Optimism over infra funding, but energy sector a concern

Sectors such as irrigation, railways, water supply and sanitation, ports, and power distribution have “not attracted the desired level of private investment”, the survey said

The government is optimistic of raising the $1 trillion required for investment on public works such as ports, roads and power plants during the 12th Five-Year Plan that starts on 1 April, despite a decline in credit flow to infrastructure this fiscal.

“The realization of investment targets for infrastructure during the 11th Plan gives hope that the financing of an even more ambitious 12th Plan target may be possible,” said the Economic Survey presented in Parliament on Thursday on the eve of the national budget.

The government has doubled the infrastructure investment target in 2012-2017 from the $500 billion fixed for the 11th Plan and will use innovative ideas and policy interventions to attract investment. The government’s optimism that the funds would be raised comes in the backdrop of a decline in credit growth to infrastructure to Rs. 70,155 crore in the nine months ended December, which was around 61% of loans that flowed to public projects in the year-ago period. “A significant reduction in credit flow was observed for the power and telecom sectors,” the survey said.

Sectors such as irrigation, railways, water supply and sanitation, ports, and power distribution have “not attracted the desired level of private investment”, the survey said.

Delays in project execution have become a stumbling block in developing the country’s deficient infrastructure. “These not only delay availability, but through cost overruns raise pricing and affordability issues. Infrastructure costs, as these are often non-tradeable, may also affect the competitiveness of the economy in long run,” the survey said.

As of October, of the 583 central sector projects costing Rs. 150 crore or more, only seven were ahead of schedule, 166 were on schedule, and 235 projects were delayed. Interestingly, the remaining 175 projects were sanctioned without a timeline being set for their commissioning. The delays resulted in a cost increase by 15.3% to Rs. 8.21 trillion.

Reinforcing infrastructure is key to achieving the government’s target of 9% annual growth for Asia’s third largest economy. For instance, energy supply has to grow 6.5% per year to achieve that level of growth in gross domestic product (GDP), the survey said, citing 12th Plan projections by the Planning Commission.

Power generation increased 9.23% between April and December to 653.446 billion kilowatt-hour (kWh) and the peak power shortage was down to 10.6% during the period. India’s oil refining capacity will rise by 15% to 214 million tonnes a year by the end of the current fiscal.

The survey also stressed the recurring theme of reforms in energy pricing and recommended a revision of electricity tariffs and a reduction of subsidies and cross-subsidies. It also drew attention to the ongoing fuel crisis and delays in achieving the target of building 20km roads a day on account of regulatory and environmental hurdles.

The survey was critical of state-owned Coal India Ltd, terming it monopolistic and called for introducing competition to fuel mining growth. Power projects are the worst hit by falling coal production as the sector is the biggest consumer of the fuel, absorbing 78% of domestic production.

“The government needs to focus on uninterrupted supply of coal to augment capacities in the power sector,” said B. Muthuraman, president of industry lobby group Confederation of Indian Industry.

Only 320 million tonnes (mt) of coal is expected to be supplied to the power sector by Coal India against the committed 347 mt in the current fiscal. The state-owned firm mined only 431 mt in 2010-11 against a target of 461.5 mt because of stalled projects. Its target in the current fiscal is 452 mt.

“Growth of the power sector will largely depend on the growth of domestic coal sector in India,” said Pukhraj Sethiya, a consultant at PricewaterhouseCoopers. “Looking at the current scenario, the growth of the power sector seems to be full of challenges. Further, growth of the coal sector has not been encouraging over the past few years, adding to worries, and going forward, expansion of the coal sector will depend on speedy clearances and land acquisition for coal mines.”

Falling gas production from Reliance Industries Ltd’s D6 field in the Krishna-Godavari basin and the deepening crisis in the Indian aviation sector also found mention in the survey.

India’s natural gas production dipped 9% to 36.19 billion cubic metres (bcm) during April-December, from 39.68 bcm in the year-ago period. Power generation from gas-based plants contracted 4%. The survey estimated the airline industry’s debt burden at $20 billion.

On telecom connectivity, the survey said that while urban teledensity is 167.4%, rural teledensity is only 37.5%.

“Reports indicate that rural telecom penetration is lower at around 30-35%. But most of the unconnected live on less than $2 a day, making it a huge challenge for them to get connected. This is where broadband comes in,” said Hemant Joshi, partner, Deloitte Haskins and Sells.