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Power shortage, budgetary deficit and more...

Jul 31, 2008

We will be not food but 'power starved' nation!
The Indian government has asked power generation utilities such as NTPC to not shut their thermal power plants for repairs and maintenance during the monsoon season due to soaring demand and lower-than-expected output from hydropower plants, which have been plagued by weak rainfall and high silt levels. But this directive could result in significant problems and potential power outages. While routine annual maintenance takes around 10 days, capital maintenance requires plants to be closed for 50 to 60 days. The more intensive capital maintenance work is typically done every five years. The majority of these thermal power units are owned by NTPC, India's largest power generation utility, which has a power generation capacity of 29,749 MW.India has an installed hydropower capacity of 32,326 MW and plans to add another 16,501 MW by 2012. However, delays in securing environment and forest clearances have ensured that these targets will not be met.

According to India's meteorological department, though the country saw only a 2% dip in rainfall from what is normal (based on a 60-year average), the months of June and July saw shortfalls as high as 15% and 32% respectively in large parts of South and Central India. Historically, during the monsoon season, when there is a rise in hydropower generation, thermal generation units are shut for maintenance. However, with hydropower generation remaining stagnant mainly due to poor rainfall, there is no cushion to meet the growing demand. According to the Central Electricity Authority (CEA), India's apex power sector planning body, for the period between 1 April and 21 July 2008, hydropower generation in the Western, Eastern and North Eastern states fell short of targets by 8%, 14% and 20% respectively.

Left may not be right
Indian citizens are discovering to their horror just how empty the government's rhetoric of responsible budgeting has been. The damaging implications of fiscal indiscipline have so far been masked by a high rate of economic growth. With Fitch Ratings cutting India's debt outlook to negative, the veneer is now peeling off.

Morgan Stanley in its Global Economic Forum has predicted that at an average price of crude oil at US$ 120 a barrel, the total budgetary deficit would be 10.4% of GDP in FY09, up from just 7.7% in FY08. If instead of US$ 120, the average price of oil were to be assumed to touch US$ 135 a barrel, the deficit estimate would rise to 11.4%. The last time the overall deficit exceeded 11% in India was in FY02. Back then, the economy was growing at an annual pace of about 5.8% YoY, against the RBI's forecast of at least 8% YoY expansion in GDP for the current fiscal. The inflation rate (WPI) was less than 2%, compared to about 12% now. Not to mention, the treatment of the deficit was done very differently than it is currently.

The then president Mr. K.R. Narayanan had, in his address to Parliament, quipped, "Disinvestment in public sector enterprises is no longer a matter of choice, but an imperative," setting the government's agenda. The government of then prime minister Mr. Atal Bihari Vajpayee turned the bleak fiscal situation into an opportunity to sell state ownership of key assets to private investors, in the process raising US$ 5 bn in three years. In May 2004, the government changed and it obliged to the Left's demand of halting privatisation. In the four years that followed, asset-sale revenue dwindled to US$ 1.5 bn, even as the benchmark BSE Sensex almost tripled in this period.

With the nuclear deal issue finally teaching the government that the 'Left may not always be right', probably the government will take steps in the direction of disinvestments as well.

  • Also read - Manmohan Singh shaken but not stirred

    Banks see change of fortunes
    In what unfolded as a change of fortunes, both good and bad for Indian banking companies, the first quarter of FY09 was quite a revelation. Slower growth, treasury losses, lower margins, rising defaults, you name it and it was affecting the performance of players in the sector. It forced aggressive players like ICICI Bank to bite the dust and grow slower than PSU behemoths like SBI and Bank of Baroda. Even that did not help ICICI Bank from hiding its delinquencies. Public sector banks despite faring better than some of their private sector counterparts in terms of growth and asset quality, took a hit on margins because of lower lending rates and farm loan waivers. HDFC Bank saw the numbers of Centurion Bank of Punjab (CBoP) get integrated with itself giving it a quantum jump in size and scale but poorer margins and quality. Having said that, the quarter amply distinguished the players that can withstand storms from those that wilt under pressure.

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