IEEMA demands greater encouragement from Govt. for Indigenous Manufacturing

IEEMA demands greater encouragement from Govt. for Indigenous Manufacturing
In an interview with Subhajit Roy; J G Kulkarni, IEEMA President talks on the present scenario of the power industry in India and highlights his roadmap in addressing the macro-level issues and challenges of electrical equipment industry
 
Mr. Kulkarni, congratulations on being elected as IEEMA President, could you outline your prime objectives that you wish to achieve being in this position?It has been our continuous endeavour to consult on policy formulation as the industry-government interface, and evolve product standards alongside India’s standards setting body the BIS.
 
In my new role as a President, I would like to support the continuous efforts made by IEEMA, addressing macro-level issues and challenges of Indian electrical equipment industry. The association has been undertaking various initiatives such as SME focus, building ‘Made in India’ brand overseas, regularly arranging international seminars for exchange and update of latest technologies.
 
Some immediate activities that will be undertaken by the association include:Mission Plan 2022: The mission plan initiative in brief has the objective of building up the Indian electrical equipment manufacturing capabilities to cater to the growing domestic demand and boost exports even to technologically advanced countries in a structured manner over the next decade. This initiative is being carried out under the aegis of the Department of Heavy Industry.
 
Sector Skill Council (SSC): The Indian electrical industry like every other sector is facing a critical shortage of skilled manpower despite having the largest number of engineers in the world. Recognising this need, IEEMA is closely working with Govt. of India to develop a strong base of skilled manpower to help Indian electrical industry go to the next level and be globally competitive. We are working on setting up an Electrical Equipment Sector Skill Council, with the support of the National Skill Development Corporation (NSDC).
 
Promote exports: Over the years, the Indian electrical equipment industry has developed a diversified, mature and strong manufacturing base, with robust supply chain, and a rugged performance design of products. There is also an emerging global reputation of Indian electrical equipment for sourcing of base products and components and also of Indian transmission and other EPC contractors.
 
India’s exports of electrical equipment were around $ 4.6 billion in 2011-12, but were less than 1 per cent of the global trade in electrical equipment. With the electricity sector being a sunrise sector across the entire developing world, there exists significant potential for India to tap the export markets. This will also help the manufacturers in using their underutilised manufacturing capacity on account of sluggish domestic demand.
 
Encourage indigenous manufacturing: In recent months in the telecom and electronics sectors, there has been a move by the government to initiate preferential market access to domestically manufactured products on security grounds and in government procurement. The power sector is of at least as much strategic importance as these sectors, if not more.
 
The government needs to encourage indigenous manufacturing and technology in the domestic electrical equipment industry by stipulating a minimum percentage of the total procurement by any utility to be of ‘Made in India’ products.
 
We also need to protect the domestic industry’s interests under different FTAs that are being negotiated. These measures will support Indian manufacturers and provide necessary safeguards to the domestic industry that is facing non-market competition on account of cutthroat below-cost entry level prices offered by Chinese manufacturers.
 
How do you see the power sector in India shaping up in the next 5-10 years?An efficient power supply system is a key ingredient for economic growth and quality of life. India, with over a 1.3 billion people, presently produces around 788 billion units of electricity which results in per capita availability of about 733 units. This is less than one-third of the world average. In fact, 30 per cent Indians do not have access to electricity at all. Large share of the Indian population is devoid of benefits of electricity. Enhancing energy supply and access is, therefore, a key component of our national development strategy.
 
To sustain the envisaged annual GDP growth rate of around 8-9 per cent over the next 20 years, it has been estimated that India will require to increase its electricity generation capacity from around 207 GW presently to over 800 GW by 2032. This would require a matching up gradation and enhancement of the electricity transmission & distribution (T&D) segment. The electricity sector requires a projected investment of about $ 300 billion over the next five years.
 
It is estimated that the elasticity of GDP vis-à-vis electricity generated in India is currently 0.9. That is for every 1 per cent growth in GDP, there has to be 0.9 per cent growth in electricity generated. The elasticity is expected to be broadly 0.9 during the 12th Five Year Plan (2012-2017) and 0.8 during the 13th Five Year Plan (2017-2022).We need to address in a concerted manner the challenges being faced by India’s power sector which are impacting our ability to meet capacity addition targets.
 
The T&D sector requires greater and focussed attention than given till now. The lopsided investment pattern needs to be corrected and we need an investment ratio of 2:1:2 amongst generation, transmission and distribution segments in order to achieve a balanced growth in the power sector.
 
We are confident that Indian electrical equipment industry will achieve $ 100 billion in sales by 2022.
 
We have drawn up a four-point agenda to achieve the Mission Plan 2022, which includes:

Encourage increase in spends by Indian companies on R&D
Realign marketing efforts towards emerging markets
Lower dependency on domestic markets and garner active support from Ministry of Heavy Industries & Public Enterprises and Ministry of Power.
 
Exports from India for electrical equipment have to grow substantially during the next ten years – this is the call of the day especially since we have to prove to the world that our technology is best-in-class and also factoring the 33 per cent spare capacity available with most manufacturers. It should be noted that the world trade in electrical equipment aggregated to about $ 260 billion in 2010, recording a 5 year CAGR of 7 per cent. India ranks 28th, registering a CAGR of 10 per cent exports over the last five years but still accounts for less than 1 per cent of global exports. Mission Plan 2022 envisages $ 100 billion sales of electrical equipment by that year.
 
What are the major difficulties the sector is facing today?The T&D equipment sector, which comprises 74 per cent of overall Power sector, has grown at CAGR of 11.5 per cent in the last 4 years. Growth rate of the T&D equipment sector decelerated to 6.9 per cent in 2011-12 as compared to 11.3 per cent and 13.7 per cent in 2009-10 and 2010-11 respectively. For the first time in 10 years, the Indian electrical equipment industry has seen a negative growth of 2.4 per cent in the first quarter (Q1) of the current fiscal (2012-13) compared to the corresponding period of Q1 of 2011-12 (13.82 per cent).
Some of the major challenges that the sector faces today are:Capacity utilisation: Based on the projections of the government for capacity enhancement in power generation, transmission and distribution in the 10th, 11th and 12th Five Year Plans, the domestic electrical equipment manufacturing industry has made huge investments in doubling and, in some cases, even tripling its production capacity.
 
The industry is fully geared up to meet the likely demand arising out of the 12th Plan and even beyond. However, this built-up capacity currently stands under-utilised across several products due to sluggish domestic demand and a surge in imports of electrical equipment in recent years, especially from China, with uncertain lifecycle and quality. This is significantly impacting the commercial viability of the domestic electrical equipment industry and also the top-line and bottom-line of the manufacturers. In the last couple of years, there has been hardly any growth in capital expenditure in the T&D equipment sector.
 
Our inability to meet targets for generation capacity addition, due to multitude of problems such as unavailability of coal linkages for new projects, land acquisition issues, delays in environmental and other clearances, etc. is adversely impacting the downstream transmission and distribution sectors.
 
Absence of a level playing field: Absence of a level playing field for the domestic industry to compete with imported electrical equipment, especially from China, is a clear and present threat. This is adversely impacting the commercial viability of the domestic industry and can have severe long term consequences.
 
During the last five years, India’s imports of electrical equipment imports have increased at a CAGR of 30.30 per cent and were at $ 15.7 billion in 2011-12. Import duties on most products are quite low and are being further lowered under the various FTAs signed by India. China’s share in Indian imports of electrical equipment has dramatically increased in the last few years and now it stands at 44.5 per cent (2011-12) of the total from 15.3 per cent in 2005-06. Imports from China have grown at a CAGR of 57.5 per cent in the last six years.
 
Domestic electrical equipment manufacturing industry suffers a cost disadvantage of about 14 per cent vis‑à‑vis imports due to sales tax / VAT, entry tax / octroi; higher financing cost; lack of quality infrastructure; and dependence on foreign sources for critical raw material and components, etc. In addition, Chinese manufacturers of electrical equipment are given by their Government export subsidies as high as 17 per cent of the export value, social security subsidies, lower income tax rate (15 per cent) and access to financing at low rates of interest, which give Chinese companies over 24 per cent unfair pricing advantage and allows them to price their products very competitively. Further, China is also offering credit to foreign buyers on very soft terms to finance their imports. As a result, imports from China are escalating every year. All these make Indian industry non-competitive in its own country.
 
Disproportionate reliance on imported power equipment, with uncertain quality and lifecycle, and with no domestic manufacturing facility to provide immediate spares, replacements, etc. especially for heavy equipment, is fraught with long term risks. The government needs to provide greater encouragement to indigenous manufacturing as done by several countries, including China.
 
T&D equipment manufacturers are working at only 65 per cent of their production capacity. In the last few years, the domestic manufacturing capacity of generation equipment has being ramped up and currently stands at 25,000 MW per annum against a requirement of about 16 – 17,000 per annum. With 6-7 joint ventures coming up in India, the capacity will increase to 40,000 MW per annum by 2014 – 15. The power generation capacity addition target for the 12th Plan has also been scaled down to about 88,425 MW. As a result, even the generation equipment sector will soon be sitting on huge surplus capacity.
 
Lack of domestic availability of critical inputs / raw material: There are several critical inputs / raw material used in the manufacture of electrical equipment which are not readily available domestically. Concerted action needs to be taken to secure supplies of these.
 
CRGO is a prime example. CRGO is a critical raw material for large generators / transformers, manufactured by 12 companies (no Indian manufacturer) in the world, and totally imported. The ambitious power development projects of the government necessitate setting up of a domestic CRGO manufacturing facility.
 
Lack of a ‘culture of innovation’ in the industry: There is slow pace of absorption of new technology by domestic manufacturers of electrical equipment, and also user industries, and low investment in research & development (R&D). According to estimates, less than 1 per cent of the annual turnover of the industry is invested in R&D.
 
The prime customers / buyers of the electrical equipment industry are the utilities in generation, transmission and distribution of power. Presently, most of these utilities are either owned by the Central Government or different State Governments. Their buying practices do not encourage innovations and R&D. As a result, main focus of the manufacturers of electrical equipment is on cutting costs and not on innovative technologies, on piecemeal short-term tactical measures rather than evolving any strategic action plan for their growth and development.
 
Looming shortage of skilled manpower: The electrical equipment industry is facing a major problem in getting skilled and employable manpower which is technically competent, equipped with skills and ready to be deployed. The industry is facing a looming skill gap, which is widening every year.
 
Due to lack of skilled manpower, electrical equipment industry is suffering as it is affecting critical functions like R&D, consultancy, design and detailed engineering work.
 
What is your comment on GOI’s debt restructuring package of State Electricity Boards? How does it going to boost the sector?The accumulated losses of power distribution companies reached a level of Rs. 1.9 lakh crore, as on 31st March 2011. Poor credit worthiness of State utilities has led to lack of payment security for private investors.
 
Poor financial health of State distribution utilities has been adversely affecting both existing and planned projects, leaving developers with no option but to run projects at sub-optimal capacities or go slow on the commissioning schedules. Discoms have been unable to sign power purchase agreements (PPAs) with power producers which have had a dampening effect on the entire sector.The announcement by the government of the package on ‘Financial Restructuring of Discoms’ will very positively impact the entire power sector as the entire power sector value chain crucially hinges on the financial viability of the power distribution sector, which has been severely eroded in the last few years. As part of the package, the government has mandated concrete and measurable action by the discoms, including annual revision in tariffs, bringing in private investment in distribution, etc., which hopefully will be strictly monitored. If what is envisaged is put in place, then it should help in substantially reforming the ailing distribution sector. With the debt restructuring and improvement in the financial health of the discoms, banks will regain confidence in sanctioning loans to them.
 
What is your opinion on the status of power equipment manufacturing sector in India?For the first time in 10 years, the Indian electrical equipment industry has seen a negative growth of 2.4 per cent in the first quarter (Q1) of the current fiscal (2012-13) compared to the corresponding period of Q1 FY12 (13.82 per cent) and sequential quarter Q4 FY12 (14.10 per cent).
The transformer industry has seen a negative growth of 7.6 per cent in Q1 FY13 against the growth of 6.6 per cent for the corresponding period of Q1 FY12. The capacitor and cable industry has witnessed a double digit negative growth of 24.8 per cent and 12.9 per cent respectively compared to the positive growth of 20.9 per cent (capacitor) and 44.6 per cent (cable) in Q1 FY12. The rotating machines industry has witnessed a negative growth of 2.6 per cent in Q1 FY13 against the growth of 9.6 per cent for corresponding quarter of last year.
 
The transformers, rotating machines and capacitor industries has been decelerating every sequential quarter and has seen a negative growth in Q1 FY13, implying distinct slowdown in industrial CAPEX activities and slowdown in off-take by users due to credit squeeze, high interest costs, etc.
 
The growth in switchgear industry has been consistent, registering an increase by 2.4 per cent compared to 2.5 per cent in corresponding quarter of last year.
 
In Q1 of FY13 there was over-achievement of the country’s power generation and transmission and sub-stations capacity addition targets. So, under ideal conditions, domestic manufacturers of power equipment should have correspondingly gained business, but reality is otherwise. In recent years, a surge in imports of cheap and inferior quality electrical equipment from abroad is significantly impacting the Indian electrical equipment industry with under-utilisation of recently enhanced capacities across several products. The commercial viability of the industry is getting dented and can have severe long term consequences, leading to a situation of unnecessary dependence on imports at the cost of domestic manufacturing.
 
The domestic electrical equipment industry, because of its heterogeneous character and despite its critical role in the economy, has not received focused attention of the policy makers. In the telecom sector, the government has initiated a move to make it mandatory for all telecom companies to procure at least 30 per cent of all electronic equipment domestically on security grounds. The power sector is of at least as much strategic importance as the telecom sector, if not more. Disproportionate reliance on imported power equipment, with uncertain quality and lifecycle, and with no domestic manufacturing facility to provide immediate spares, replacements, etc. especially for heavy equipment, is fraught with long term risks.
 
The GOI has imposed 21 per cent duty on import of power gear, how do you react to this? How does it going to help the domestic manufacturers and the sector at large?The government decision is to impose import duty on generation equipment for Mega Power Projects (MPPs) / UMPPs (1,000 MW and above) where the current basic customs duty (BCD) is nil (0 per cent). The decision is for 5 per cent BCD, 12 per cent additional customs / countervailing duty (CVD – equivalent to central excise), and 4 per cent special additional duty (SAD – equivalent to state levies), which will come to a total import duty of 22.85 per cent (including education cess). The other components of the import duty (CVD, SAD and education cess) are not material for the comparison as these are (or will be) equivalent to the taxes (central excise and state taxes) levied on domestic manufacturers also.
 
The domestic electrical equipment industry is not looking for any protection but wants a level playing field and this recent move has only partially levelled the field.During the last five years, India’s imports of electrical equipment imports have increased at a CAGR of 30.30 per cent and were at $15.7 billion (Rs. 75,057 crore) in 2011-12. China’s share in Indian imports of electrical equipment has dramatically increased in the last few years and now it stands at 44.5 per cent (2011-12) of the total from 15.3 per cent in 2005-06. Imports from China have grown at a CAGR of 57.5 per cent in the last six years.
 
Imports of electrical equipment in the country have assumed very threatening proportions and have now captured 43 per cent of the market for electrical equipment in India, whereas there is significant domestic overcapacity.
 
Import duties on most products including generation equipment for non-mega projects and transmission and distribution equipment are quite low (BCD ranges from 5 per cent to 7.5 per cent on most products) and are being further lowered under the various FTAs signed by India.
 
What are your other expectations from Government?The domestic electrical equipment industry is not looking for any protection but wants a level playing field. The government needs to provide greater encouragement to indigenous manufacturing in strategic sectors, as done by several countries including China. IEEMA has been asking for: 

Limiting participation in tenders for bidding for domestically funded projects to domestic manufacturers only with tightened quality requirements so that only good quality & reliable equipment comes into the country
Putting in place a mandatory requirement of setting up a manufacturing facility in India, within a specified time frame of the award of the tender, where foreign bidding is allowed, to provide for level playing field bidding, that is, phased manufacturing process (PMP) should be made mandatory in the country for supply of major equipment
Stipulating a minimum percentage of the total procurement by any utility to be of ‘Made in India’ products
Protecting the domestic industry’s interests under different Regional Trade Arrangements (RTAs).
 

Disproportionate reliance on imported power equipment, with uncertain quality and lifecycle, and with no domestic manufacturing facility to provide immediate spares, replacements, etc. especially for heavy equipment, is fraught with long term risks. The government needs to provide greater encouragement to indigenous manufacturing as done by several countries, including China.

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