New Measures Pit Indian Generators Against Equipment Makers

Energy-hungry India’s power sector is financially hemorrhaging due to a number of critical issues relating to the availability of coal and gas, its loss-making state power distribution companies, and costly delays stemming from land acquisition and permit approvals. Recent measures by the  government aimed at bolstering the country’s $25 billion domestic electrical equipment sector could make matters worse, a number of generators have said.

The Indian government in early September “extended” a policy that mandates domestic sourcing of supercritical equipment by central and state-owned generating companies like NTPC. The Ministry of Heavy Industries has, meanwhile, been contemplating intervention to make it mandatory to force developers of major projects (like ultra-mega power plants) to buy domestic equipment.

Local equipment makers like Bharat Heavy Electricals Ltd. (BHEL), Larsen & Toubro, Thermax, and BGR Energy have applauded the moves, which they say comes at a time when fresh orders from private power generators have dried up. But power generators are decrying the move as “anti-competitive,” saying foreign competitors enjoy more flexibility in pricing—an important consideration because it limits project costs and, as a result, electricity tariffs. In a letter to the minister of finance, the Association of Power Producers calls instead for “an enabling environment” that removes investment impediments to increase investor confidence.

The measures’ possible impacts are underscored by the volume of work to be done. Along with expanding transmission and distribution (T&D), the government has plans to increase power generation in the country from 200 GW in 2012 to about 400 GW by 2022. Additionally, in late August, India approved infrastructure projects worth $27.8 billion to revive economic growth, which has faltered as the rupee quickly crashed to record lows in recent months. In late August as this article was being written, financial analysts were struggling to make sense of the rupee’s value plunge into what they described as “uncharted territory” while others cautioned the situation was vastly compounded by investors who were fleeing domestic markets, which are facing stiff economic challenges and volatile global markets. The government’s solution entails reviving 36 stalled projects in sectors from oil, gas, and power to roads and railways. These include 18 power projects with an investment of $12.6 billion and nine infrastructure projects worth $2.1 billion.

According to the Ministry of Heavy Industries, generation equipment (boilers, turbines, and generators) makes up about a fourth of India’s domestic electrical equipment sector, the remainder of which is dedicated to T&D (Figure 1). With about 500,000 employees, the sector contributed 1.4% to the nation’s gross domestic product (GDP) over 2011 and 2012 and 10% to the manufacturing GDP. Over that period, electrical equipment made up just 1.5% of total exports but about 3.2% of total imports, and that trade deficit continues to widen every year, “which is a matter of serious concern,” says the ministry.

This is because projections indicate that despite importing 43% of needed electrical equipment, the domestic generation equipment sector’s total manufacturing capacity of 25 GW per year will double to 40 GW by 2015, when more joint ventures begin production—meaning it will be sitting on massive surplus capacity. A “Mission Plan for 2012–2022” released by the Heavy Industries Ministry in July seeks to  provide a “level playing field” to the domestic sector vis-à-vis foreign manufacturers, “who are enjoying support from their respective governments with respect to subsidies on raw material, incentives for export, low cost of funds, better infrastructure.” Besides increasing import duties on electrical equipment, the ministry suggests allowing imports of cold-rolled grain-oriented electrical steel at a zero customs duty, mandating type testing of some equipment domestically, and establishing product ratings and specifications. But it also calls for forcing foreign suppliers of heavy equipment to set up phased manufacturing facilities in India.

India’s own shortfalls include a lack of important research and development, the ministry acknowledges. It urges government backing of efforts by Indian companies—like BHEL, which has developed a demonstration model based on integrated gasification combined cycle and advanced ultrasupercritical technology. Then, it cautions, the country must tackle skill shortages that are compounded by inadequate curriculums in technical training institutes. In due time, India should also boost exports of power equipment with help from the Export-Import Bank of India and the Central Power Research Institute—which should work to see that all certification is accepted in foreign countries. Ultimately, the power sector’s bigger problems stemming from land acquisition and permit delays must be tackled to help the domestic generation equipment sector flourish.

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1. Estimated segment size of India’s electrical equipment sector (2011–12). India’s $25 billion electrical equipment industry made up of 500,000 employees is classified into two sectors: generation equipment (consisting of boilers, turbines, and generators), which contributed $6.5 billion over 2011–2012, and transmission and distribution equipment, which provided the larger share of $13.4 billion. Other electrical equipment, including instrument transformers, surge arrestors, stamping and lamination, insulators, insulating material, industrial electronics, indicating instruments, and winding contributed $5.2 billion. Source: Indian Electrical and Electronics Manufacturers Association