactory capitalisation and liquidity.

Icra has assigned ‘LAA’ rating to the proposed Rs 2 billion perpetual bonds of Indian Overseas Bank. The assigned rating takes into account the consistent growth maintained in credit over the past several years, the improvement achieved in its asset quality and the bank’s improving core profitability.

Care has assigned ‘BBB+’ rating to the proposed fully convertible debentures for a limit of Rs 3.97 crore of IKF Finance Limited and the agency has also reaffirmed the ‘BBB+’ rating of the outstanding non-convertible debenture of IKF for amount of Rs 3.5 crore. The assigned rating factors in the promoter’s track record in financial services, strong recovery system, zero non-performing asset level and good capitalisation level of IKF.

Care has retained the credit rating of Maharashtra State Electricity Transmission Company bond issue (Series VII) at ‘BBB (SO)’ for an outstanding amount of Rs 84.54 crore. However, the rating continues to be on ‘credit watch’ with developing implications on account of the unresolved issues pertaining to the unbundling of the erstwhile MSEB. The rating draws strength from the irrevocable and unconditional guarantee for debt servicing by the government of Maharashtra.

Care has reaffirmed the ‘A+’ rating assigned to the existing Tier-II bonds of Dena Bank. The rating draws strength from the majority ownership of the bank by the government of India, stable retail deposit base and large branch network with good presence in Western India.

Care has reaffirmed the AAA (In) rating to the claims paying ability of General Insurance Corporation of India. The rating factors in the GIC’s status in Indian insurance industry as the national reinsurer, its dominant market share in the Indian insurance market, strong solvency position, low operating leverage, adequate liquidity and good profitability.

CORPORATE SECTOR

Lupin Limited has signed a licensing agreement with ItalFarmaco, an Italian drug company, to market ItalFarmaco’s cardiovascular critical care product ‘Enoxaparin Sodium Injection’ in pre-filled syringes under the Lupenoz brand in India.

Engineering and construction major Larsen and Toubro has ventured into dredging business by acquiring majority shares in International Seaport Dredging, promoted by Belgian multinational, Dredging International NV, for an undisclosed amount.

Kamat Hotels has registered a 52 per cent growth in net sales at Rs 82 crore for the year ended March 2006 and net profit has surged by 286 per cent at Rs 15.8 crore over the same period a year ago.

Hikal Limited, a pharma and agrochemical bulk outsourcing company, has posted 6.43 per cent rise in net sales to Rs 57.9 crore for the quarter ended March 2006 and net profit has increased by 8.7 per cent at Rs 12.5 crore over the corresponding quarter previous year.

Havell's India Limited has reported a 67 per cent growth in gross sales to Rs 1,115 crore in the financial year ended March 2006. The company’s net profit has surged by 107 per cent at Rs 63.21 crore over a year ago.

Unichem Laboratories has posted a 43.3 per cent growth in net sales at Rs 105.8 crore for the fourth quarter ended March 2006 and net profit has galloped by 101 per cent at Rs 13.54 crore compared over the corresponding period in the previous year.

Maharashtra Scooters has reported net sales of Rs 6.44 crore for the quarter ended March 2006. The net sales for the previous corresponding period have remained the same. Its net profit has reported a growth of 69.13 per cent at Rs 4.11 crore over the same period previous year.

Bajaj Auto, the country’s second largest motorcycle maker after Hero Honda, has reported sound financial performance for 2005-06. Net sales have grown by 28 per cent to Rs 8,106 crore as against 2004-05 and net profit has surged by 54 per cent to Rs 1,123 crore. During 2005-06, the company has sold 19.12 lakh units of motorcycles, an increase of 32 per cent from 2004-05. The company’s market share in the motorcycle segment has improved to 31 per cent in 2005-06 from 28 per cent in 2004-05. The company has exported 2.5 lakh units of vehicles during 2005-06, a growth of 27 per cent from the previous year.

Tata Motors, the country's largest truck maker, has reported a growth of 29 per cent to Rs 6,882 crore in its net sales during the quarter ended March 2006 and an 18 per cent rise in its net profit at Rs 458 crore over the same period previous year. During 2005-06, Tata Motors net sales have improved by 18 per cent to Rs 20,602 crore and net profit has augmented by 24 per cent to Rs 1,528 crore over 2004-05. Tata Motors, India's third-biggest carmaker after Maruti Udyog and South Korea's Hyundai Motor Company, has sold 14.93 lakh units of vehicles during 2005-06, a growth of 8.4 per cent over the previous year. For the quarter ended March 2006, Tata Motors' market share in the medium and heavy commercial segment has climbed up to 62.2 per cent from 61.60 per cent. In the light commercial vehicle segment, its market share has increased to 65.4 per cent from 51.8 per cent in 2004-05.

Deepak Fertilisers and Petrochemicals Corporation has posted a 17.56 per cent increase in net sales at Rs 170.16 crore for January-March 2006. However, the company’s net profit has declined by 3.2 per cent at Rs 26.83 crore over the corresponding quarter previous year.

India's largest private steel company Tata Steel has reported a 7 per cent increase in net sales at Rs 4,128 crore in the fourth quarter ended March 2006. However, lower steel prices and higher input costs have pulled down its net profit by 13.8 per cent to Rs 783 crore in from Rs 908 crore in the corresponding period previous year. The company's annual net sales have gone up by 4.4 per cent at Rs 15,139 crore over the corresponding period a year ago and net profit has risen marginally by 1 per cent at Rs 3,506 crore for the financial year ended March 2006.

LABOUR

The Prime Minister’s Office (PMO) has proposed the criteria of creation of 10,000 jobs for setting up IT Special Economic Zones (SEZs) in mega cities like Delhi, Mumbai etc. and a minimum built-up area of 1 lakh sq ft. The proposal will free IT SEZs from the existing minimum area criterion of 10 hectares. In case of Tier two cities, the government has prescribed a minimum generation of 5000 jobs and a built-up area of 5 lakh sq ft. In the case of smaller towns, the criteria of a minimum employment generation and built-up area will be 2500 jobs and 2,50,000 sq ft, respectively. Thus, essentially, all new IT SEZs will have to create their minimum quota of jobs before they start enjoying tax benefits available under the SEZ package. The minimum job generation criterion will make sure that corporate sector does not divert their existing business into SEZs.

The final report drafted by the National Commission for Enterprises in the Unorgansied Sector (NCEUS) for providing social security to unorganised sector workers has been submitted to the Prime Minister. The bill to provide social security would include health benefits, life insurance and provident fund or old age pension for the country’s 30 crore unorganised workers. The social security bill for this purpose would cost Rs 25,401 to the exchequer over the next five years and the funds would be generated through a social security tax or cess. The features of the scheme would include:

All the informal workers will be provided a social security cover irrespective of their ability to pay for their own cover. These include marginal and small farmers and non-agricultural informal workers whose monthly income is less than Rs 6500. The number of such workers has been estimated to be close to 30 crore in 2005-06.

Bharat Sanchar Nigam Ltd. (BSNL) has reduced its intra-circle call tariff for landline subscribers by 25 per cent to Rs 1.20 per minute from Rs 1.60 a minute for calls made to other networks. The reduction in local tariff follows the rationalisation of local calls from BSNL landline phones (within a circle). Local calls to fixed lines both for own and other networks will be charged at a pulse rate of 180 seconds as against 45 seconds for other networks. Making calls of 180 seconds instead of 45 seconds has reduced the tariff for other fixed line networks within 0-50 kilometre. The pulse rate for more intra-circle calls from BSNL landline phones to other cellular, WLL and unified licence networks have been increased to 60 seconds from 45 seconds, which is at par with state-run BSNL’s landline phones to its own cellular networks.

*These statistics and the accompanying review are a product arising from the work undertaken under the joint ICICI research centre.org-EPWRF Data Base Project.