An exclusive report on Indian electrical equipment industry’s readiness towards dealing with high imports and sluggish demand.
Indian electrical equipment industry witnessed a growth of 4.25 per cent in 2016-17. However, higher imports and sluggish demand continue to hamper industry. On this note, here we feature industry expert’s views to counter the issues.
Reasons for higher imports
Foreign manufacturers get strong support
“Despite having huge capacities, access to high skilled human resources and quality products, the Indian electrical industry is not able to compete effectively in the market,” points out Manish Agarwal, EVP and Chief Customer Officer, Sterlite Power Transmission Ltd. Briefing his view on how high imports are hampering the growth of the industry he says, “Foreign manufacturers get strong support of governments in terms of export subsidy, subsidy on raw material, and long-term line of credit at low rates of interest etc. The combinations of these factors give foreign counterparts an estimated 15-20 per cent pricing advantage over Indian equipment manufacturers. Inverted duty structure is another cause of concerns for industry today – duty on finished product is lower than duty on raw material to manufacture the product. This is leading to qualitative skew in India’s trade balance – importing finished good, instead of raw material which is another worrisome trend.”
Imteyaz Siddiqui, Area Sales Manager – South Asia and GCC, ISA Advance Instruments (I) Pvt. Ltd (Altanova Group) agrees that the growth of the industry during the last financial year was not encouraging, and higher imports clubbed with the sluggish demand continued to hamper the growth. He says, “The prime reason behind this is the policy paralysis that the country has seen during the UPA II regime. Many projects got delayed or shelved because of the indecisiveness of the then government. This escalated the cost, resulting in unviability of projects. The present government has been trying to revive the badly hit infrastructure sector, but it will take some more time because the entire world is going through the economic crisis.
No value addition in products due to high imports
“There have been several domestic bottlenecks like delays in sanction of various projects in electrical asset reconstruction, policies implementation prevailing in the sector have delayed the progress,” notes Parag Yelegaonkar, Business Development Manager, Testo India Pvt Ltd. He adds, “Exports have been less, demands to an extent were stagnant, and our import-export policies have been convoluted and most importantly the higher imports of electronic components leave no scope for any value addition in the product in India. So it is true that the industry has been on back foot so far but we see change now.”
Ways to counter high imports
Mandating type testing of imported products
Briefing on how to counter high imports Agarwal suggests, “Assured availability of quality electrical equipment is a sine-qua-non for national success, hence, mandatory type testing of imported products in Indian labs is recommended. When purchasing electrical equipment or services that may affect national security, import restrictions can be imposed on unfriendly countries.”
He adds, “On the export front, higher export incentive at least 5 per cent credit scrip to capture existing and upcoming opportunities. Also, I would like to recommend signing of FTAs, including the expansion of existing PTAs already signed, in markets such as Brazil, Colombia, Chile, Egypt, Algeria etc, where duties are very high making these markets inaccessible for Indian manufacturers.”
Exports to become competitive if cost of borrowing reduces
“Focused initiatives of the Government of India, such as ‘Make in India’ program, Skill Development programme, and inflow of FDI, will act as catalysts for the future growth,” says Siddiqui. He adds, “If the cost of borrowing reduces and become at par with other Asian countries like Japan and Korea, our export will become more competitive. The Public Private Partnership model pushed by the government for wider implementation will result in the fast-track implementation of power projects, which will further grow our economy. Unlike many countries, we are extremely lucky to have a big domestic market with sufficient demand to help grow our manufacturing sector at a steady pace. Although the economy is showing a visible sign of revival, we must keep our belt tightened and all stakeholders should contribute continuously to be able to get the desired result.”
Need for products with innovative features
To counter high imports, Yelegaonkar says better products with innovative features can be a great advantage to the industry improving the present situation of the industry. While giving an example he says, “Testo’s range of electrical parameter measuring instruments and thermal imaging cameras will be a great asset for various electrical industries and EPC contractors. Highly in demand utility of these instruments for several applications and its unique features with appreciable price ensure to strengthen the electrical market. Also the way things are shaping up with several government funding schemes, technology involvement and continuous advancements in the respective sector, expansion and growth of the electrical equipment industry is certain.”
“Adoption and implementation of new technology, robust growth in renewables, emerging concepts of transformation and favourable policy environment have accelerated the sector growth substantially. We hope that soon we will break all the barriers that hamper the industry growth,” says Yelegaonkar.
Reasons for sluggish demand
India is projected to achieve an economic growth rate that will trigger multifold increase in energy demand. Preparing for the future, the country faces an energy-trilemma – power for all, energy security and commitment to suitability. In last three years, the government’s response has been to address macro drivers with an ultimate view to provide reliable, quality and round the clock power for all. Generation capacity additions, rapid addition of transmission lines, debottlenecking fuel supply through coal block auction, boosting renewable energy, penetration in rural India, improvement in quality of power in urban and industrial area, speedy project clearances etc shows the size, scale and sentiment of government’s initiatives.
Massive project execution delays
Sharing his views regarding the sluggish growth Agarwal says, “While, the demand for electrical equipment was expected to significantly improve under a stable and predictable policy regime, Indian electrical industry is experiencing slackness in demand due to massive project execution delays and deferment of CAPEX roll-out mostly by the state TRANSCOS and DISCOMS. To make matters worse, influx of foreign electrical equipment and an absence of a level playing field are threatening the existence of the Indian players.”
High cost of borrowing for manufacturers
Sluggish demand in the international market, high cost of borrowing for manufacturers, and infrastructural bottleneck are a few reasons that have been hampering our export to other countries, believes Siddiqui. He notes, “We have often seen that many of our manufacturers do not give much importance to the quality of their products, and hence the products do not work properly after a few weeks and months of commissioning. This creates bad name not only for these specific manufacturers but also for others who are genuinely quality conscious and reliable. The sluggish domestic demand is also the reason behind this slow growth.”
Ways to counter sluggish demand
Fast track execution of projects
In order to counter the sluggish demand and to enhance the demand Agarwal recommends, “States must encourage private participation in transmission to fast track execution of projects. In domestically funded projects of Power Minister or Central PSUs or by State Power Utilities, the procurement of equipment and material should be made from domestic or local manufacturers through local competitive bidding only.”
He adds, “Furthermore, policy for providing preference to ‘Make in India’ in government procurements should be adopted in letter and spirit. Approved by the union cabinet, preference in government procurement is to be given to local suppliers. Local suppliers are those whose goods or services meet prescribed minimum thresholds (ordinarily 50 per cent) for local content.”
GST to make Indian goods competitive
Being optimistic about the growth in the sector Siddiqui comments, “I am very optimistic that things will show a significant improvement soon. Implementation of GST from July 1st will improve the ease of doing business in India. This will also make Indian goods competitive because multiple taxation, procedural complexities, and institutional rigidities will be issues of the past. Policy changes clubbed with various initiatives taken by the industry and government are showing signs of revival, and I firmly believe that the growth in this financial year (2017–18) will be improved by at least 2 per cent.”
Acceptance of ‘Make in India’ concept
The ‘Make in India’ and ‘Made for India’ concept has been widely accepted and internalised by large number of hi-tech companies who have a set up and are setting up manufacturing facilities for aero planes, metro train engines and carriages, buses and cars, mobile phones, lighting equipment, particularly LED Lighting, the demand for which has been rising fast. This is further resulting in strong wave of financial comfort and economic growth in the country, says Mahendru.
De-licensing the electrical machinery industry and allow FDI
The Indian electrical equipment industry is currently operating at a capacity utilisation of 65 – 70 per cent. Khemka says, “Some key government initiatives such as de-licensing the electrical machinery industry and allowing 100 per cent foreign direct investment (FDI) in the sector will give a big boost to the sector. Another key initiative of the government is the Electrical Equipment Skill Development Council (EESDC). This initiative aims at identifying critical manufacturing skills required for the electrical machinery industry.”
To counter the issue hampering growth of the industry he suggests, “Policies need to be put in place as per Indian Standards for products as it has been done for motors. For motors, it mandates the manufacture of minimum IE2 motors, below which can neither be manufactured, neither stocked nor can be imported. Similar steps can be taken for various products so as to push the initiative of ‘Make in India’ and deter the growth of imports in the country.”
Demand growth for transformers and alternators
The key growth drivers for electrical equipment industry are planned generation capacity addition, rural electrification and manufacturing growth, believes Avinash Khemka, Chief Manager, ICAI. The installed capacity in India increased from approximately 200 GW to 303 GW during FY12 to FY16. As per the National Electricity Plan (NEP 2016), there is expected to be a power capacity addition of approximately 280 GW over the next decade (FY16-21: 129 GW, FY21-22: 159 GW). Over the last decade, India has achieved 89 per cent of the capacity addition targets for generation capacity. Additionally, in the last five years, the achievement rate was 101 per cent.
The government aims to increase contribution of the manufacturing sector to GDP from current 16 per cent to 25 per cent over the next decade owing to the ‘Make in India’ initiative and regulatory changes. Under this initiative, several global companies have announced their plans to invest in India, estimated at approximately $ 10 billion.
Khemka says, “As per our estimates, demand for transformer (in MVA) grew by CAGR 2 per cent between FY14-16 but is expected to grow by CAGR 7 per cent by FY21.” This is mainly due to growth in power capacity addition as per the NEP and increased focus of utilities on lowering total losses in transmission and distribution. “Due to a declining demand for the motors used in industries and high power applications, the overall demand for motors segment (in kw) has declined over the past three years by CAGR 4 per cent (Fy14-FY16). Motor demand is expected to see a growth, CAGR 3 per cent by FY21,” he informs.
He adds, “Demand for alternators segment has been driven by demand from power generation segment due to growing thrust on ‘Power for All’ and rural electrification in India. As a result, demand for alternators in kVA grew by 7 per cent CAGR (FY14-FY16). Demand for alternators used in conventional power generation is expected to reduce with the increasing focus on renewable generation capacity. As a result this segment will grow by CAGR 4.5 per cent by FY21.”
LEDs growth is considerable
V P Mahendru, Chairman and Managing Director, EON Electric believes that there is growth in demand. On being optimistic about the growth he says, “Reason for the growing demand for Indian electrical equipment industry is that the extensive growth of Indian economy in general and LED Lighting industry in particular, its growth on the horizon is very substantial. We believe that this growth will surpass the past annual growths substantially.”