The government’s mid-year economic review may have painted an uncharacteristically sobering picture, but the bigger worry could be the absence of credible signs of a recovery getting underway in the domestic economy. If the real-time status of project development on the ground were to be taken as a measure, the picture that emerges is in sharp contrast to the narrative of an impending industrial uptick. What makes the prognosis grimmer for core sectors such as power, a key enabler for fuelling a rebound in the economy, is the worrying drop in private sector interest in setting up new projects.
In 2010, for instance, a total of 46 power generation projects were granted transmission connectivity — a key milestone for a power project that entitles the generation plant to get hooked on to the country’s electricity grid. This number is down to just two projects each in 2014 and in the first eleven months of 2015, a reflection of the dwindling investor interest.
Worrying still is the fact that the two thermal projects granted connectivity in 2015 were both in the public sector, as compared to 35 private projects in the list of 46 granted connectivity five years ago. This sharp drop in the number of projects moving towards the final stages of commissioning is bound to show up in the form of supply shortages, as and when the economy were to pick up.
There are sector-specific issues that are proving to be a drag in sectors such as power generation. Demand is worryingly stagnant, a situation aggravated by the continuing industrial slowdown and thermal power plants, the mainstay of the Indian electricity grid, being forced to operate at a plant load factor of 60 per cent — a 10-year low — as distribution companies (or discoms) do not have the money to pay for buying more power.
Of the country’s total installed generation capacity of 2,68,603 MW, the peak demand met at the height of summer this year — May 23, 2015 — was less than half at just 1,34,892 MW.
Over 57 base-load thermal units across India’s northern and western heartland on that day were faced with ‘reserve shut-down’, a technical term for a unit shut down due to lack of demand.
Reflecting the low actual off-take, data from the central electricity regulator or CERC on traded power price shows a consistent drop in volumes since 2009 — a direct consequence of the fact that capacity addition grew at 13.7 annually in the three years to 2015 even as consumption grew at a measly 6 per cent.
In the northern region, at this time of the year, states such as Uttar Pradesh, Haryana, Punjab and Rajasthan are having to back down generation due to lack of demand. A vast majority of power generation projects are currently distressed because either their tariff is prohibitive or they are not in a position to access assured fuel supplies. This is on account of a combination of factors such as high construction cost, high fuel price, or inordinate delay, which cause cost over-run and accumulation of interest during construction.
What makes it worse for developers is a stifling bureaucratic conditionality imposed on them — that they cannot get coal from long-term linkage or even mine their own coal unless they have a long-term PPA (power purchase agreement) with discoms. Without a PPA, the only option is to buy costly coal from e-auctions. This conditionality is a boon for state-owned Coal India Ltd, but bad for both power producers and consumers. And the irony is this — discoms are not in the least interested in long-term PPAs because spot (or short-term) electricity is selling at half the long-term rates on the power exchange.
An indication of this is the fact that stalled projects in sectors such as power generation are yet to bottom out. The latest estimates on stalled projects tracked by CMIE points to an increase in their stock from Rs 8.8 trillion to Rs 9.9 trillion over the three months to end-September 2015.
The stalling rate, or stock of stalled projects as a share of all projects under implementation, rose to 11 per cent in the last quarter, up from 9 per cent. Nearly a quarter of projects are stalled due to lack of promoter interest or commercial unviability.
B Prasada Rao, Chairman and Managing Director, BHEL, can testify this given his first-hand experience of problems on account of large-scale stranded projects. The state-owned company was faced with stuck projects worth about nearly 10,000 MW, where the receivables outstanding have mounted to Rs 3,340 crore. On this, Rao does not see much movement during this quarter either.
At an analysts meet, Rao was candid about the lack of progress. “We are not seeing the traction in terms of execution of the projects; many of the projects are struggling to get clearances, to get land fully into their control. So they are not able to give clearances for us to dispatch our equipment. In fact, most of our equipment are ready in our shops but we’re not able to dispatch.”
L&T, the other capital goods bellwether, is seeking more than just the 50 basis point cut announced by the RBI in its last review. On October 30, L&T declared that it had halved its order book growth guidance to 5-7 per cent and lowered revenue projection to around 10-15 per cent for the current fiscal.
“Despite efforts taken by the government, investment momentum is yet to pick up and as a result, order inflows are devoid of large investments. There is still capacity under-utilisation and, therefore, no investments are coming in capacity addition. Players are waiting for demand momentum to go up,” L&T Chief Financial Officer R Shankar Raman said. L&T’s half-year position pegged order inflows at Rs 55,000 crore compared to Rs 73,000 crore a year ago.
The lack of demand is aggravated by the fact that most power companies made aggressive bids in the reverse auction for coal blocks designated for the power sector. Promoters who have bid aggressively, with some even quoting an additional premium to the government — over and above the mandatory royalty and reserve price — in their eagerness to access fuel, have no option but to smuggle the fuel-charges into the fixed capacity charges. Most of these project developers, who bid aggressively to secure coal blocks in the auctions, are now reluctant to mine them in the wake of the government’s decision to cap fixed charges based on regulatory considerations.
Distribution loss reduction efforts seem to have plateaued off in recent years, with discoms finding it difficult to bring losses down below 20 per cent. A new debt restructuring plan has now been rolled out by the government targeted at power distribution utilities, wherein a cleanup of the books is intended at a means of enabling the utilities to raise cheaper capital. The problem though is that almost identical efforts have been tried out at least twice in the last two decades, with the situation relapsing each time.
In telecommunications, the success story is steadily being eroded, reflected in the poor service and call drops. Telecom operators, who bid very aggressively in the 3G auctions, paid out nearly $17 billion in the latest round. Unlike with coal, spectrum already under use by incumbents was re-allocated through auctions. This left existing operators, who have massive fixed investments, with little choice but to bid aggressively to retain their spectrum.
The exorbitant cost of spectrum adds to other headwinds that telecoms operators have to navigate. Though one of the fastest growing telecoms market in the world by customer-base, operator margins are squeezed by the lowest ARPUs (average revenue per user) of about $3, less than a tenth of the global average. This is exacerbated by cut-throat competition, with nearly ten operators in each circle. And now, the high cost of spectrum has sharply increased debt leverage of operators, leaving them with little room to raise resources to invest on network expansion, maintenance, and upgradation.
The Indian steel sector is passing through a global over-supply crisis, something that is expected to linger over the next 18-24 months.
Amitabh Kant, Secretary, Department of Industrial Policy and Promotion, counters the argument that private investments are petering out, especially in manufacturing. “Since the announcement of Make in India we have been able to get significant investments… FDI in the last 17 months as compared to the previous 17 months has grown by about 35 per cent… We have been able to get substantial investments in areas which include electronics, automotive, food processing, textiles and garments, renewable energy and construction,” he said last Thursday.
The macro picture, though, is far from reassuring. On the back of declining corporate capex investments comes the news of fall in capital expenditure by public sector units (PSUs). The capex by 35-odd largest listed PSUs declined by 24 per cent to Rs 1.29 lakh crore in 2014-15.
An RBI survey of ex-ante capital expenditure investment decisions of Indian corporates found that in 2014-15, 830 firms intended to invest in Rs 1459 billion, as against 1056 companies’ investment plans for Rs 2081 billion in 2013-14. The time phasing of the investment intentions of these companies indicate likely investments worth Rs 1933 billion in 2014-15, 27 per cent lower than 2013-14, a trend that has continued into the initial months of this fiscal.
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