Embed Size (px)
Citation preview
6 September 2011
Nalin Bhatt ([email protected]); +91 22 3982 5429 / Dipankar Mitra ([email protected]) +91 22 3982 5405
PolicyMakerthe
Insights from bureaucrats
Satyam Agarwal ([email protected]); +91 22 3982 5410
Delhi Drive: Core sectors in action modeGovernment seems committed to 9%+ GDP growth in 12th Plan
Recently, we visited Delhi and interacted with several key policy makers - from Union
Minister of Coal to Joint Secretaries in the ministries of coal, mines, power, and also a
member of the Planning Commission. Based on these interactions, we believe the
authorities are committed to (1) set right the development framework for core sectors
like coal, mines, power and infrastructure, which are integral to India's socio-economic
development, and (2) achieve the targeted 9%+ GDP growth in the 12th Plan.
Delhi
Mr B K ChaturvediMember
Planning Commission
Mr G SrinivasJoint Secretary
Ministry of Mines
Mr Rakesh JainJoint Secy. & Fin. Advisor
Ministry of Power
Mr SriprakashJaiswal
Minister of Coal
Mr Alok PertiJoint SecretaryMinistry of Coal
Mr N C JhaChairmanCoal India
DelhiDriveDelhiDrive
6 September 2011 I 2
PolicyMakerthe
Delhi Drive: Core sectors in action modeKey takeaways from interactions with key policy makers in Delhi
Mr Sriprakash Jaiswal, Union Minister of Coal; Mr Alok Perti, JointSecretary, Ministry of Coal; Mr N C Jha, Chairman, Coal IndiaDomestic coal availability is an issue of paramount importance and Ministry of Coal (MoC)remains focused on addressing bottlenecks in domestic production ramp-up and evacuation.Production issues are structural in nature and would require compromise/alignment withlocals, addressing law and order situation in coal-bearing areas, and resolution ofenvironment/forest issues. Evacuation issues are being addressed through closeconsultation with Ministry of Railways; results are forthcoming with rake availabilityimproving by 12-15 rakes/day in FY12. Wage negotiation has begun, and Coal India'spast experience would help address various issues. Mining tax would be debated well byGroup of Ministers (GoM) before final framework is ready, but MoC has proposed miningtax based on profit (rather than revenue) as impact is nearly half.
Mr Rakesh Jain, Jt Secretary and Financial Advisor, Ministry of PowerMinistry of Power expects 11th Plan capacity addition of 69GW (including renewable),and is also not concerned about capacity addition in the 12th Plan (FY13-17) as over80GW of projects are already under construction. Key challenges facing the sector are:a) Fuel availability and b) Financial health of SEBs. On SEBs front, Shunglu committeereport is likely to be out by September, which will be reviewed along with state powerministries to chalk out a turnaround plan. Central government would work on "carrot andstick" approach (through performance based schemes l ike R-APDRP, etc) and bailoutpossibi lities do not exist. Tariff hike and long-term power availability would help bringdown SEB losses. Central government is tightening short-term funding for SEBs; it wouldalso not intervene if CPSUs cut power supply to states if dues are not paid as per"commercial terms". Onus is thus on States to charter recovery path. However, PFC/RECwould not face any issues given escrow mechanism.
Mr G Srinivas, Joint Secretary, Ministry of MinesMining in India is still at a very nascent stage with only 3% of surface area surveyed.Thus, large scale development could drive GDP growth for many mineral rich states likeOrissa, Jharkhand and Chhattisgarh. Ministry of Mines is working on a program tochannelize dedicated efforts towards exploration. The MMDR Act is important, as it couldact as a catalyst to bring large areas under mining, through participation by locals. Giventhis, the set-off of CSR activities already spent by mining companies like Coal India coulddilute the very purpose of the Act. However, CSR efforts can be incentivized by givingpriority to companies in new mineral allocations. Auction of mining blocks is in advancedstage and the process will likely commence in FY12.
Mr B K Chaturvedi, Member, Planning CommissionMr Chaturvedi gave some early indications of priorities that would guide the 12th Plan(FY13-17). First, the Planning Commission seeks to raise the growth bar to 9% from~8% of 11th Plan. Agriculture and infrastructure are high-focus areas; the targets seemfeasible. However, the envisaged pick-up in industry may be the biggest challenge. In thesocial sector, the focus would shift to health from education in 11th Plan. Inclusive growthwould receive enhanced attention, and subsidies reduced through better targeting.Interestingly, the Commission seeks to resolve the inflation-interest rate spiral throughlong-term supply-side measures in contrast with RBI's demand-side management.
Mr Sriprakash JaiswalUnion Minister of Coal
Mr Rakesh JainJoint Secy &
Financial AdvisorMinistry of Power
Mr B K ChaturvediMember
Planning Commission
Mr G SrinivasJoint Secretary
Ministry of Mines
6 September 2011 I 3
PolicyMakerthe
Mr Sriprakash Jaiswal, Coal Minister; Mr Alok Perti, JointSecretary; Mr N C Jha, Chairman, Coal IndiaAddressing production, evacuation issues remain key near-term focus
Domestic coal availability is an issue of paramount importance and Ministry of Coal (MoC)
remains focused on addressing bottlenecks in domestic production ramp-up and
evacuation. Production issues are structural in nature and would require compromise/
alignment with locals, addressing law and order situation in coal-bearing areas, and
resolution of environment/forest issues. Evacuation issues are being addressed through
close consultation with Ministry of Railways; results are forthcoming with rake availability
improving by 12-15 rakes/day in FY12. Wage negotiation has begun, and Coal India's past
experience would help address various issues. Mining tax would be debated well by Group
of Ministers (GoM) before final framework is ready, but MoC has proposed mining tax
based on profit (rather than revenue) as impact is nearly half.
Production growth remains the key focus, long-term solutions beingput in place Given the current scenario, Ministry of Coal remains focused on ramping up production
from domestic sources. There are several headwinds, including constraints in evacuationinfrastructure. Large parts of the reserves are located in areas where the law andorder situation is not comfortable, given issues of Naxalites, Maoism, etc.
The logjam to a large extent can be addressed through a robust policy of Resettlementand Rehabilitation (R&R) of locals, fairness and transparency in land acquisition, etc.Hence passage of the draft Mining and Minerals (Development and Regulation) Act,draft National Land Acquisition (Rehabilitation & Resettlement) Bill, etc, will act as keyenablers going forward. These issues need a co-ordinated working of mine developerswith the local population, and cannot be fully addressed just through policy directives.
Other issues such as environment / forest clearances can be minimized or addressedthrough government interventions. CEPI (Comprehensive Environment Pollution Index)norms have already been relaxed for a large number of mines.
Auction of coal blocks will also be prioritized and MoC is hopeful of awarding few blocksby end FY12. A lot of ground work has already been completed.
Evacuation infrastructure an equally pressing issue; MoC workingclosely with railways Evacuation infrastructure has also emerged as an equally important issue, particularly
when coal is in short supply and higher inventory at mines has also impacted production. Evacuation of coal is linked to improvement in rail infrastructure, as it remains the most
predominant and economically feasible way of coal transportation. Thus, the only solutionis to increase wagon availability in the system; railways have planned to procure 20,000-22,000 wagons per annum.
These initiatives have improved rake availability for Coal India by 12-15 rakes/day inFY12 over FY11. Coal India has also been able to liquidate ~19m tons of inventory tillAugust 2011, which is very encouraging.
Land acquisition Act
Only solution for higher
evacuation of coal is to
increase wagon availability
5 September 2011 I 3
PolicyMakerthe
6 September 2011 I 4
PolicyMakerthe
To address long-term issues, Ministry of Railways had been given the proposal thatCoal India can finance the investment for wagon procurement provided that wagonsare available at the Coal Ministry disposal, and not allowed to carry other materials.This has not found many takers in the Ministry of Railways as this will meaningfullylower the Indian Railways' flexibility to adjust wagon availability based on priority demandin the economy. (Coal transportation contributes 43% of the earnings for Indian Railways.)
Higher washing capacity on the cards; a key long-term driver forCoal India Washing of coal is most important from both points of view - cleaner environment and
better economics. Coal India has initiated the process for award of coal washeries to enhance capacity to
110m tons (Stage 1). It has also identified additional 21 washeries to be awarded inStage 2. This would mean that 50% of the coal will be washed by FY17 and would bebenchmarked to market prices.
We believe coal washing will meaningfully improve margins for Coal India, and EBIDTAper ton will increase ~2-2.5x v/s sale of raw coal currently. Coal India's washed coalvolume for FY11 stands at 15.5m tons, just 3.7% of sales.
Mining tax - better on profits than revenue The draft MMDR Act for coal mining companies will be debated further in the Group of
Ministers meeting. Consensus building is in advanced stages and most of the modalitiesare expected to be fast tracked.
MoC had suggested royalty on profits and not on revenues, given royalty as a flatpercentage of revenues could have led to a much larger impact on Coal India.
Wage negotiations - an elaborate process; cost push unlikely to impactCoal India's earnings Joint Bipartite Committee for Coal Industry (JBCC) is now formed and trade unions have
been forthcoming with their demand/recommendations. The wage negotiation processis a very detailed one, including benefits, other demands, etc. Coal India has completedeight wage negotiations to date and has enough experience of addressing various issues.
In the past, Coal India has always been able to address the resultant cost pressuresthrough an offset mechanism (albeit with a lag), and the situation is likely to be thesame this time as well.
Looking at strategic mine acquisition overseas; long-term importcontracts are not forthcoming Coal India had invited proposals for coal imports and the company did not get good
long-term proposals, as it is difficult to negotiate commercially viable contracts in thecurrent scenario, particularly for a fairly long period of time.
The other option is then of acquiring mines abroad; Coal India has a budget of INR60bin FY12 towards the same. Coal India has mines in Mozambique and the company isalso getting options in other countries as well. Besides, Coal India is also participating incompetitive bidding for acquisitions.
By FY17, 50% of the coal
will be washed, and prices
benchmarked to market
In the past, Coal India has
always been able to address
the cost pressures through
an offset mechanism
6 September 2011 I 5
PolicyMakerthe
Social overhead expenses composition for Coal India (FY11, INR m)FY09 FY10 FY11 % of total Gr (% YoY)
Salaries, wages 4,867 5,324 6,180 27 16Power 4,686 5,084 5,504 24 8Medical facility 1,998 2,262 2,756 12 22Repairs* 2,506 2,396 2,502 11 4Other Welfare Charges 1,297 1,135 2,353 10 107Others 2,014 2,198 1,456 6 -34Grants to schools / Inst. 544 827 901 4 9Environment Exp. 346 354 558 2 58Free Coal 594 595 491 2 -17Total 18,851 20,175 22,701 100 13*Township building, vehicle, plants Soucre:MoP/CIL/Railways/MOSL
Coal India: Status of washeriesS.No. Washery Capacity (m tons) Status
1 Maduband 5.00 LoA issued, action taken for EMP clearance2 Patherdih 5.00 Approval for awarding contract awaited3 Basundhara 10.00 Approval for awarding contract awaited4 Ashoka 10.00 Price bids under evaluation5 Jagannath 10.00 Price bids will be opened very soon6 Dugda 2.50 Evaluation of offers in progress7 Dahibari 1.60 Evaluation of offers in progress8 Rest 11 washeries 61.00 Bidders short listed on centralized RFQ tender
Coal as % of railway freight: Consistently above 40% Trend in wagon procurement by railways
131 144 158 175200
224
43
41
3839
41
43
FY05 FY06 FY07 FY08 FY09 FY10
Coal freight revenues (INR b) As a % of total freight
0
100,000
200,000
300,000
400,000
500,000
FY51
FY61
FY71
FY81
FY91
FY01
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
E
-20,000
-10,000
0
10,000
20,000Wagon Availability (Nos)Yearly Change (Nos)*
Trend in India's coal production (m tons) Trend in captive coal blocks awarded (m tons*)
4 2 2 2 010
0 0 7 2 723 32
163
129
5842
1993
1995
1997
1999
2001
2003
2005
2007
2009
114
125
131
140
147
154
166
181
196
203
214
233
242
249
258
273
289
296
290
295
303 328
341
361 383
407 431 457 49
3 532
538
FY19
81
FY19
83
FY19
85
FY19
87
FY19
89
FY19
91
FY19
93
FY19
95
FY19
97
FY19
99
FY20
01
FY20
03
FY20
05
FY20
07
FY20
09
FY20
11
Key sectoral trends
* Net of scrapping
* Peak production capacity of blocks
6 September 2011 I 6
PolicyMakerthe
Mr Rakesh Jain, Jt Secretary and Financial Advisor, MoPCapacity additons robust, fuel supply an issue; bailout for SEBs unlikely
Ministry of Power expects 11th Plan capacity addition of 69GW (including renewable), and
is also not concerned about capacity addition in the 12th Plan (FY13-17) as over 80GW of
projects are already under construction. Key challenges facing the sector are: a) Fuel
availability and b) Financial health of SEBs. On SEBs front, Shunglu committee report is
likely to be out by September, which will be reviewed along with state power ministries to
chalk out a turnaround plan. Central government would work on "carrot and stick"
approach (through performance based schemes like R-APDRP, etc) and bailout possibilities
do not exist. Tariff hike and long-term power availability would help bring down SEB losses.
Central government is tightening short-term funding for SEBs; it would also not intervene
if CPSUs cut power supply to states if dues are not paid as per "commercial terms". Onus
is thus on States to charter recovery path. However, PFC/REC would not face any issues
given escrow mechanism.
Capacity addition not a big challenge any more Capacity addition achieved till date in the 11th Plan stands at 42GW, and including
captive and renewables is 59GW. 10GW additional capacity addition is expected inremaining FY12 and thus the capacity addition in 11th Plan is targeted at 69GW. Projectsunder construction stand at 80GW to be commissioned in the 12th Plan; thus, a steadypace of capacity addition is no longer an issue.
For developers, the PPA terms are binding and walking out of the same is unlikely to beeasy. The terms are being looked at by beneficiaries/regulatory bodies in the light ofthe current scenario, on a case to case basis.
Fuel challenges persist, pressure building up to move on a war footing In the power sector, generation was de-licensed, and evinced increased interest from
private sector players. In the euphoria, the Letter of Assurance for fuel supplies by CoalIndia was being interpreted as Letter of Agreement. Hence, a large part of the currentissues in the system, including for financial institutions, is caused by poor 'due diligence'.
Coal India was able to honor most of the commitments as part of the LoA prior to FY10,but the gap has widened post that, as the pace of capacity addition has picked up. ForFY11, capacity addition in the system was 15GW (including 3GW, that was notsynchronized) and expected capacity addition in FY12, is 17GW.
Policy stance, in very recent times, has been more accommodative and evacuationinfrastructure too has eased up with Coal India liquidating inventory of 19m tons inYTDFY12. For fuel suppliers, there is a significant pressure to move at a war footinggiven the current scenario.
SEB finances: Shunglu committee report expected in Sep-2011; severalinitiatives to address long-term viability Improving the financial health and viability of SEBs is the most important reform agenda
for the sector. The political leadership is also sensitized to the gravity of the situation,and various initiatives are expected to address the same.
The Shunglu Committee is expected to submit its final report in September 2011, whichwill also draw-up the accounts of all SEBs on a common platform. This is critical as thecurrent losses reported by SEBs are subject to wide variations in accounting policies.
Projects under construction
stand at 80GW; thus 12th
Plan capacity addition is no
longer an issue
Coal India is responding to
the pressure to increase
fuel supply
Political leadership sensitized
to the gravity of SEB's
financial situation; initiatives
taken to address the same
6 September 2011 I 7
PolicyMakerthe
Several initiatives are being undertaken to address the issue of SEBs' long-term viability:1. R-APDRP will help lower the T&D losses from ~27% currently to 15% going forward;
and Phase A of the R-APDRP is expected to be completed in few states like Gujaratand Maharashtra. The results will start becoming visible from March 2012.
2. Central government has suggested conversion of the state government debt intoequity, as typically in many cases the subsidy provided by the state government isequivalent to the interest due from the SEB. This has led to limited actual cashinflows in the hands of SEBs towards subsidy.
3. States like Tamil Nadu, Rajasthan and Madhya Pradesh will witness a meaningfulincrease in generation capacity going forward; this will help lower the powerpurchase cost and improve the viability for the distribution companies.
SEB bailouts unlikely; Center taking stringent steps to improve financialdiscipline The clear message: Bailouts are not possible. Power is a concurrent subject (whereas distribution is a state subject); hence, Central
government has to use a carrot and stick approach. The Central government can disciplinethe states by two powerful mechanisms: (1) control on the 'short-term funding', and(2) non-interference in SEBs' commercial terms with CPSUs for power supplies, fuelsupplies, power transmission, etc.
In an attempt to press for reforms, a rating system based on the health of the SEBs(and not just financial health) is being worked out, which would mean lending at differentrates to various SEBs. Key pressure point for states will be no easy availability of 'short-term' money to fund SEB losses.
RBI has also reiterated banks to stop providing short-term financing to SEBs which havelarge losses, and that determining the end use of the loans is critical.
Also, state governments will find it challenging to support SEB losses on an ongoingbasis. TNEB is raising INR30b through state government guarantee bonds. But thiscannot be a recurring phenomenon, as every State Government has a legislation onfiscal responsibility.
Central Government is also finalizing the broad contours of the National Electricity Fund,where interest subvention will be based on the performance/actual achievements. Thus,poor performing states will find it difficult to access any subsidized rates from theCentral government.
Central government also does not intend to interfere in SEBs' commercial terms withCPSUs. Thus, if power supply bills remain unpaid, NTPC can withhold power supplies asper the commercial terms.
PFC / REC unlikely to be at a significant risk SEBs per se may not risk default with PFC / REC as they have always depended on these
institutions. (PFC and REC are the largest financial institutions for funding power projects.) Further, both PFC and REC have escrow mechanism, and the end use of funds is clearly
defined.
States like Tamil Nadu,
Rajasthan and Madhya
Pradesh will see increase in
generation capacity
Center can ensure SEB
discipline by (1) control on
'short term funding', and
(2) non-interference in
CPSUs' commercial terms
Fiscal responsibility legislation
with make it challenging for
states to support SEB losses
on an ongoing basis
6 September 2011 I 8
PolicyMakerthe
Capacity addition robust in 11th Plan (GW) TTM addition above 12GW, consistently (GW)
Base and Peak deficit taper off
Coal imports set to rise SEB losses to taper off given lower cost, tariff hike
9.3
3.5
9.6
12.2
17.2
FY08
FY09
FY10
FY11
FY12
E
2.8
2.8 3.
8 4.4 5.0 6.
05.
7 6.9
7.0
6.7 7.1
7.3
9.2
9.1
8.8
8.9 9.4
9.2
9.4 9.9
9.7
12.1
12.1
11.7
11.3
11.8
11.5 12
.613
.0
Mar
-09
May
-09
Jul-
09
Sep-
09
Nov
-09
Jan-
10
Mar
-10
May
-10
Jul-
10
Sep-
10
Nov
-10
Jan-
11
Mar
-11
May
-11
Jul-
11
All India Base Deficit (%)
8%
7% 7%9%
12%
8%6% 6%
8% 7%9%
7% 7%
8%10
% 12%
11%
10%
8.5%
6.2%
FY93
FY94
FY95
FY96
FY97
FY98
FY99
FY00
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
YTD
FY12
All India Peak Deficit (%)21
%18
%17
% 18%
18%
11% 14
%12
%13
%
12%
12%
11% 13
%
13%
14% 17
%12
% 13%
13.3
%9.
9%
FY93
FY94
FY95
FY96
FY97
FY98
FY99
FY00
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
YTD
FY12
Soucre:CEA/ PFC/MoP/MOSL
43.2
12.1 9.4
49.562.4
11.922.4
59.4
80.4
37.1
10.5%9.7%
8.6%
1.9%2.8%
FY11 FY12E FY13E FY14E FY15E
Domestic blending (m tons)Coastal projects (m tons)Domestic blending shortage (%)
(INR b)
6 September 2011 I 9
PolicyMakerthe
Mr G Srinivas, Joint Secretary, Ministry of MinesMining sector needs scale-up; focus on exploration, conducive policies
Mining in India is still at a very nascent stage with only 3% of surface area surveyed.
Thus, large scale development could drive GDP growth for many mineral rich states like
Orissa, Jharkhand and Chhattisgarh. Ministry of Mines is working on a program to channelize
dedicated efforts towards exploration. The MMDR Act is important, as it could act as a
catalyst to bring large areas under mining, through participation by locals. Given this, the
set-off of CSR activities already spent by mining companies like Coal India could dilute the
very purpose of the Act. However, CSR efforts can be incentivized by giving priority to
companies in new mineral allocations. Auction of mining blocks is in advanced stage and
the process will likely commence in FY12.
MMDR Act is critical to increase mining activities Mines and Minerals (Development and Regulations) Act is critical as it will provide assured
funding for the infrastructure development and basic amenities in most mining areas.This would help reduce local resistance.
Contribution of mining sector to India's GDP is ~1% over the past 10-20 years and couldincrease meaningfully. Increased mining activities are necessary to achieve improvedgrowth potential in many of the backward areas. To illustrate, the share of mining inGDP of states like Chhattisgarh can increase from ~13% to 22%, while in Orissa, shareof mining in GDP can increase from 6-7% to 20%. This will create a vibrant economicscenario in many of these regions.
Currently, most of the mining areas continue to remain backward with limited basicinfrastructure in place. There is an urgent need to address this including drinking water,sanitation, health, education, and also connectivity (roads, railways, etc), which wouldspur economic development. The mining departments of the state also need to bestrengthened e.g. appointment of geologists.
Under the existing policy, taxation on mining forms part of the Consolidated Funds ofthe state and Central governments; thus, the amount does not get reinvested in thesame region. This has led to projects getting blocked given increased local resistance.Taxes levied by the MMDR Act will be earmarked for specific purposes and thus thespending will be more direct.
The Cabinet Note on the MMDR Act will be circulated shortly and the bill may possibly beintroduced in Parliament in the monsoon session, post which, it will be referred to theStanding Committee.
CSR set-off could dilute the purpose of "creating funds for developmentof large scale mining"; such companies can be incentivized separately In India, most of the mining is being done by small miners. For instance, iron ore mining
is largely done by private players. Thus, permitting Coal India to set off its CSR spendagainst local area expenditure will lead to insufficient funds for large parts of the miningregions.
The key objective is to provide funds for infrastructure development and expedite themining operations by reducing the quantum of resistance; hence, the set-off stance willdilute the very purpose of the Act.
However, a company which incurs large amounts on CSR activities (particularly PSUs)are likely to be incentivized by giving priority in terms of new allocations.
Contribution of mining to
India's GDP is ~1% over the
past 10-20 years; and could
increase meaningfully
Currently, mining tax is part
of Consolidated Funds and
is not reinvested in the
same region
Permitting Coal India to set
off its CSR against local area
spend will dilute the very
purpose of the MMDR Act
6 September 2011 I 10
PolicyMakerthe
Ground work on for coal block auctions, to provide clarity at the timeof bidding Ministry of Mines is pursuing with Ministry of Environment and Forests (MoEF) to provide
certain level of preliminary clearances, and there is a need for co-ordinated approachto arrive at a consensus.
Given the precedent, the idea is not to get clearance in the nature of demarcation ofareas as Go / No Go. Rather, the basic objective is to provide clarity to the bidder rightat the time of bidding about the process of the environment and forest clearances.
Ministry plans to commence the process of auction of blocks in FY12; it has alreadycarried out lot of ground work on the same.
Exploration needs sizable investment; 'We do not know what we have' Currently, only 3% of India's surface is surveyed vs 100% in other countries like Australia.
The Ministry wants international companies to participate in the exploration process. Government is working on a program to increase exploration efforts, including by
Geological Survey of India. This is not possible without the support of various agenciesincluding state governments.
Incentive structure is being worked out for a large area prospecting license e.g. if theexploration leads to discoveries of minerals, the exploration company could be given anassured mining lease.
Supreme Count ban on mining in Karnataka emphasizes environmentprotection Supreme Court's ban on iron ore mining is related more to environment damage and
has no major consequence on the legality of the mining process. Ongoing mining activities in the region have damaged the environment beyond the
extent to which the impact can be borne.
Attempts to increase transparency Ministry of Mines is in favor of forming a tribunal, which will act as an independent
regulatory body. This will ensure that the timelines set in terms of according clearances,etc, are met, and will be a confidence booster for the private sector.
Ministry of Mines is pursuing
with Ministry of Environment
and Forest (MoEF) to
provide certain level of
preliminary clearances
Government is working on a
program for increased
exploration efforts
6 September 2011 I 11
PolicyMakerthe
Mr B K Chaturvedi, Member, Planning CommissionAiming GDP growth of 9%+ in 12th Plan
Mr Chaturvedi gave some early indications of priorities that would guide the 12th Plan
(FY13-17). First, the Planning Commission seeks to raise the growth bar to 9% from ~8%
of 11th Plan. Agriculture and infrastructure are high-focus areas; the targets seem feasible.
However, the envisaged pick-up in industry may be the biggest challenge. In the social
sector, the focus would shift to health from education in 11th Plan. Inclusive growth would
receive enhanced attention, and subsidies reduced through better targeting. Interestingly,
the Commission seeks to resolve the inflation-interest rate spiral through long-term
supply-side measures in contrast with RBI's demand-side management.
On growth and sectoral priorities Raising the growth bar: Despite the 11th Plan falling short of targeted growth by
almost a full 1%, the targeted growth for 12th Plan has been set high at 9-9.2%. Saving and investment: To achieve the growth rate of 9-9.2%, a saving/investment
rate of 36-38% is envisaged. Agriculture to receive greater focus; turnaround envisaged in industry: 12th
Plan envisages annual agricultural growth rate of +4% (including allied services). Industrialgrowth rate is aimed at 9-11%.
12th Plan target to be kept high at 9%+ despite Growth bar raised for agriculture, industry islower growth of crisis hit 11th Plan expected to significantly revive
8.0
9.0 9.0
8.0
7.8
10th Plan 11th Plan 12th Plan (E)
Target Achievement
2.43.3
4
9.3
7.2
10
10th Plan 11th Plan 12th Plan (E)
Agriculture Industry
Source: Planning Commission
On infrastructure Accelerated emphasis: 11th Plan targeted infrastructure spending was USD514b
(the actual amount will be near that). In the 12th Plan, target spending will be USD1t,largely in segments like Power, Roads, Railways, Telecom, Shipping, Pipelines, etc. Inthe 11th Plan, positive surprises have been accelerated investments in oil pipelines,telecom and power (which compensated for shortfall in other segments). The full impactof these investments is yet to seen as much of it continues to be CWIP (capital work-in-progress).
6 September 2011 I 12
PolicyMakerthe
Three key focus areas - Energy, Environment, Water: Energy includes access toenergy, energy conservation and focus on clean energy (50% of thermal plants in 12thPlan will be supercritical and in 13th Plan, 100% will be supercritical). Wind energyoriginal estimate was 50GW and this would need to be stepped up. Nuclear powerinvestments will also be expedited. Environment will continue to be a key factor in allpolicy decisions. Water entails need for efficient use, recycling, conservation, etc.
PPP: PPP will continue to be the key focus area for infrastructure spending. Privateinvestments in infrastructure are currently at 4% of GDP and the government will focuson increasing the same. 10% of the infrastructure spend in 10th Plan was from PPP,which increased to 33% in 11th Plan and is targeted at 50%+ in 12th Plan.
On social sector, subsidies and inclusive growth Increased emphasis on health: Health and education have been highlighted as major
areas of concern by the Prime Minister. The target is to spend 3% of GDP in the healthsector.
Lowering subsidies: Target is to lower subsidy bill to 1.2% of GDP in 12th Plan (v/s1.5% currently).
Rationale for continuation of subsidies: 37-80% of India's population is below thepoverty line (BPL), and the economy needs to provide for their support. Hence a balanceis required. The approach of the Planning Commission is: Support the poor; and go-ahead with growth plans.
Targeting: The subsidies should be well directed and should be only for BPL families.For instance, HSD subsidy for cars should be abolished, and the Planning Commissionwill continue to pursue such initiatives at all forums.
Food subsidy: The Planning Commission's view is that the Food Security Bill should beconfined to the BPL section.
UID: The Unique Identification project (led by Mr Nandan Nilekani) will ensure thatsubsidies are not mis-utilized. Also, it will enable financial inclusion as large section ofthe population is currently unable to avail banking facilities.
On growth and inflation Trade-off and the current scenario: There is clearly a trade-off between growth
and inflation. High inflation was the primary reason for lower growth rates in FY12 fromthe original targeted 9.5% to 8-8.5% currently. However, expect inflation to peter downgradually by the end of 11th Plan period (i.e. FY12).
Food inflation: Increased focus on the farm sector (primary commodities) in 12th Plancould drive up development of this sector and also ease food inflation. Farm sectorgrowth rate in 10th Plan was 2%, which increased to 3.5% in 11th Plan, and the targetis 4%+ in 12th Plan. National Food Security Mission will step up investments in theagriculture sector. Also, eastern UP and Bihar now have water resources and are graduallycoming up.
Fuel inflation: Stabilization of oil prices is the key. Inflation and interest rate: If the government is able to control inflation at 5-6%,
then the interest rates will decline.
On GST (Goods & Services Tax) Government is looking at a revenue neutral rate comprising of 6% for Centre and 9%
for states. The eventual taxes should be lower by 2-3%. This will lead to a lot of efficiencies as tax on tax will be avoided. Also, exports will increasingly become more competitive.
514
1,00
0
7.2
9.6
11th Plan 12th Plan
Infra spend (USD b)As % of GDP
Infrastructure to remain infocus in 12th plan
Source: Planning Commission
1.0
3.0
11th Plan 12th Plan (E)
3-fold jump in health spendenvisaged in 12th plan
Source: Planning Commission
6 September 2011 I 13
PolicyMakerthe
Our views based on Mr Chaturvedi's comments
On growth and sectoral priorities The higher growth target of 9-9.2% for 12th Plan may not be entirely unrealistic given
that setback in 11th Plan was due to a year of unprecedented global crisis and twoyears of moderate recovery thereafter.
Higher agricultural growth rate of 4%+ (v/s 3.3% in 11th Plan) also appears achievabledue to continuous efforts toward water preservation, improving productivity, policyfocus and higher support prices.
Achieving 9-11% industrial growth will the real challenge (v/s 7.2% in 11th Plan,down from 9.3% in 10th Plan). A new manufacturing policy is being finalized thatseeks to enhance the share of manufacturing to 25% from 16% at present. Also, a lotis happening in terms of export promotion and industrial zoning. However, industrialrevival depends heavily upon inflation and competiveness, issues of land acquisitionand water availability, and global trade conditions, including relative exchange ratemovement.
On infrastructure The 12th infrastructure target spend of US$1t is likely to be met given the emphasis it
now receives from both public and private sector. Some headway in resolving medium term issues in land acquisition, mining and
environment also raises hopes breaking the infrastructure bottleneck. Also the thrust on diversifying energy resources and the attention to environment
indicate the late-starter benefit that India is likely to reap.
On social sector, subsidies and inclusive growth Expect inclusive growth to be more strongly embedded in the 12th plan. With target spend of 3% of GDP, healthcare is a focus area for the 12th Plan whereas
education saw higher emphasis in the 11th Plan. Subsidy target of 1.2% of GDP is a long way off from our current estimate of 2%. A
major part of the subsidy reduction is likely to be achieved through better targeting,significantly helped by the UID roll-out.
On growth and inflation Focus on supply-side issues like increasing farm output is a welcome complement to
the RBI's demand-side management of the growth-inflation dilemma.
Motilal Oswal PolicyMaker Gallery
Motilal OswalProduct Gallery
Motilal OswalSector
Periodicals
weekly
power utilities monthly
DisclosuresThis report is for personal information of the authorized recipient and does not construe to be any investment, legal or taxation advice to you. This research report does not constitute an offer, invitation or inducementto invest in securities or other investments and Motilal Oswal Securities Limited (hereinafter referred as MOSt) is not soliciting any action based upon it. This report is not for public distribution and has beenfurnished to you solely for your information and should not be reproduced or redistributed to any other person in any form.
Unauthorized disclosure, use, dissemination or copying (either whole or partial) of this information, is prohibited. The person accessing this information specifically agrees to exempt MOSt or any of its affiliatesor employees from, any and all responsibility/liability arising from such misuse and agrees not to hold MOSt or any of its affiliates or employees responsible for any such misuse and further agrees to hold MOStor any of its affiliates or employees free and harmless from all losses, costs, damages, expenses that may be suffered by the person accessing this information due to any errors and delays.
The information contained herein is based on publicly available data or other sources believed to be reliable. While we would endeavour to update the information herein on reasonable basis, MOSt and/or itsaffiliates are under no obligation to update the information. Also there may be regulatory, compliance, or other reasons that may prevent MOSt and/or its affiliates from doing so. MOSt or any of its affiliates oremployees shall not be in any way responsible and liable for any loss or damage that may arise to any person from any inadvertent error in the information contained in this report . MOSt or any of its affiliatesor employees do not provide, at any time, any express or implied warranty of any kind, regarding any matter pertaining to this report, including without limitation the implied warranties of merchantability, fitnessfor a particular purpose, and non-infringement. The recipients of this report should rely on their own investigations.
This report is intended for distribution to institutional investors. Recipients who are not institutional investors should seek advice of their independent financial advisor prior to taking any investment decisionbased on this report or for any necessary explanation of its contents.
MOSt and/or its affiliates and/or employees may have interests/positions, financial or otherwise in the securities mentioned in this report. To enhance transparency, MOSt has incorporated a Disclosure of InterestStatement in this document. This should, however, not be treated as endorsement of the views expressed in the report.
Disclosure of Interest Statement Companies where there is interest1. Analyst ownership of the stock None2. Group/Directors ownership of the stock Coal India3. Broking relationship with company covered None4. Investment Banking relationship with company covered None
Analyst CertificationThe views expressed in this research report accurately reflect the personal views of the analyst(s) about the subject securities or issues, and no part of the compensation of the research analyst(s) was, is, orwill be directly or indirectly related to the specific recommendations and views expressed by research analyst(s) in this report. The research analysts, strategists, or research associates principally responsiblefor preparation of MOSt research receive compensation based upon various factors, including quality of research, investor client feedback, stock picking, competitive factors and firm revenues.
Regional Disclosures (outside India)This report is not directed or intended for distribution to or use by any person or entity resident in a state, country or any jurisdiction, where such distribution, publication, availability or use would be contrary tolaw, regulation or which would subject MOSt & its group companies to registration or licensing requirements within such jurisdictions.
For U.K.This report is intended for distribution only to persons having professional experience in matters relating to investments as described in Article 19 of the Financial Services and Markets Act 2000 (FinancialPromotion) Order 2005 (referred to as "investment professionals"). This document must not be acted on or relied on by persons who are not investment professionals. Any investment or investment activity towhich this document relates is only available to investment professionals and will be engaged in only with such persons.
For U.S.MOSt is not a registered broker-dealer in the United States (U.S.) and, therefore, is not subject to U.S. rules. In reliance on the exemption from registration provided by Rule 15a-6 of the U.S. Securities ExchangeAct of 1934, as amended (the "Exchange Act") and interpretations thereof by the U.S. Securities and Exchange Commission ("SEC") in order to conduct business with Institutional Investors based in the U.S.,Motilal Oswal has entered into a chaperoning agreement with a U.S. registered broker-dealer, Marco Polo Securities Inc. ("Marco Polo").
This report is intended for distribution only to "Major Institutional Investors" as defined by Rule 15a-6(b)(4) of the Exchange Act and interpretations thereof by SEC (henceforth referred to as "major institutionalinvestors"). This document must not be acted on or relied on by persons who are not major institutional investors. Any investment or investment activity to which this document relates is only available to majorinstitutional investors and will be engaged in only with major institutional investors.
The Research Analysts contributing to the report may not be registered /qualified as research analyst with FINRA. Such research analyst may not be associated persons of the U.S. registered broker-dealer, MarcoPolo and therefore, may not be subject to NASD rule 2711 and NYSE Rule 472 restrictions on communication with a subject company, public appearances and trading securities held by a research analyst account.
Motilal Oswal Securities Ltd3rd Floor, Hoechst House, Nariman Point, Mumbai 400 021
Phone: (91-22) 39825500 Fax: (91-22) 22885038. E-mail: [email protected]
