Core sector growth plunges below 4%

The first month of 2008-09 reveals a sharp dip in performance of six core infrastructure industries. Compared with a much better 5.9% in April 2007, the overall growth in April 2008 is only 3.6% (Figure 1).

A close look at individual performances of six core industries (i.e. crude oil, petroleum refinery products, coal, electricity, cement and finished steel) shows that compared with April 2007, growth rates in April 2008 have declined for crude oil, petroleum refinery and electricity, while they have increased for coal, cement and finished steel (Figure 1). In spite of such an across-the-board division in performances, overall growth has taken a hit primarily on account of poor shows by electricity and crude oil, as the weightages of these industries are pretty high in the six-industry basket.

The decline in electricity generation is certainly a matter of concern. The sector is seen to maintain the declining trend that set in March 2008 (3.6%). A growth of only 1.4% in April 2008 is not encouraging given that peak summer is yet to set in. However, there is cause for cheer in the robust performance of coal, which appears to be maintaining the high growth trend that has taken off since February 2008. The good growth in coal production assures enough availability for coal-fired thermal plants.

The oil segments, however, continue to be in spots of bother. Growth in crude production is just under 1% in April 2008. This is, however, a marked improvement over the negative growth of -0.3% in March 2008. But while crude output growth was moderate throughout last year, the low growth in refined petroleum products, though better than in March 2008 (0.1%), seems a continuation of the phase that set in from October 2007.

Finally, cement and steel both, put up better performances. The almost 7% growth rate recorded by cement probably points higher demand arising from robust activity in construction and housing industries. Steel growth, though not remarkably high, is better on a year-on-year basis. Given the key influence of both these industries on manufacturing output, the growth rates of cement and steel are certainly encouraging signs for overall manufacturing production.

Finally, cement and steel both, put up better performances. The almost 7% growth rate recorded by cement probably points higher demand arising from robust activity in construction and housing industries. Steel growth, though not remarkably high, is better on a year-on-year basis. Given the key influence of both these industries on manufacturing output, the growth rates of cement and steel are certainly encouraging signs for overall manufacturing production.

ONGC to drill more wells

ONGC Ltd. - the numero uno oil & gas exploration and production company in Asia - plans to drill 162 wells in both onshore and offshore petroleum exploration license (PEL), mining lease (ML) and New Exploration Licensing Policy (Nelp) areas during 2008-09. The drilling comes on the back of ONGC’s shortage in rig availability. The projections, however, are on the higher side given that it had drilled 87 wells in 2006-07 and 98 wells in 2007-08. During the 10th Five Year Plan (FYP) too, the company drilled a total of 576 exploratory wells, which were far less than its target of 771 wells. These unfortunate shortfalls are on account of a variety of factors including political agitations and insurgency.

Oil touches US$140

Crude oil was almost US$140 per barrel on June 16 as investors overlooked Saudi Arabia's promise to boost production. Light sweet crude for July delivery soared to a trading record of US$139.89 before retreating to US$136.96 a barrel on the New York Mercantile Exchange. In London, August Brent crude futures shot up to US$137.02 per barrel. Several investors across the world are increasingly using crude as a hedge against inflation when the US dollar weakens. The latter is also making oil less expensive for investors dealing in other currencies. Many analysts believe the dollar's protracted decline is a major factor behind crude prices doubling over the past year.

BP warns of decline in global oil production

BP Plc, Europe’s second-largest oil company, announced in its annual Statistical Review of World Energy that global oil production fell for the first time in five years in 2007 and reserves also declined as prices rose to record highs. The Review stated that crude oil production had dropped 0.2 per cent to 81.533 million barrels per day in 2007 from 81.659 million barrels a day in 2006. It further stated that proved reserves were 1,237.9 billion barrels at the end of 2007, compared with a revised total of 1,239.5 billion barrels in 2006.

The Review also states that natural gas production gained 2.4 per cent to 2,940 billion cubic metres last year. Growth was led by the US, where output jumped by 4.3 per cent to 545.9 billion cubic metres. Further, the Review also stated that global trade in liquefied natural gas (LNG) increased by 7.3 per cent last year. Total LNG imports increased to 226 billion cubic metres in 2007 from 211 billion cubic metres in 2006.

Goldman predicts ‘super spike’ in crude prices

Crude prices can rise between US$150-US$200 (Rs 6,105- Rs 8,140) per barrel in the coming two years as growth in supply fails to keep pace with increased demand from developing nations, according to Goldman Sachs Group Inc.’s report. Goldman, which was one of the first to point to a triple digit crude price more than two years ago, said it believed the market was approaching the crunch in the ‘super-spike’. The report also mentions that “the possibility of $150-200 per barrel seems increasingly likely over the next six-24 months, though predicting the ultimate peak in oil prices as well as the remaining duration of the upcycle remains a major uncertainty.”

While demand for oil keeps increasing, supply of the same has run into rough weather with a dispute coming up between the US and Iran regarding the Persian Gulf oil producer’s plan to develop nuclear energy. In Nigeria - Africa’s biggest oil exporter - militant attacks on oil installations and abduction of workers since the beginning of 2006 has forced Royal Dutch Shell Plc. to halt output. In Venezuela, production has slumped to about 2.34 million barrels per day from almost 3 million barrels per day in 2002 according to Bloomberg’s estimates. Iraq’s oil production is yet to reach the levels attained before the US-led invasion of 2003 as the country struggles to cope with sectarian fighting and attacks on its energy infrastructure. Mexico’s production has fallen below 3 million barrels per day since October as Petroleos Mexicanos - the state-owned oil company - failed to compensate for a 30% drop at Cantarell, its largest field, which accounts for 40% of total output.

OVL to buy Canadian oil firm

ONGC Videsh Ltd (OVL) has been aggressively pursuing energy interests in South and North America. In its latest initiative, OVL has entered into talks to acquire a midsized listed Canadian oil company having hydrocarbon blocks, including oil sand assets. The Canadian firm, through its subsidiary in Bermuda, holds three oil fields in a third country under two production sharing contracts. The acquisition will place OVL in a strategic position in the North American energy space. Code-named ‘Project Crystal’, the target company is listed on TSX Venture Exchange in Canada and the Stockholm Stock Exchange, Sweden.

The acquisition, if it goes through, will give OVL a foothold for its plan in oil sands, which has now gained currency following the spike in global oil prices. Canada is known to have high deposits of oil sands which are now being explored as a viable source of hydrocarbons. With crude prices ruling at record highs, several non-conventional hydrocarbon sources like gas hydrates are being researched.

OVL has significant portfolio of oil & gas assets in Colombia, Brazil, Venezuela and Cuba. In April 2008, it signed an agreement with Venezuela’s national oil company, PdVSA, to pick up a 40% stake in the San Cristobal oil field. Venezuela has also agreed to give two more blocks to OVL. OVL also has hydrocarbon assets in Vietnam, Russia, Sudan, Myanmar, Iraq, Libya, Qatar, Egypt, Syria and Turkmenistan.

Panna-Mukta fields to produce oil and ‘some gas’ soon

According to BG Group Plc’s Indian unit, Panna-Mukta oil and gas fields, located off the western coast of India, and which were shut down will soon resume production of oil and some associated gas. Gas production from the fields was cut by 5.6 million cubic meters per day from a daily average of 17.3 million cubic meters after an explosion in early June 2008. This halted the oil output of 40,000 barrels per day. The fields account for 20 percent of India’s gas production.

Rig use reaches 16-year high

Increased demand for oil and gas has pushed the rig use by petroleum explorers (e.g Chevron Corp., Total SA and Reliance Industries Ltd) in the Asia-Pacific region to a 16-year high in May 2008. The region, led by India and Indonesia, deployed 263 rigs in April, or about 24% of drilling equipment used globally excluding the US and Canada, the highest since February 1992 - oilfield services firm Baker Hughes Inc. said on its website. The region’s rig count rose 9% from a year earlier.

Oil producers are expanding their search for untouched reserves from India to the Canadian Arctic as record oil prices make previously uneconomical fields worth drilling. The international rig count, excluding the US and Canada, for May 2008 stood at 1,075 compared with 1,007 in the same month a year ago, the report said.

Private airstrips in great demand

The corporates are making a beeline with projects for government approval with government allowing establishment of private airstrips and airports. While Gwalior Sugar has applied for a private airport near Gwalior, aluminum major Vedanta has applied for an airstrip in Orissa and Sahara India is awaiting reply for a heliport at its Amby Valley project near Lonavala. The Adani Group wants a private airstrip and a public one at its SEZ in Mundra. A number of hospitals like Escorts in the National Capital Region (NCR) want a heliport. The AIIMS also wants a rooftop helipad. The Government is keen to start all these along with a heliport in Delhi before the 2010 Commonwealth Games. A steady flow of applications seeking Directorate General of Civil Aviation (DGCA) approval is expected soon.

Government to encourage airstrips in coastal areas

The government is contemplating to permit construction of new airports, including those located in the Special Economic Zones (SEZs) in coastal areas on a “case-by-case” basis provided they do not compromise “environmental considerations”.

In a draft notification issued on May 9, 2008 by the ministry of environment and forests (MoEF), and titled the Coastal Management Zone (CMZ) Notification, the government has clearly stated that such airport projects would be based on “detailed scientific study incorporating adequate environmental safeguard measures required for neutralizing damage to the coastal environment”.

It is believed that such a move will also help large coastal SEZs who may want own airstrips after the government last month announced a policy that makes this easier. Under the new policy, most airports can be cleared by the civil aviation ministry directly instead of seeking a Union cabinet approval.

Government gives big push to Aviation

Airports account for 40 per cent of India's trade by value and 95 per cent of international travel to and from India takes place through this mode. However, aviation infrastructure needs to be augmented for meeting the challenges of India’s growing cargo trade and passenger travel. According to estimates, the present infrastructure can support a 20 per cent growth in passenger traffic and 10 per cent growth in cargo traffic. The ministry of civil aviation estimates that there is a need for an investment of Rs 260 - Rs 360 billion for taking the infrastructure to desired levels.

The government has decided to give a big push to FDI in the sector. It has opened up 28 airports for foreign investment in areas of operation and maintenance of airports. For greenfield airports, FDI up to 100 per cent is allowed through automatic approvals whereas for existing airports, FDI up to 74 per cent is permitted through automatic approvals and upto 100 per cent through special permission from the Foreign Investment Promotion Board (FIPB).

Study highlights India’s mining potential

With India’s rich metal reserves, the country’s mining industry is projected to cross US$30 billion (about Rs 1,27,662 crore) accounting for about 2.5% of the total GDP in the next four years, according to a latest report. With a conducive regulatory framework facilitating significant investments in exploration, mine development and infrastructure, the mining industry can certainly live up to the projections.

The report on metals and mining also highlights India’s immense natural resources given that it ranks among the top 10 mineral-rich countries globally with endowments of iron ore deposits at 25.2 billion tonne, coal at 257.4 billion tonne and bauxite at 3.3 billion tonne constituting 3%, 10%, and 4% respectively of the world’s resources. The country also holds leading position globally in mica (No 1), barytes (No 2), chromite (No 4), kaolin (No 4), and manganese (No 7).

The report mentioned that the proposed National Mineral Policy and the allotment of captive coal blocks (in effect opening up the nationalized coal sector) are the key triggers for future development of mining in India. The ongoing bull run in minerals has created enormous wealth for investors. Market capitalisations of the leading global mining companies have increased at a compound annual growth rate (CAGR) of 39% per annum during 2001 to 2007, while the corresponding figure for top Indian miners is a whopping 139% per annum.

Reliance Power eyeing Indonesian coal mine

Reliance Power Ltd, the recently listed power generation company of the Anil Dhirubhai Ambani Group (ADAG), has plans to invest about US$1 billion (Rs 4,000 crore) in acquiring and developing a coal mine in the South Sumatra province of Indonesia. The sub-bituminous coal from the mine would be supplied to the company's 4,000-MW Ultra Mega Power Project at Krishnapatnam in Andhra Pradesh, which would be on stream by 2013. The coal would also be supplied to the 4,000-MW Shahapur power project in Maharashtra, which has a thermal power component of 1,200 MW. The Indonesian mine has coal resources of about 2 billion tonnes. The exploitable reserves are about 1.2 billion tonnes.

Reliance Power is the second largest domestic power company to acquire coal mines in Indonesia following Tata Power which had invested US$1.1 billion to purchase a 30 per cent stake in two major Indonesian thermal coal producers - PT Kaltim Prima Coal and PT Arutmin Indonesia - and a related trading company owned by PT Bumi Resources Tbk in March 2007.

CIL plans to develop abandoned mines

Coal India Limited (CIL) plans to develop 26 abandoned coal mines in joint venture with private sector players. CIL's board of directors has given an in-principle approval to the proposal. These 26 abandoned mines have huge untapped reserves of good quality coking coal and CIL is keen to develop these underground mines in 50:50 joint ventures with selected private sector partners. The exercise could result in significant addition to CIL's revenue and would help the public sector company in acquiring state-of-the-art technological know-how.

 

Bagrodia clarifies Government stand on New Coal Distribution Policy

The new Union minister of state for coal - Santosh Bagrodia - clarified that the government had no plans to overhaul the new coal distribution policy being rolled out. He had earlier stated that the coal policy launched in October 2007 was going to be turned on its head. "The new policy is a well framed policy and we will work under the broad guidelines of it," he said. However, he added that all industries needed to get coal at the same price and this could entail some fine-tuning in the system to do away with discrimination pricing. As a first step to curb supply constraints, he directed Coal India to ensure that there is no supply shortage. "We currently have a stock of 47 million tonne and we propose to liquidate it so that there is abundant supply in the market".

Government plans to boost hydel power capacity

The government is planning addition of 40,000 mw of hydroelectric power generation capacity during the 12th (2012-17) and 13th Five Year Plans (2017-22) to deal with energy shortfalls. The 11th Five-Year Plan also focuses primarily on adding power generation capacity using coal and gas as fuel. It is expected that a growth of 9 per cent in the power sector will be reached during the 11th Plan.

States of Jammu & Kashmir, Arunachal Pradesh, Himachal Pradesh, Sikkim and Uttarakhand have been identified for setting up the hydro power projects. The government is also looking for new efficient technologies for the sector. There are efforts to place Renovation and Modernisation (R&M) programmes for efficiency since High Plant Load Factor (PLF) is always not high in efficiency. Besides, coal production is being doubled in the next five years for meeting fuel requirements of thermal plants

Tatas plan wind power expansion

Energy major Tata Power has plans to add 115 MW of wind power capacity in the current fiscal at an estimated investment of Rs 500 crore. The new capacities would be coming up in Gujarat and Karnataka. Orders for the turbines have already been placed with Suzlon and Enercon. The company already has 85 MW of installed wind capacity in Maharashtra.

The company is also looking at other sectors like solar power for possible investment opportunities. However, investment in this sector is not forthcoming on account of inadequate policy support from the government. Nevertheless, solar power is under active consideration of the company.

NTPC also plans fresh hydel capacity

The state-run NTPC has already begun preparations for adding nearly 7,000 mw in the hydro sector by the end of the 12th Plan (2012-17). NTPC’s move is crucial given that the power ministry and the Central Electricity Authority (CEA) had recently called upon the state and central undertakings and the private sector to start planning beyond the 11th Plan.

NTPC Hydro Limited, a subsidiary formed to take forward the hydro capacity expansion and provide exclusive push to small and medium sized hydro projects upto 250 mw, also plans to develop Lata Tapovan (171 mw) in Uttarakhand and the Rammam-III (120 mw) in West Bengal during the 12th Plan period. The company is currently in the process of acquiring land for both these projects. In the meantime, NTPC is in the process of developing three hydel projects - Koldam (800 mw) in Himachal Pradesh, Loharigang Pala (600 mw) and Tapovan Vishnugad (500 mw) in Uttarakhand. These projects are likely to be developed within the 11th Plan period.

Aston to set up greenfield projects in India

US-based infrastructure project management company, Astonfield Renewable Resources, has plans to set up nationwide renewable energy energy projects of 500 mw. It is for the first time that such greenfield projects with more than a megawatt solar power capacity is going to be set up in the country. The country's total solar energy output is estimated to be around only 2.5 mw, mostly supported by government programme and NGOs. According to top officials with Astonfield, solar power projects worth 160 mw will be commissioned over the next 3 years along with 140 mw of biomass projects in the first phase. Astonfield is expecting greater returns from the solar power business as the tariff is likely to drop in the coming years.

The company will invest more than $1billion over the next three years, focusing on areas such as solar, biomass and biogas. Astonfield is also setting up a solar power plant at Bankura, West Bengal, with 5 mw capacity for which the power purchasing agreement has already been approved by West Bengal electricity board.

Besides, the company is in talks with other state government officials in Rajasthan, Punjab and Haryana for setting up power plants based on renewable energy. At present only West Bengal, Rajasthan, Punjab and Haryana have approved policies through which the state electricity departments can buy solar or other renewable power from private players.

 

Inclusive Growth : A Challenge for Infrastructure

Biswajeet Dhar

India’s infrastructural frailties have widely been recognised as major impediments towards realising the goal of sustained economic expansion. The Planning Commission has indicated that the Eleventh Plan target of 9 per cent GDP growth, with emphasis on a broad-based and inclusive approach that would improve the quality of life and reduce the disparities across regions and communities, can only be achieved if a comprehensive programme for infrastructure development can be put in place. In its recent edition of the Development Policy Review for India, the World Bank has emphasised that inadequate infrastructure has emerged as a binding constraint on the country’s growth process. The greatest pressures on India’s infrastructure, according to the World Bank, are probably in electricity, roads and urban infrastructure. The Bank has further argued that since infrastructural bottlenecks may be affecting the poorer sections disproportionately, overcoming these bottlenecks can help address the issue of equity besides contributing to the growth momentum.

While the problems caused by the inadequacies in the available infrastructure on the efficiencies of both the goods and the services producers have been discussed quite extensively, a less focused dimension is the adverse effect of the infrastructural bottlenecks on the country’s engagement with the global economy. A recent report produced by the World Trade Organization (WTO) has revealed that the quality and cost of infrastructure and the related services can have considerable impact on the transactions cost and hence the efficiencies in engaging in global business operations. Importantly, the WTO has pointed out that infrastructural services play an important role in the conduct of trade, and that efforts must be made to improve their efficiency and effectiveness.

With the government recognising the importance of strengthening the country’s infrastructure, efforts are now being made to set the priorities. This is obviously a daunting task given that India has considerably under-invested in infrastructure during the past decade and a half. A comparison with China – another emerging economy – would help clarify this dimension. While China’s installed power capacity had increased by 136 per cent between 1990 and 2000, for India the corresponding figure was a mere 51 per cent. Similar situations prevail in areas like investment in roads: since the mid-1990s, China has been investing around 8-10 times more than what India has managed to do. The gap in the available infrastructure stocks between the two countries has grown so large that, according to World Bank estimates, India would have to invest around 12.5 per cent of its GDP annually until 2015 in order to catch up with China’s present levels of stocks on per capita terms.

Contrary to these estimates provided by the World Bank, the Planning Commission has decided to invest an equivalent of 7.44 per cent of the country’s GDP (at market prices) over the Eleventh Plan period (2006-07 to 2011-12). An estimated US $ 488 billion has thus been provided for building the infrastructural facilities. This figure is in keeping with the expectation of an average annual GDP growth of 9 per cent over the current plan period.

In terms of the priorities set by the Planning Commission, electricity and roads have been allocated the largest shares of funds allocated for infrastructure. More than 45 per cent of the total Eleventh Plan allocations on infrastructure have been set aside for these two sectors alone. Almost 20 per cent of the total investment on infrastructure would be made in the rural sector, the largest component of which would be investment on irrigation, including watershed development.

These priorities, particularly the allocations for infrastructure projects in the rural sector, would, in our view, require a serious look given the crisis that agriculture faces at the present juncture. The relative neglect of agriculture, which has been a feature of India’s development experience, is largely responsible for the deep-seated crisis facing this sector. Agricultural crisis in India has been manifest in two prominent ways. First, productivity gains for most of the important crops, in particular the food crops, have been down-hill for close to a decade now. Second, the share of agriculture in the country’s GDP has declined to just more than a sixth of the total, down from a third in the early 1990s. However, during this period, the share of the total workforce dependent on the rural sector has remained almost stagnant. The squeeze on agriculture has posed considerable problems for the urban centres, and it is increasingly evident that the urban areas cannot provide decent employment to the rural migrants. Given this scenario, it is imperative that a major initiative should be taken to revive the rural economy and the cornerstone of this initiative would be to strengthen rural infrastructure. Driving this initiative should be the objective of improving the viability of the small farmers, who are the mainstay of Indian agriculture.

It may be argued that there are at least three ways in which infrastructural deficiencies can affect the small farmers. In the first place, they have little scope to improve their on-farm efficiencies, which is reflected in the slowing down of productivity gains. Second, the lack of infrastructure limits the post–harvest options for the farmers. In the absence of storage facilities and cold-chains, the small farmers find themselves at the mercy of the middlemen who make the most out of their poor bargaining position. And, finally, the inadequate infrastructure in the rural areas limits the possibilities of establishing agro-processing units, which can provide an alternate channel for the farmers to market their products. It is therefore critically important that the policy makers focus on the urgent infrastructural needs of the small farmers so as to help them improve their economic viability, which can, in turn, contribute substantially towards extricating Indian agriculture from the present morass.

The above-mentioned perspective seems lacking in the recent thinking amongst the policy makers on strengthening the country’s infrastructure. This has been reflected in the allocations they have made for the rural electricity and roads. While rural electricity projects would get only about 5 per cent of the total funds allocated for the electricity sector during the Eleventh Plan, the share of rural roads in total investment in road sector would be about 13 per cent.

Finally, it must be emphasised that bridging the rural-urban gap in infrastructure is one of the necessary conditions for realising the objective of inclusive growth that has been set for the Eleventh Plan.

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