ECONOMY MATTERS Volume 01 No. 11 November-December 2013 Rejuvenating Exports Cover Story - Euro Area's Economic Recovery Falters in the Third Quarter Inside This Issue - Asian Economies: A 'Mixed Bag' as far as Growth is Concerned - Cautious Optimism on Growth and Current Account - GST is Inevitable; - But Only After Next General Elections! - Sector in Focus: Electricity
Euro Area is recovering slowly, with its major member countries registering lower-than-expected growth rates in the third quarter. Major Asian economies have shown diverse growth trends in the last few quarters. We cover this in the section on Global Trends in this month’s issue of Economy Matters.
In the section on Domestic Trends, we discuss the trends emanating out of the recent releases on GDP, Current Account, IIP and Inflation data during the month of December 2013.
The Sectoral spotlight for this issue is on Electricity, which remains an important contributor to GDP growth. We evaluate the impact of the Electricity Act, 2003 on the sector’s performance.
In the Special Article, we provide a snapshot of India’s exports sector along with analyzing the important sectors in exports such as services and tourism.
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identifying the exemptions and determination of RNR.
An important pending issue is finalisation of the rules
relating to 'Place and Time of Supply of Goods &
Services'. On the issue of Dual GST, the States have
sought to administer and collect on Centre's behalf
CGST as well, for Small Business with a threshold of
annual turn-over of Rs 1.5 crore. While opposing this
move, the Centre pointed out that a slew of measures
including use of robust technology would mitigate the
apprehensions of the Small Business on dual control.
The issue of collection of SGST in inter-state transactions
by Centre was closed in the First Discussion Paper itself
when the Integrated GST (IGST) model was chosen. But
some States have desired to administer SGST on inter-
state transactions as well. Final decision on these
important technical issues are critical for designing the
GST-Net, a special purpose vehicle that would provide
the IT support for GST business processes.
Thus, besides the issue of Constitutional amendment,
lot of grounds will have to be covered on technical
issues as well before a decent dual GST can be
introduced. In the light of the seemingly endless
negotiations on these critical issues, a question
therefore arises whether the Centre should seriously
consider introducing its own Central GST by bringing all
Central indirect taxes within its ambit. This would not
require any Constitutional amendment. In fact, Sijbren
Cnossen, an international VAT expert, has recently
suggested precisely this. He has inter alia suggested that
the Centre should proceed to introduce its own GST on
as broad a base as possible and apply a single, uniform
low rate. It would then be upto the States to introduce a
similar GST. He felt that it would be 'easier with an
overarching modern GST at the Central level'. This is a
pragmatic idea, which deserves careful consideration.
The bottom-line, however, is that any further critical
decision with respect to GST will have to wait until the
next General Elections in 2014.
norms are not violated. The Parliamentary Standing
Committee on Finance chaired by Yashwant Sinha
submitted its report on the Bill in July 2013. It made an
unequivocal endorsement of the Dual GST structure.
While making recommendations on various provisions
of the Bill, the all-party Committee also allayed the fears
of some of the States about loss of fiscal autonomy.
The Centre accepted most of the Committee's
recommendations and sent a revised Bill for
endorsement by the States. Some of the features of the
Revised Bill were as follows. The stipulation regarding
'consensus' before every decision of the GST Council
was replaced by 'voting'. The provision regarding GST
Dispute Settlement Authority was dropped, and instead
GST Council was to deal with the disputes. Certain critical
items like Petroleum and Petroleum products, Alcohol
etc were not to be excluded from the ambit of GST in the
Constitutional provision itself. The 'entry tax' including
'Octroi' was to be subsumed in the GST. In deference to
the Committee's observations, the Centre also suitably
modified the provisions regarding 'Declared Goods' by
bringing the GST Council in the loop.
The States, however, in the November meeting of the EC
opposed most of the views of the Centre. They insisted
on retaining the exclusion clause relating to Petroleum,
Alcohol etc in the Constitution itself. They opposed
subsuming of 'entry tax'. They even opposed the
existing Constitutional authority of the Centre with
regard to 'Declared Goods'. They also reiterated the
demand for a formal Constitutional mechanism for
compensating the States for possible revenue loss after
introduction of GST. Against this backdrop, one will now
have to wait for the new Lok Sabha to deal with a new
Amendment Bill after the general elections.
Among the technical issues, agreement has been
reached on 'threshold' which would be an annual
turnover of Rs. 25 lakhs. Exercise is continuing on
GST is Inevitable; - But Only After Next General Elections!
the Empowered Committee of State Finance Ministers
(EC) was tasked to steer the introduction of GST as well.
In November 2009, the EC came out with the First
Discussion Paper on GST which outlined its broad
structures and flagged the issues to be sorted out
between Centre and the States. Some such issues were
determination of 'Threshold' above which GST would be
applicable, items and taxes that would remain outside
its ambit, identification of exemptions, determination of
Revenue Neutral Rates (RNR) and GST rates, and
designing a mechanism of administering Dual Control by
Centre and the States. On taxation of inter-state
transaction of goods and services, it endorsed the
scheme of Integrated GST (IGST) proposed by the
Centre, in terms of which the IGST on inter-state
transactions would be levied and collected by Centre
and distributed to the destination States.
The other important issue was the need for amendment
of the Constitution. The Centre had placed a
Constitution Amendment Bill (the Bill) before
Parliament in March 2011. Besides empowering both
Centre and the States for collecting GST, the Bill
proposed creation of a 'GST Council' and a Dispute
Settlement Authority (DSA) so as to ensure that the GST
Goods and Service Tax (GST) is designed to facilitate
seamless flow of goods and services throughout
the country. With its introduction, there will be minimal
cascading effect of taxing the taxes because of input tax
credit at each taxation point, and optimum contact
between taxpayers and taxmen since its administering
would be technology driven. There will be two streams
of GST - the Central GST and the States GST. The two tax
administrations will have commonality of law,
procedure and dispute resolution mechanisms. Due to
substantially higher tax base, the GST rate is expected to
be low, and that would bring down the price of the
goods and services.
With the success of Value Added Tax (VAT) in the States,
TAXATIONGuest Article
(Views are personal)
18ECONOMY MATTERS 19 NOVEMBER - DECEMBER 2013
Mr Sumit Dutt Mazumdar
Indirect Tax Ombudsman andFormer Chairman, CBEC
identifying the exemptions and determination of RNR.
An important pending issue is finalisation of the rules
relating to 'Place and Time of Supply of Goods &
Services'. On the issue of Dual GST, the States have
sought to administer and collect on Centre's behalf
CGST as well, for Small Business with a threshold of
annual turn-over of Rs 1.5 crore. While opposing this
move, the Centre pointed out that a slew of measures
including use of robust technology would mitigate the
apprehensions of the Small Business on dual control.
The issue of collection of SGST in inter-state transactions
by Centre was closed in the First Discussion Paper itself
when the Integrated GST (IGST) model was chosen. But
some States have desired to administer SGST on inter-
state transactions as well. Final decision on these
important technical issues are critical for designing the
GST-Net, a special purpose vehicle that would provide
the IT support for GST business processes.
Thus, besides the issue of Constitutional amendment,
lot of grounds will have to be covered on technical
issues as well before a decent dual GST can be
introduced. In the light of the seemingly endless
negotiations on these critical issues, a question
therefore arises whether the Centre should seriously
consider introducing its own Central GST by bringing all
Central indirect taxes within its ambit. This would not
require any Constitutional amendment. In fact, Sijbren
Cnossen, an international VAT expert, has recently
suggested precisely this. He has inter alia suggested that
the Centre should proceed to introduce its own GST on
as broad a base as possible and apply a single, uniform
low rate. It would then be upto the States to introduce a
similar GST. He felt that it would be 'easier with an
overarching modern GST at the Central level'. This is a
pragmatic idea, which deserves careful consideration.
The bottom-line, however, is that any further critical
decision with respect to GST will have to wait until the
next General Elections in 2014.
norms are not violated. The Parliamentary Standing
Committee on Finance chaired by Yashwant Sinha
submitted its report on the Bill in July 2013. It made an
unequivocal endorsement of the Dual GST structure.
While making recommendations on various provisions
of the Bill, the all-party Committee also allayed the fears
of some of the States about loss of fiscal autonomy.
The Centre accepted most of the Committee's
recommendations and sent a revised Bill for
endorsement by the States. Some of the features of the
Revised Bill were as follows. The stipulation regarding
'consensus' before every decision of the GST Council
was replaced by 'voting'. The provision regarding GST
Dispute Settlement Authority was dropped, and instead
GST Council was to deal with the disputes. Certain critical
items like Petroleum and Petroleum products, Alcohol
etc were not to be excluded from the ambit of GST in the
Constitutional provision itself. The 'entry tax' including
'Octroi' was to be subsumed in the GST. In deference to
the Committee's observations, the Centre also suitably
modified the provisions regarding 'Declared Goods' by
bringing the GST Council in the loop.
The States, however, in the November meeting of the EC
opposed most of the views of the Centre. They insisted
on retaining the exclusion clause relating to Petroleum,
Alcohol etc in the Constitution itself. They opposed
subsuming of 'entry tax'. They even opposed the
existing Constitutional authority of the Centre with
regard to 'Declared Goods'. They also reiterated the
demand for a formal Constitutional mechanism for
compensating the States for possible revenue loss after
introduction of GST. Against this backdrop, one will now
have to wait for the new Lok Sabha to deal with a new
Amendment Bill after the general elections.
Among the technical issues, agreement has been
reached on 'threshold' which would be an annual
turnover of Rs. 25 lakhs. Exercise is continuing on
GST is Inevitable; - But Only After Next General Elections!
the Empowered Committee of State Finance Ministers
(EC) was tasked to steer the introduction of GST as well.
In November 2009, the EC came out with the First
Discussion Paper on GST which outlined its broad
structures and flagged the issues to be sorted out
between Centre and the States. Some such issues were
determination of 'Threshold' above which GST would be
applicable, items and taxes that would remain outside
its ambit, identification of exemptions, determination of
Revenue Neutral Rates (RNR) and GST rates, and
designing a mechanism of administering Dual Control by
Centre and the States. On taxation of inter-state
transaction of goods and services, it endorsed the
scheme of Integrated GST (IGST) proposed by the
Centre, in terms of which the IGST on inter-state
transactions would be levied and collected by Centre
and distributed to the destination States.
The other important issue was the need for amendment
of the Constitution. The Centre had placed a
Constitution Amendment Bill (the Bill) before
Parliament in March 2011. Besides empowering both
Centre and the States for collecting GST, the Bill
proposed creation of a 'GST Council' and a Dispute
Settlement Authority (DSA) so as to ensure that the GST
Goods and Service Tax (GST) is designed to facilitate
seamless flow of goods and services throughout
the country. With its introduction, there will be minimal
cascading effect of taxing the taxes because of input tax
credit at each taxation point, and optimum contact
between taxpayers and taxmen since its administering
would be technology driven. There will be two streams
of GST - the Central GST and the States GST. The two tax
administrations will have commonality of law,
procedure and dispute resolution mechanisms. Due to
substantially higher tax base, the GST rate is expected to
be low, and that would bring down the price of the
goods and services.
With the success of Value Added Tax (VAT) in the States,
TAXATIONGuest Article
(Views are personal)
18ECONOMY MATTERS 19 NOVEMBER - DECEMBER 2013
Mr Sumit Dutt Mazumdar
Indirect Tax Ombudsman andFormer Chairman, CBEC
Electricity
cent. In order to make the sector more efficient,
promote its development and consolidate laws relating
to generation, transmission, distribution, trading and
use of electricity, government had brought into effect
the Electricity Act on 10th June 2003. The six key
elements of the reform agenda were:
- Introducing competition
- Enhancing accountability and transparency
- Improving cost recovery and commercial viability
- Increasing access to electricity, particularly in rural
areas
- Improving customer service and affordability
- Enhancing accountability and transparency
Electricity sector is an important contributor to the
economic growth of the country. However, in the
last year, the sector's growth halved to 4.0 per cent as
compared to 8.2 in 2011-12. In the current year, the first-
half growth remained tepid at 5.9 per cent, however, in
September 2013, growth stood at a fiscal year high of
12.9 per cent. In October 2013, the momentum in the
sector slowed down as growth came in at a paltry 1.3 per
Source: CSO
Electricity Sector Growth (as per IIP), y-o-y%
6.5
1.3
16
12
8
4
0
-4
Apr
-10
Jul-1
0
Oct
-10
Jan-
11
Apr
-11
Jul-1
1
Oct
-11
Jan-
12
Apr
-12
Jul-1
2
Oct
-12
Jan-
13
Apr
-13
Jul-1
3
Oct
-13
1. Competition in generation, leading to capacity
addition and better price discovery: The Act
created initial positive momentum and the rate
of capacity addition increased three times from
an average of 3.5 GW per year from 1993-2002
(VIIth and IXth plan periods) to 10.5+ GW per
year during 2003-2013. The progress in
renewables has been equally impressive, with
India adding approximately 26 GW during 2003
to 2013, against an installed base of just 3.5 GW in
2002. However, this momentum was then lost
due to falling returns and increasing risks to
developers and is amply clear from the fact that
India still suffers from a peak deficit of around 10
per cent. Moreover, at a time when capacity
addition should continue to keep pace, the
industry is hit by declining investments, as
evident from BHEL's order inflow. Decreasing
investment, and thus the reduced rate of
capacity addition, does not augur well for the
energy sector. Based on the current trajectory,
India could expect a continued power deficit
situation, and could face a peak deficit of 13 per
cent by 2017.
As the Act completes its 10 years, it will be pertinent to
evaluate the post Act era, especially the key successes
of the Act, the important learnings and enumerate the
next steps for the Indian power sector.
I. Overarching Objectives Not Met
The Electricity Act 2003 was intended to pave the way
for an India that provided "power for all". It aimed to
develop the power markets (competition in generation,
development of merchant markets), improve the
viability of distribution companies (discoms) and make
the sector more consumer oriented (supply in all areas,
choice). This was to be enabled by the establishment of
independent regulators. However, the sector has not
achieved its main objectives. Only 75 per cent of villages
were electrified by 2012, as per the World Energy
Outlook. Progress in creating peaking power capacity is
crucial for India, given that it has over 50 per cent share
of service in GDP and also it continues to urbanise
rapidly.
The Act focused on aforesaid six areas to drive
development. Progress was achieved in two areas,
which subsequently lost momentum, and little to no
progress was made in the rest. Here is an evaluation:
Order Inflow for BHEL (Rs Crores) Power Deficit is Likely to Continue
Source: BHEL Annual Reports, Planning Commission, CEA & McKinsey Analysis
59678 59037 60507
22096 22500
FY09 FY10 FY11 FY12 FY13
135 123
199176
Peakdemand
Peak supply
Peakdemand
Peaksupply
2012 2017 (E)
launched under National Electricity policy to
ensure electrification of all villages by 2010, and
the deadline was later shifted to 2012. However,
the scheme failed to achieve electrification of all
villages. The Ministry of Power's definition of
electrification (a village is considered electrified
if power is available to public places and to 10 per
2. Supply of electricity to all areas, through T&D
network build-up, and introduction of open
access: The Rural Electrification policy was
launched in 2006, in order to comply with the
2003 Act, and aimed to provide electricity to all
households. The Rajiv Gandhi Grammen
Vidhyutikaran Yojana (RGGVY programme) was
20ECONOMY MATTERS 21 NOVEMBER - DECEMBER 2013
SECTOR IN FOCUS
Electricity
cent. In order to make the sector more efficient,
promote its development and consolidate laws relating
to generation, transmission, distribution, trading and
use of electricity, government had brought into effect
the Electricity Act on 10th June 2003. The six key
elements of the reform agenda were:
- Introducing competition
- Enhancing accountability and transparency
- Improving cost recovery and commercial viability
- Increasing access to electricity, particularly in rural
areas
- Improving customer service and affordability
- Enhancing accountability and transparency
Electricity sector is an important contributor to the
economic growth of the country. However, in the
last year, the sector's growth halved to 4.0 per cent as
compared to 8.2 in 2011-12. In the current year, the first-
half growth remained tepid at 5.9 per cent, however, in
September 2013, growth stood at a fiscal year high of
12.9 per cent. In October 2013, the momentum in the
sector slowed down as growth came in at a paltry 1.3 per
Source: CSO
Electricity Sector Growth (as per IIP), y-o-y%
6.5
1.3
16
12
8
4
0
-4
Apr
-10
Jul-1
0
Oct
-10
Jan-
11
Apr
-11
Jul-1
1
Oct
-11
Jan-
12
Apr
-12
Jul-1
2
Oct
-12
Jan-
13
Apr
-13
Jul-1
3
Oct
-13
1. Competition in generation, leading to capacity
addition and better price discovery: The Act
created initial positive momentum and the rate
of capacity addition increased three times from
an average of 3.5 GW per year from 1993-2002
(VIIth and IXth plan periods) to 10.5+ GW per
year during 2003-2013. The progress in
renewables has been equally impressive, with
India adding approximately 26 GW during 2003
to 2013, against an installed base of just 3.5 GW in
2002. However, this momentum was then lost
due to falling returns and increasing risks to
developers and is amply clear from the fact that
India still suffers from a peak deficit of around 10
per cent. Moreover, at a time when capacity
addition should continue to keep pace, the
industry is hit by declining investments, as
evident from BHEL's order inflow. Decreasing
investment, and thus the reduced rate of
capacity addition, does not augur well for the
energy sector. Based on the current trajectory,
India could expect a continued power deficit
situation, and could face a peak deficit of 13 per
cent by 2017.
As the Act completes its 10 years, it will be pertinent to
evaluate the post Act era, especially the key successes
of the Act, the important learnings and enumerate the
next steps for the Indian power sector.
I. Overarching Objectives Not Met
The Electricity Act 2003 was intended to pave the way
for an India that provided "power for all". It aimed to
develop the power markets (competition in generation,
development of merchant markets), improve the
viability of distribution companies (discoms) and make
the sector more consumer oriented (supply in all areas,
choice). This was to be enabled by the establishment of
independent regulators. However, the sector has not
achieved its main objectives. Only 75 per cent of villages
were electrified by 2012, as per the World Energy
Outlook. Progress in creating peaking power capacity is
crucial for India, given that it has over 50 per cent share
of service in GDP and also it continues to urbanise
rapidly.
The Act focused on aforesaid six areas to drive
development. Progress was achieved in two areas,
which subsequently lost momentum, and little to no
progress was made in the rest. Here is an evaluation:
Order Inflow for BHEL (Rs Crores) Power Deficit is Likely to Continue
Source: BHEL Annual Reports, Planning Commission, CEA & McKinsey Analysis
59678 59037 60507
22096 22500
FY09 FY10 FY11 FY12 FY13
135 123
199176
Peakdemand
Peak supply
Peakdemand
Peaksupply
2012 2017 (E)
launched under National Electricity policy to
ensure electrification of all villages by 2010, and
the deadline was later shifted to 2012. However,
the scheme failed to achieve electrification of all
villages. The Ministry of Power's definition of
electrification (a village is considered electrified
if power is available to public places and to 10 per
2. Supply of electricity to all areas, through T&D
network build-up, and introduction of open
access: The Rural Electrification policy was
launched in 2006, in order to comply with the
2003 Act, and aimed to provide electricity to all
households. The Rajiv Gandhi Grammen
Vidhyutikaran Yojana (RGGVY programme) was
20ECONOMY MATTERS 21 NOVEMBER - DECEMBER 2013
SECTOR IN FOCUS
cent of that remained unsold, despite an energy
deficit of 8.5 per cent, and significant amount of
power was being generated from diesel sets at
over Rs 25 per unit. This was largely driven by
discoms resorting to load shedding to prevent
further financial losses, and partly due to
unavailability of evacuation infrastructure.
cent of the village's households), 90 per cent of
electrification has been achieved so far.
However, this is still way off the Act's stated
objective of 100 per cent electrification.
3. Trading and merchant market development:
Power available at the exchange doubled in the
last 3 years to 18 TWh. However, almost 20 per
Demand Supply Position (in TWh) Demand Supply Imbalance in Power Exchange (in TWh)
746.6
788.4
830.6
861.6
2009 2010
18.3
14.9
2009 2010
9.8 9.4
Source: IEX & CEA
most states, and the creation of independent
regulators. Moreover, there has been a steady progress
in capacity addition since the implementation of the Act
in 2003. 117 GW of generation capacity was added in the
last decade, an average of approximately 11 GW per
year. Of the total, 75 GW was added in the last 4 years.
This is a significant improvement compared to the 36
GW added between 1999 and 2002 (3.6 GW per year).
Some of its successes have been enumerated below:
a. Mobilised massive private sector interest and
investment: Past attempts to mobilise private
sector investments in electricity were not
successful. However, the Act prompted massive
private sector and even international interest in
investing in the power sector. Of the 111 GW of
generation capacity installed in the last decade,
the private sector contributed more than 50 per
cent (57 GW). This has increased their overall
contribution in generation capacity from a mere
11 per cent in 2004 to 31 per cent in 2013.
4. Discom viability through improved aggregate
t e c h n i c a l a n d c o m m e r c i a l ( A T & C )
performance, unbundling and cost reflective
tariffs: Though AT&C losses were reduced from
over 35 per cent in 2003 to 25 per cent in 2012 and
discoms were unbundled and recapitalised, the
accumulated losses in 2013 far exceed the pre-
recapitalisation losses.
5. Consumer benefit through choice (open
access), improved service and affordability:
This has remained a non-starter.
II. Good Act, Derailed By Poor Execution
And Externalities
Even though many of the objectives of the Act remained
unmet, it did lay a sound foundation for the electricity
sector in India. The many successes of the Act include:
the creation of generation capacity across conventional
and renewable technologies, operations improvements
across most discoms, unbundling of electricity across
22ECONOMY MATTERS
e. Conducive for the growth of renewables: The
Electricity Act has also been conducive for the
growth of renewables. The installed renewables
capacity has grown from an insignificant 3.5 GW
to more than 29 GW by 2013 - a phenomenal 8x
increase. Wind power has been the main driver
of growth in the last decade. The next decade
has been termed the "decade of solar" with
ambitious targets and incentives for growth
being set.
Importantly, similar Acts have succeeded in other
countries, e.g., United Kingdom. Further, the principles
of these acts are seen as the template of power sector
reforms in countries considering reforms. However,
despite the aforesaid benefits of the Act, poor
execution and externalities have marred its
performance. This is discussed in the next section.
III. Poor Execution and Externalities Have
Marred Performance
Despite the significant AT&C loss reduction reported in
the last few years, discoms continue to bleed financially.
Their accumulated losses have grown six times in the
last 7 years, to a staggering Rs 250,000 crore. This has
severely constrained their ability to secure long-term
and short-term power, and many discoms prefer to
resort to load shedding. This has mainly been driven by
their inability to pass on increases in power sourcing
costs (due to fuel inflation) to consumers. At the same
b. Very competitive tariffs underpinned by
innovation on capex and opex: The early rounds
of competitive bidding in generation led to very
competitive tariffs - among the lowest in the
world. While some of this was driven by
exuberance, there is also ample evidence to
show that the boundaries of efficiency,
technology, capital efficiency and plant
availability have been pushed through
innovative practices.
c. Spectacular operational performance
improvement in a few Discoms: High AT&C
losses have been the bane of the sector for
many decades and many believed it was
impossible to reduce them. However, average
AT&C losses have come down in the last 10 years
f r o m a p p r o x i m a t e l y 3 5 p e r c e n t t o
approximately 25 per cent. What is more
impressive is that a few discoms have reduced
losses from over 40 per cent to less than 20 per
cent in 5 to 6 years, and that 31 out of 35 discoms
have an improving trajectory here.
d. Unbundling and establishment of independent
regulators: There is legitimate frustration on the
difficulty of making any progress in the power
sector due to it being a state subject. However,
the silver lining is that most states aligned with
Electricity Act 2003, undertook the unbundling,
and established independent regulators.
Source: CEA, Planning Commission & Infraline
Increasing Share of Private Sector in Generation (in GW)
12 13 14 15 18 2027 31
88 87 86 85 82 80 73 69
2006 2007 2008 2009 2010 2011 2012 2013
Government Private
23 NOVEMBER - DECEMBER 2013
Supply Demand Supply Demand
cent of that remained unsold, despite an energy
deficit of 8.5 per cent, and significant amount of
power was being generated from diesel sets at
over Rs 25 per unit. This was largely driven by
discoms resorting to load shedding to prevent
further financial losses, and partly due to
unavailability of evacuation infrastructure.
cent of the village's households), 90 per cent of
electrification has been achieved so far.
However, this is still way off the Act's stated
objective of 100 per cent electrification.
3. Trading and merchant market development:
Power available at the exchange doubled in the
last 3 years to 18 TWh. However, almost 20 per
Demand Supply Position (in TWh) Demand Supply Imbalance in Power Exchange (in TWh)
746.6
788.4
830.6
861.6
2009 2010
18.3
14.9
2009 2010
9.8 9.4
Source: IEX & CEA
most states, and the creation of independent
regulators. Moreover, there has been a steady progress
in capacity addition since the implementation of the Act
in 2003. 117 GW of generation capacity was added in the
last decade, an average of approximately 11 GW per
year. Of the total, 75 GW was added in the last 4 years.
This is a significant improvement compared to the 36
GW added between 1999 and 2002 (3.6 GW per year).
Some of its successes have been enumerated below:
a. Mobilised massive private sector interest and
investment: Past attempts to mobilise private
sector investments in electricity were not
successful. However, the Act prompted massive
private sector and even international interest in
investing in the power sector. Of the 111 GW of
generation capacity installed in the last decade,
the private sector contributed more than 50 per
cent (57 GW). This has increased their overall
contribution in generation capacity from a mere
11 per cent in 2004 to 31 per cent in 2013.
4. Discom viability through improved aggregate
t e c h n i c a l a n d c o m m e r c i a l ( A T & C )
performance, unbundling and cost reflective
tariffs: Though AT&C losses were reduced from
over 35 per cent in 2003 to 25 per cent in 2012 and
discoms were unbundled and recapitalised, the
accumulated losses in 2013 far exceed the pre-
recapitalisation losses.
5. Consumer benefit through choice (open
access), improved service and affordability:
This has remained a non-starter.
II. Good Act, Derailed By Poor Execution
And Externalities
Even though many of the objectives of the Act remained
unmet, it did lay a sound foundation for the electricity
sector in India. The many successes of the Act include:
the creation of generation capacity across conventional
and renewable technologies, operations improvements
across most discoms, unbundling of electricity across
22ECONOMY MATTERS
e. Conducive for the growth of renewables: The
Electricity Act has also been conducive for the
growth of renewables. The installed renewables
capacity has grown from an insignificant 3.5 GW
to more than 29 GW by 2013 - a phenomenal 8x
increase. Wind power has been the main driver
of growth in the last decade. The next decade
has been termed the "decade of solar" with
ambitious targets and incentives for growth
being set.
Importantly, similar Acts have succeeded in other
countries, e.g., United Kingdom. Further, the principles
of these acts are seen as the template of power sector
reforms in countries considering reforms. However,
despite the aforesaid benefits of the Act, poor
execution and externalities have marred its
performance. This is discussed in the next section.
III. Poor Execution and Externalities Have
Marred Performance
Despite the significant AT&C loss reduction reported in
the last few years, discoms continue to bleed financially.
Their accumulated losses have grown six times in the
last 7 years, to a staggering Rs 250,000 crore. This has
severely constrained their ability to secure long-term
and short-term power, and many discoms prefer to
resort to load shedding. This has mainly been driven by
their inability to pass on increases in power sourcing
costs (due to fuel inflation) to consumers. At the same
b. Very competitive tariffs underpinned by
innovation on capex and opex: The early rounds
of competitive bidding in generation led to very
competitive tariffs - among the lowest in the
world. While some of this was driven by
exuberance, there is also ample evidence to
show that the boundaries of efficiency,
technology, capital efficiency and plant
availability have been pushed through
innovative practices.
c. Spectacular operational performance
improvement in a few Discoms: High AT&C
losses have been the bane of the sector for
many decades and many believed it was
impossible to reduce them. However, average
AT&C losses have come down in the last 10 years
f r o m a p p r o x i m a t e l y 3 5 p e r c e n t t o
approximately 25 per cent. What is more
impressive is that a few discoms have reduced
losses from over 40 per cent to less than 20 per
cent in 5 to 6 years, and that 31 out of 35 discoms
have an improving trajectory here.
d. Unbundling and establishment of independent
regulators: There is legitimate frustration on the
difficulty of making any progress in the power
sector due to it being a state subject. However,
the silver lining is that most states aligned with
Electricity Act 2003, undertook the unbundling,
and established independent regulators.
Source: CEA, Planning Commission & Infraline
Increasing Share of Private Sector in Generation (in GW)
12 13 14 15 18 2027 31
88 87 86 85 82 80 73 69
2006 2007 2008 2009 2010 2011 2012 2013
Government Private
23 NOVEMBER - DECEMBER 2013
Supply Demand Supply Demand
own. It is no surprise that the sentiment has
turned negative.
3. Gaining privileged access to low cost fuel is
necessary: Fuel prices will continue to escalate.
Recent analysis suggests that the price of
seaborne thermal coal could cross US$130 per
ton by 2015. In such an escalating, volatile
environment, leaving a significant part of India's
generation capacity exposed will make the task
of creating a viable distribution sector even
tougher than it is now. Therefore, it is critical
that India fully monetises its domestic fuel
resources and use its scale to gain privileged
access to international fuel resources.
Needless to say, these learnings are very difficult to
operationalise. Though many solutions have been
discussed by various stakeholders, following are the
few solutions, which have worked in small pockets and
can be scaled up, and new ideas which are becoming
feasible due to recent technologies.
- Ensure cost reflective tariffs. This is the single
biggest lever to ensure the viability of the
distribution sector, though politically this
remains the most difficult. While the usual
options (e.g., linking payment to performance,
open access) should continue to be pursued,
leveraging Aadhaar to pay subsidies directly to
economically weak families is a promising area
to explore.
- Pay subsidy directly to economically weak
households. The biggest obstacle against cost
reflective tariffs is the need to provide
affordable power to users in the agricultural
sector and low income households, which is
provided through low tariffs for these
categories. However, as with other subsidies,
most of these lower tariffs get misdirected.
Aadhaar now allows for subsidies to be directly
paid to the economically weaker segments,
removing the need to keep tariffs artificially low.
The direct payout amount is likely to be a much
lesser, compared to the annual discom losses -
our analysis suggests subsidy for residential
customers would reduce by approximately 40
per cent. More importantly, it will pave the way
for making distribution viable and will help
unlock the development of the sector.
time, consumers use significantly higher cost, diesel
based power, pointing to a massive market failure.
Massive externalities like fuel security and project
execution delays have further hurt the sector.
Challenges at each stage of mining (e.g., exploration,
clearances and development) have severely impacted
domestic coal production. This has led to heavy reliance
on expensive imported coal for power generation,
causing significant value erosion in the sector - with
distribution companies resorting to load shedding and
suffering from unviability; and consumers paying over
Rs 25 per unit; while generating stations lie idle.
IV. Repowering the Indian Electricity Sector
India needs to add 450 to 600 GW of power generation
capacity over the next 20 years to meet the demands of
the economy. This means a staggering 20 to 30 GW per
year that requires US$1 to 1.5 trillion in investments (at
today's real value). Meeting these challenging goals
requires mobilising significant public and private sector
participation across the value chain. Building on the
strong foundation of the Electricity Act 2003 and
incorporating learnings from the last 10 years, it will be
possible to drive the development of the electric power
sector in India and increase its contribution to India's
economic and social progress.
As we look ahead, it is critical that we fully learn from the
experiences of the past decade.
1. The power sector can't develop if distribution is
not fixed: Distribution generates the cash flows
to fund the full power sector value chain, and
unless it becomes viable, sustainable
development in the power sector is not
possible. At the same time, politically, this is the
most difficult to achieve and will require
significant ingenuity.
2. A balanced risk-return profile is critical to
attract investment and drive innovation:
Investment will only flow into the sector if the
opportunities offer balanced risk and returns.
Over the last seven years, the return on invested
capital in the sector (based on an analysis of
listed companies) has fallen from approximately
11 per cent to 5 per cent. At the same time,
developers are bearing risks (e.g., fuel price and
availability, project execution, counter party
risks), many of which they cannot legitimately
24 25 NOVEMBER - DECEMBER 2013
Residential Power Consumption
Domesticelectricityconsumption
Source: Census India; National Sample Survey Data; CEA
1 Lowest income 40% households consume 22.1 Twh of energy(13% of household consumption). At cost to serve of INR 6.5 per unit,it translates to a direct payout of INR 14,000 crore, even at full subsidy
Subsidy/Under - Recovery Burden (Rs Crore)
14.000
25.000
1Direct payout Current residentialunder - recovery
40%
40%
20%
13%
100% = 16.58 cr households 100% = 170 Twh
Electrifiedhouseholds
34%
53%
approximately 12 per cent, are significantly
lower than the average losses of public sector
discoms, which are 27 per cent. Even the top 10
public sector discoms have AT&C losses of 19 per
cent.
- Drive private sector participation in
distribution. There is strong evidence that the
private sector is more effective in driving
operational performance - the average AT&C
losses of the private sector discoms, at
Private Sector has Performed Significantly Better (Per cent, AT&C losses)
Source: Powerline Magazine, CEA & Company Websites
34.8
12.4
19.1
Private sector performance average
Top 10 public DISCOM average
Other public sector average
Note: Simple average of per cent AT&C loss value of DISCOMs has been taken Private DISCOMs include Torrent, Reliance Infra, NDPL, CESC, BYPL
ECONOMY MATTERS
own. It is no surprise that the sentiment has
turned negative.
3. Gaining privileged access to low cost fuel is
necessary: Fuel prices will continue to escalate.
Recent analysis suggests that the price of
seaborne thermal coal could cross US$130 per
ton by 2015. In such an escalating, volatile
environment, leaving a significant part of India's
generation capacity exposed will make the task
of creating a viable distribution sector even
tougher than it is now. Therefore, it is critical
that India fully monetises its domestic fuel
resources and use its scale to gain privileged
access to international fuel resources.
Needless to say, these learnings are very difficult to
operationalise. Though many solutions have been
discussed by various stakeholders, following are the
few solutions, which have worked in small pockets and
can be scaled up, and new ideas which are becoming
feasible due to recent technologies.
- Ensure cost reflective tariffs. This is the single
biggest lever to ensure the viability of the
distribution sector, though politically this
remains the most difficult. While the usual
options (e.g., linking payment to performance,
open access) should continue to be pursued,
leveraging Aadhaar to pay subsidies directly to
economically weak families is a promising area
to explore.
- Pay subsidy directly to economically weak
households. The biggest obstacle against cost
reflective tariffs is the need to provide
affordable power to users in the agricultural
sector and low income households, which is
provided through low tariffs for these
categories. However, as with other subsidies,
most of these lower tariffs get misdirected.
Aadhaar now allows for subsidies to be directly
paid to the economically weaker segments,
removing the need to keep tariffs artificially low.
The direct payout amount is likely to be a much
lesser, compared to the annual discom losses -
our analysis suggests subsidy for residential
customers would reduce by approximately 40
per cent. More importantly, it will pave the way
for making distribution viable and will help
unlock the development of the sector.
time, consumers use significantly higher cost, diesel
based power, pointing to a massive market failure.
Massive externalities like fuel security and project
execution delays have further hurt the sector.
Challenges at each stage of mining (e.g., exploration,
clearances and development) have severely impacted
domestic coal production. This has led to heavy reliance
on expensive imported coal for power generation,
causing significant value erosion in the sector - with
distribution companies resorting to load shedding and
suffering from unviability; and consumers paying over
Rs 25 per unit; while generating stations lie idle.
IV. Repowering the Indian Electricity Sector
India needs to add 450 to 600 GW of power generation
capacity over the next 20 years to meet the demands of
the economy. This means a staggering 20 to 30 GW per
year that requires US$1 to 1.5 trillion in investments (at
today's real value). Meeting these challenging goals
requires mobilising significant public and private sector
participation across the value chain. Building on the
strong foundation of the Electricity Act 2003 and
incorporating learnings from the last 10 years, it will be
possible to drive the development of the electric power
sector in India and increase its contribution to India's
economic and social progress.
As we look ahead, it is critical that we fully learn from the
experiences of the past decade.
1. The power sector can't develop if distribution is
not fixed: Distribution generates the cash flows
to fund the full power sector value chain, and
unless it becomes viable, sustainable
development in the power sector is not
possible. At the same time, politically, this is the
most difficult to achieve and will require
significant ingenuity.
2. A balanced risk-return profile is critical to
attract investment and drive innovation:
Investment will only flow into the sector if the
opportunities offer balanced risk and returns.
Over the last seven years, the return on invested
capital in the sector (based on an analysis of
listed companies) has fallen from approximately
11 per cent to 5 per cent. At the same time,
developers are bearing risks (e.g., fuel price and
availability, project execution, counter party
risks), many of which they cannot legitimately
24 25 NOVEMBER - DECEMBER 2013
Residential Power Consumption
Domesticelectricityconsumption
Source: Census India; National Sample Survey Data; CEA
1 Lowest income 40% households consume 22.1 Twh of energy(13% of household consumption). At cost to serve of INR 6.5 per unit,it translates to a direct payout of INR 14,000 crore, even at full subsidy
Subsidy/Under - Recovery Burden (Rs Crore)
14.000
25.000
1Direct payout Current residentialunder - recovery
40%
40%
20%
13%
100% = 16.58 cr households 100% = 170 Twh
Electrifiedhouseholds
34%
53%
approximately 12 per cent, are significantly
lower than the average losses of public sector
discoms, which are 27 per cent. Even the top 10
public sector discoms have AT&C losses of 19 per
cent.
- Drive private sector participation in
distribution. There is strong evidence that the
private sector is more effective in driving
operational performance - the average AT&C
losses of the private sector discoms, at
Private Sector has Performed Significantly Better (Per cent, AT&C losses)
Source: Powerline Magazine, CEA & Company Websites
34.8
12.4
19.1
Private sector performance average
Top 10 public DISCOM average
Other public sector average
Note: Simple average of per cent AT&C loss value of DISCOMs has been taken Private DISCOMs include Torrent, Reliance Infra, NDPL, CESC, BYPL
ECONOMY MATTERS
Rejuvenating Exports
India's export performance over the last two years has
been affected by continued sluggishness in global
trade and an overvalued exchange rate for a prolonged
period. Exports began on a weak footing in the start of
this fiscal, contracting by 3.1 per cent in the first quarter;
however, its growth picked up to 12.2 per cent in the
second quarter, moderating to 9.7 per cent in October-
November 2013 so far. Export recoveries were evident in
sectors, such as petroleum products, rice, readymade
garments, marine products and other chemicals. The
depreciation in the exchange rate, both in nominal and
real terms, appears to have helped improve India's
export competitiveness in the recent quarters.
Improvement in exports is critical for lifting the
economic growth and containing the current account
deficit.
Judging by the trends so far, global trade volumes in
2013 are expected to expand at roughly the same rate as
last year, which was the slowest pace in the last 12 years,
except for the contraction in 2009 in the wake of the
global Financial crisis. However, the recent optimistic
set of data sets coming out of the major advanced
economies in last few months is expected to continue
cushioning India's exports growth going forward.
In this article, we provide a snapshot of India's exports
sector along with analyzing the upcoming sectors in
exports such as services and tourism, listing out
suggestions in order to accelerate their exports growth.
Based Incentive in Wind). Additionally, a
sovereign fund could be created to bolster R&D
in these areas. Finally, and most importantly,
set-up future project bidding and award
processes that allow for above threshold
returns, and have the potential for upside (e.g.,
ownership of assets). Private capital has many
opportunities for deployment, and will seek out
the best returns over time.
- Accelerate development of CIL reserves
through a process similar to NELP (which, in
effect, reassigned blocks not being developed
by ONGC). Identify reserves where no or little
development has taken place (based on
milestones, e.g., exploration license received)
and auction these reserves to public and private
entities using NELP or a similar model. This
should increase investments in the sector and
introduce competition. It is anticipated that
power tariffs will provide a natural cap to
auction prices for these blocks.
- For new projects, which will need to rely on
imported coal, create a 100 MTPA imported
channel into the country. The Government of
India, through a consortium of companies, could
float an international competitive bidding for
this volume of coal over a 20 year period. While
the exact numbers can be worked out, the
volume and duration of the contract must be
such that it incentivises global producers to
develop new tier 2 coal reserves over the next 10
years and bring them to market. The contracted
coal, if secured at attractive prices, can be
offered to power generation developers in
India, who would bid for projects based on the
lowest development cost, with coal being a free
issue material.
Conclusion
Given the importance of electricity sector to the overall
growth schema of the country, it's pivotal that
government in liaison with relevant stakeholders tries
to remove the existing lacunae from the Electricity Act
2003 through suitable amendments and also
implements all its recommendations in its entirety for
the sector to benefit. CII through its National
Committee on Power has been at the forefront of this
dialogue with the government and will continue to do
so in the future too.
- Scale-up separation of agricultural feeders. This
has proven to be very successful in creating
transparency and driving performance
improvement, and should be scaled-up.
- Link FRP payout to financial and operational
performance, including discoms setting cost
reflective tariffs. Through CERC, set a minimum
floor level for tariffs for all states (across
categories).
- Evaluate separation of content and carriage.
Many countries have implemented this to
provide more choice, and by definition, better
service to customers. It also allows for
competition in electricity retail, which could
drive down power tariffs and allow consumers
to buy expensive peaking power (vs. running
diesel gensets), if power retailers are able to
supply. The opinion of various stakeholders was
split on whether India is ready for the separation
of content and carriage. Regulators, in
collaboration with industry participants, should
evaluate this in detail.
- Allow for automatic index-linked revision of
the fuel component of tariffs. Consider an oil
product style linkage of tariffs to the national
coal basket.
- Accelerate the implementation of multi-year
time-of-day tariffs to give consumers access to
peaking power - either through discoms or using
open access.
- Leverage de-centralised distributed generation
(DDG) to drive rural electrification. With India
significantly behind its rural electrification
targets, the cost of grid extension already very
high (Rs 15 to 20 per unit depending on distance
from existing grid and population density of
villages), and declining solar and bio-mass costs,
the DDG policy could drive significant rural
electrification. India should aim to light-up an
additional 50,000 villages through DDG in the
next 5 to 10 years.
- C r e a t e d i s p r o p o r t i o n a t e r e t u r n s f o r
innovation. Encourage investments in relatively
newer and efficient technologies (e.g., ultra
super critical plants, low speed wind, energy
storage, AT&C loss reduction). One possible
route could be to provide an incentive to bump-
up developer IRRs (e.g., similar to Generation
26
This article is based on the Report Repowering India's Electricity Sector, published by CII in November 2013
27 NOVEMBER - DECEMBER 2013
SPECIAL ARTICLE
ECONOMY MATTERS
Rejuvenating Exports
India's export performance over the last two years has
been affected by continued sluggishness in global
trade and an overvalued exchange rate for a prolonged
period. Exports began on a weak footing in the start of
this fiscal, contracting by 3.1 per cent in the first quarter;
however, its growth picked up to 12.2 per cent in the
second quarter, moderating to 9.7 per cent in October-
November 2013 so far. Export recoveries were evident in
sectors, such as petroleum products, rice, readymade
garments, marine products and other chemicals. The
depreciation in the exchange rate, both in nominal and
real terms, appears to have helped improve India's
export competitiveness in the recent quarters.
Improvement in exports is critical for lifting the
economic growth and containing the current account
deficit.
Judging by the trends so far, global trade volumes in
2013 are expected to expand at roughly the same rate as
last year, which was the slowest pace in the last 12 years,
except for the contraction in 2009 in the wake of the
global Financial crisis. However, the recent optimistic
set of data sets coming out of the major advanced
economies in last few months is expected to continue
cushioning India's exports growth going forward.
In this article, we provide a snapshot of India's exports
sector along with analyzing the upcoming sectors in
exports such as services and tourism, listing out
suggestions in order to accelerate their exports growth.
Based Incentive in Wind). Additionally, a
sovereign fund could be created to bolster R&D
in these areas. Finally, and most importantly,
set-up future project bidding and award
processes that allow for above threshold
returns, and have the potential for upside (e.g.,
ownership of assets). Private capital has many
opportunities for deployment, and will seek out
the best returns over time.
- Accelerate development of CIL reserves
through a process similar to NELP (which, in
effect, reassigned blocks not being developed
by ONGC). Identify reserves where no or little
development has taken place (based on
milestones, e.g., exploration license received)
and auction these reserves to public and private
entities using NELP or a similar model. This
should increase investments in the sector and
introduce competition. It is anticipated that
power tariffs will provide a natural cap to
auction prices for these blocks.
- For new projects, which will need to rely on
imported coal, create a 100 MTPA imported
channel into the country. The Government of
India, through a consortium of companies, could
float an international competitive bidding for
this volume of coal over a 20 year period. While
the exact numbers can be worked out, the
volume and duration of the contract must be
such that it incentivises global producers to
develop new tier 2 coal reserves over the next 10
years and bring them to market. The contracted
coal, if secured at attractive prices, can be
offered to power generation developers in
India, who would bid for projects based on the
lowest development cost, with coal being a free
issue material.
Conclusion
Given the importance of electricity sector to the overall
growth schema of the country, it's pivotal that
government in liaison with relevant stakeholders tries
to remove the existing lacunae from the Electricity Act
2003 through suitable amendments and also
implements all its recommendations in its entirety for
the sector to benefit. CII through its National
Committee on Power has been at the forefront of this
dialogue with the government and will continue to do
so in the future too.
- Scale-up separation of agricultural feeders. This
has proven to be very successful in creating
transparency and driving performance
improvement, and should be scaled-up.
- Link FRP payout to financial and operational
performance, including discoms setting cost
reflective tariffs. Through CERC, set a minimum
floor level for tariffs for all states (across
categories).
- Evaluate separation of content and carriage.
Many countries have implemented this to
provide more choice, and by definition, better
service to customers. It also allows for
competition in electricity retail, which could
drive down power tariffs and allow consumers
to buy expensive peaking power (vs. running
diesel gensets), if power retailers are able to
supply. The opinion of various stakeholders was
split on whether India is ready for the separation
of content and carriage. Regulators, in
collaboration with industry participants, should
evaluate this in detail.
- Allow for automatic index-linked revision of
the fuel component of tariffs. Consider an oil
product style linkage of tariffs to the national
coal basket.
- Accelerate the implementation of multi-year
time-of-day tariffs to give consumers access to
peaking power - either through discoms or using
open access.
- Leverage de-centralised distributed generation
(DDG) to drive rural electrification. With India
significantly behind its rural electrification
targets, the cost of grid extension already very
high (Rs 15 to 20 per unit depending on distance
from existing grid and population density of
villages), and declining solar and bio-mass costs,
the DDG policy could drive significant rural
electrification. India should aim to light-up an
additional 50,000 villages through DDG in the
next 5 to 10 years.
- C r e a t e d i s p r o p o r t i o n a t e r e t u r n s f o r
innovation. Encourage investments in relatively
newer and efficient technologies (e.g., ultra
super critical plants, low speed wind, energy
storage, AT&C loss reduction). One possible
route could be to provide an incentive to bump-
up developer IRRs (e.g., similar to Generation
26
This article is based on the Report Repowering India's Electricity Sector, published by CII in November 2013
27 NOVEMBER - DECEMBER 2013
SPECIAL ARTICLE
ECONOMY MATTERS
28ECONOMY MATTERS
04.Although, the pace of exports growth was
punctuated twice by sharp slowdown in the world
economy during 2008-09 and during the last two fiscal
years, India's trade prospects have continued to grow
over time. India's exports were worth US$64.0 billion in
2003-04, which more than quadrupled to US$300.5
billion in 2012-13.
Background
India saw its foreign trade expand remarkably in the past
decade. India's total trade with the world touched
US$809 billion in 2012-13, growing at a compounded
annual growth rate of 18.7 per cent since 2003-
Mr Sanjay BudhiaChairman, CII Export Committee and
Managing Director, Patton Group
India's Export Scenario
CII VIEW POINT
Source: DGCI&S
The value of manufacturing goods exports has more
than quadrupled to US$186.8 billion over the decade.
Exports of primary products, with their share remaining
fairly constant at little below 15 per cent during 2003-04
to 2012-13, have also scaled over five times in dollar value
In the merchandise trade, manufacturing goods still
constitute the lion share of total merchandise exports.
They constituted over 60 per cent of total exports in
2012-13, a fraction that has remained mostly unchanged
over the decade, although dipped marginally last year.
29 NOVEMBER - DECEMBER 2013
has shrunk from 23 per cent in 2000-01 to 13 per cent in
2012-13. In contrast to this, share of developing markets
of Latin America, Africa, and ASEAN have witnessed a
significant increase. This trend has helped India weather
the global crisis emanating from Europe and America.
India has made major strides in its diversification of
export markets, as its dependence on the EU and the US
has reduced to a large extent (see figure below). Europe
currently occupies 19.5 per cent share in India's exports,
in contrast to 26 per cent in 200-01. Similarly, share of US
Source: DGCI&S
India's Exports, Imports & Trade Deficit
terms, growing at a CAGR of 18.0 per cent over the last
ten years. Importantly, petroleum and its products have
brought in substantial revenues that soared from US$2.6
billion in 2003-04 to US$55.6 billion in 2012-13. Their share
too has increased four times in the decade to a little
below 20 per cent in 2012-13. Jump in export values is also
attributable to soaring agricultural, mineral and metal
commodity prices.
Over a period of time from the year 2000 onwards, there
has been change in composition of India's export basket
as shown in graph below, indicating that India is
gradually moving towards high-value added product
exports especially in engineering goods. Nevertheless, a
lot needs to be done to not only diversify the export
basket but also have a perceptible share in the top items
of world trade.
0
100
200
300
400
500
In $
Bil
lio
n
Exports Imports Trade Deficit
2003-04
2004
-05
2005-06
2006-07
2007-08
2008-09
2009-2010
2010-2011
2011-2012
2012-2013
Change in India's Export Composition
2.64.4
16.8
24.3
10.7
18.920.3
8.8
14.012.9
2.54.3
1.92.8
8.8
13.8
1.6
14.4
0
5
10
15
20
25
30
2000-01
2012-13
Sh
are
in %
Agri & Allie
d Products
Ores & M
inerals
Leather & Products
Gems & Je
wellery
Chemicals
Engineering G
oods
Electronics
Textil
es
Petroleum products
28ECONOMY MATTERS
04.Although, the pace of exports growth was
punctuated twice by sharp slowdown in the world
economy during 2008-09 and during the last two fiscal
years, India's trade prospects have continued to grow
over time. India's exports were worth US$64.0 billion in
2003-04, which more than quadrupled to US$300.5
billion in 2012-13.
Background
India saw its foreign trade expand remarkably in the past
decade. India's total trade with the world touched
US$809 billion in 2012-13, growing at a compounded
annual growth rate of 18.7 per cent since 2003-
Mr Sanjay BudhiaChairman, CII Export Committee and
Managing Director, Patton Group
India's Export Scenario
CII VIEW POINT
Source: DGCI&S
The value of manufacturing goods exports has more
than quadrupled to US$186.8 billion over the decade.
Exports of primary products, with their share remaining
fairly constant at little below 15 per cent during 2003-04
to 2012-13, have also scaled over five times in dollar value
In the merchandise trade, manufacturing goods still
constitute the lion share of total merchandise exports.
They constituted over 60 per cent of total exports in
2012-13, a fraction that has remained mostly unchanged
over the decade, although dipped marginally last year.
29 NOVEMBER - DECEMBER 2013
has shrunk from 23 per cent in 2000-01 to 13 per cent in
2012-13. In contrast to this, share of developing markets
of Latin America, Africa, and ASEAN have witnessed a
significant increase. This trend has helped India weather
the global crisis emanating from Europe and America.
India has made major strides in its diversification of
export markets, as its dependence on the EU and the US
has reduced to a large extent (see figure below). Europe
currently occupies 19.5 per cent share in India's exports,
in contrast to 26 per cent in 200-01. Similarly, share of US
Source: DGCI&S
India's Exports, Imports & Trade Deficit
terms, growing at a CAGR of 18.0 per cent over the last
ten years. Importantly, petroleum and its products have
brought in substantial revenues that soared from US$2.6
billion in 2003-04 to US$55.6 billion in 2012-13. Their share
too has increased four times in the decade to a little
below 20 per cent in 2012-13. Jump in export values is also
attributable to soaring agricultural, mineral and metal
commodity prices.
Over a period of time from the year 2000 onwards, there
has been change in composition of India's export basket
as shown in graph below, indicating that India is
gradually moving towards high-value added product
exports especially in engineering goods. Nevertheless, a
lot needs to be done to not only diversify the export
basket but also have a perceptible share in the top items
of world trade.
0
100
200
300
400
500
In $
Bil
lio
n
Exports Imports Trade Deficit
2003-04
2004
-05
2005-06
2006-07
2007-08
2008-09
2009-2010
2010-2011
2011-2012
2012-2013
Change in India's Export Composition
2.64.4
16.8
24.3
10.7
18.920.3
8.8
14.012.9
2.54.3
1.92.8
8.8
13.8
1.6
14.4
0
5
10
15
20
25
30
2000-01
2012-13
Sh
are
in %
Agri & Allie
d Products
Ores & M
inerals
Leather & Products
Gems & Je
wellery
Chemicals
Engineering G
oods
Electronics
Textil
es
Petroleum products
30ECONOMY MATTERS
Positive Developments in India's
Trade Pattern
Evidence suggests there has been a structural shift in
both commodity composition as well as product and
market diversification in India's merchandise exports.
The revealed comparative advantage for India is higher
in chemicals, agricultural products, mining products,
iron and steel and textiles.
The robust performance of India's international trade
over the two decades reflects India's increasing
integration with the global economy. Marked increase in
adaptability of Indian exporters to meet the changing
patterns of global demand can be testified by the
change in India's export composition over the last two
decades. The dynamics of inter-sectoral composition
within manufactured exports reveal increasing
contribution of technology-intensive goods in India's
exports. For instance, the combined share of
technology-intensive products like engineering goods,
petroleum products, chemicals and related products
The strong growth in India's merchandise exports has
been accompanied by an increase in the share of India in
the global export market reflecting, among others,
emergence of newer markets, increased adaptability of
Indian exporting companies to meet the changing
patterns of global demand, and the availability of
financing structures for such activities. According to the
World Trade Organisation (WTO), India's share in global
exports and imports, which stood at 0.5 percent and 0.7
per cent in 1990, more than trebled to 1.6 per cent and
2.6 per cent, respectively, in 2012, resulting in a
significant improvement of India's standing in the global
trade. By 2012, India became the 10th largest importer in
the world, as against 28th in 1990; and 19th largest
exporter globally as against 33rd in 1990.
At the same time, India's direction of trade increasingly
shifted towards emerging markets. The combined share
of developing Asia, Africa and Latin America and
Caribbean increased from less than one-fourth of India's
total exports in 1992-93 to more than half of India's total
For more details, Please Contact: Confederation of Indian Industry
The Mantosh Sondhi Centre, 23, Institutional Area, Lodi Road, New Delhi- 110003 (INDIA)Tel : +91-011-24629994-7, Fax: +91-011-24626149; Email: [email protected]
Dr. Danish A. Hashim, Director- Economic Research
Sixthly, short courses, vocational courses and skill
development programmes like the Hunar se Rozgar
schemes should be encouraged. Facilitation of PPP
models for tourism related courses and institutions in
conjunction with National Skill Development
Corporation should be encouraged.
Lastly and most importantly, marketing and promotion
of India as a major tourist destination is critical for the
industry to achieve its potential. The "Incredible India"
campaign helped place India on top of the list and there
is a need for a renewed campaign. Newer tourism
concepts, which include cruise tourism, adventure
tourism, agri tourism or rural tourism, are emerging in
India and these require support to develop and flourish.
Hence, greater marketing push for these different
products is required.
To remain competitive in the fiercely crowded space,
India needs to change its traditional methodology to a
more agile, young and modern approach. There is a need
to develop a niche market and a brand position which
captures the essence of the country. All this should make
Indian tourism a major foreign exchange earner for the
country.
has requested the reduction of distance of the 'No
Development Zones' all along the tidal water bodies in
selected coastal stretches for promoting tourism from
100 to 50 m. Implementation of M.S. Swaminathan
Committee Report can add a substantial number of
tourist on beaches. Also Ministry of Environment &
Forests needs to issue their Ecotourism policy. This will
help articulate a lot of matters relating to the conduct of
wildlife tourism, community participation and
sustainable operations.
Fifthly, Coordination with Ministry of Culture is needed.
UNESCO has nominated 23 cultural and 5 natural as
World Heritage Sites in India and 32 other sites across
various states have been proposed to be included under
Heritage Status. At most sites basic infrastructure such
as transport linkages, garbage and solid waste
management, tourist facilities such as toilets, day
centres, site information and manuals guide,
recreational facilities are in need of an upgrade. One way
of doing it by selective brandings at monuments in PPP
mode, which should be allowed in lieu of sharing of
upkeep costs. Also selectively allow use of monument
sites as venues should be allowed for events to enhance
experience.
40ECONOMY MATTERS
ECONOMY MATTERS
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Monthly Journal of top management of 8000
companies
Read by CII Members, Thought Leaders,
Diplomats, Policy Makers, MPs and other
decision makers
The Facts
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n
n
Domestic Trends
Corporate Performance
Sector in Focus
Special Article
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Economy Monitor
Global Trends
The Coverage
CII invites full-page* Advertisements for
this flagship document at an attractive rate
of Rs 60,000 per issue and Rs 6 lakh for 12
issues.
For more details, Please Contact: Confederation of Indian Industry
The Mantosh Sondhi Centre, 23, Institutional Area, Lodi Road, New Delhi- 110003 (INDIA)Tel : +91-011-24629994-7, Fax: +91-011-24626149; Email: [email protected]
Dr. Danish A. Hashim, Director- Economic Research
Sixthly, short courses, vocational courses and skill
development programmes like the Hunar se Rozgar
schemes should be encouraged. Facilitation of PPP
models for tourism related courses and institutions in
conjunction with National Skill Development
Corporation should be encouraged.
Lastly and most importantly, marketing and promotion
of India as a major tourist destination is critical for the
industry to achieve its potential. The "Incredible India"
campaign helped place India on top of the list and there
is a need for a renewed campaign. Newer tourism
concepts, which include cruise tourism, adventure
tourism, agri tourism or rural tourism, are emerging in
India and these require support to develop and flourish.
Hence, greater marketing push for these different
products is required.
To remain competitive in the fiercely crowded space,
India needs to change its traditional methodology to a
more agile, young and modern approach. There is a need
to develop a niche market and a brand position which
captures the essence of the country. All this should make
Indian tourism a major foreign exchange earner for the
country.
has requested the reduction of distance of the 'No
Development Zones' all along the tidal water bodies in
selected coastal stretches for promoting tourism from
100 to 50 m. Implementation of M.S. Swaminathan
Committee Report can add a substantial number of
tourist on beaches. Also Ministry of Environment &
Forests needs to issue their Ecotourism policy. This will
help articulate a lot of matters relating to the conduct of
wildlife tourism, community participation and
sustainable operations.
Fifthly, Coordination with Ministry of Culture is needed.
UNESCO has nominated 23 cultural and 5 natural as
World Heritage Sites in India and 32 other sites across
various states have been proposed to be included under
Heritage Status. At most sites basic infrastructure such
as transport linkages, garbage and solid waste
management, tourist facilities such as toilets, day
centres, site information and manuals guide,
recreational facilities are in need of an upgrade. One way
of doing it by selective brandings at monuments in PPP
mode, which should be allowed in lieu of sharing of
upkeep costs. Also selectively allow use of monument
sites as venues should be allowed for events to enhance