 "We've to fix demand, distribution in power value chain: Banmali Agrawala")
A long-term player in the Indian market, US-based General Electric sees its businesses looking up in anticipation of increased government activity in all but the thermal power sector. Banmali Agrawala, president and chief executive officer, GE South Asia, tells Jyoti Mukul the government will need to moderate populist issues to spur the economy. Edited excerpts:
Do you see any revival in the economy?
It is a mixed bag. Some macroeconomic indicators are positive but if you convert it into what is happening on the ground, there is some disconnect. The challenges continue. Interest rates are pretty high and credit offtake still low. Bank credit growth is only 10 per cent (yearly) because the cost of capital is high.
The government also needs to get a fix on some populist themes. Even from a financing standpoint, government schemes with a fairly high coupon rate, like eight per cent net of tax, also sets the tone of what is the average cost of money available. Add to this the risk and the cost of capital goes up. There has to be a certain lowering of interest rates, through a combination of setting the right level and the right return in government securities. Besides, more than 75 per cent of our banking system is public sector. There should be a few large banks instead of many smaller ones, for driving infra growth.
Will the government effort to get foreign funds into infrastructure help improve credit flow?
The country is short of capital in terms of both equity and debt. The balance sheet of all infrastructure companies are stretched. We do not have an alternative but to make room for foreign capital. It is a great idea to get pension and sovereign funds - the capital is needed and is long-term, which matches the infrastructure flavour; besides, coupon rates are modest. They come in because they look at stability and surety of performance. That is the environment we would need to create. Therefore, if the government takes the sovereign risk and gets in funds into sectors like roads and railways, it will work. In power, however, it is riskier. But, within power, the transmission sector can attract such investment, since uncertainties are low.
Why is investment in the power sector not picking up?
We have a paradox. There is unutilised capacity but at the same time, there is load shedding; no power and diesel-generated power. Clearly, it means electricity boards are not willing to increase rates and buy more power. We have come to a point where if the demand-side and distribution side in the power value chain is not fixed, there will not be any investment on the generation side and even the good story we see on the renewable side will come to an end.
Will measures like the coal block auction and gas mechanism for stranded power plants revive activity?
In coal auctions, whatever hiccups we are seeing are a loss of time. The private sector has a responsibility of not trying to gain the system but to participate in the spirit of the auction and not to figure ways to be one-up.
For India, coal will remain a dominant fuel but it cannot be the only one. We will need to supplement it, particularly with gas-based and renewable power, especially for peaking power. At least for some time, gas-based plants will start working because of the package offered by the government. But, state electricity boards need to start buying this power at Rs 5.50 a unit.
In generation, we need to look at the constraints around land, water, amount of capital and cost of capital. The sources for funding available for coal-based generation are getting limited. For instance, the Norwegian sovereign wealth fund has said it is withdrawing from coal-based generation.
How can domestic manufacturing in the power sector be promoted?
Wind (energy) manufacturing is localised. It's on the solar side that imports happen. Worldwide in solar manufacturing, nobody is making money. We need to come up with the right solution for better predictability of renewable power. From a manufacturing perspective, we need to step up the electronic industry, which plays a part in all manufacturing.
On thermal, we have 30-35-Gw manufacturing capacity but no demand. As a country, we need to add 10-12 Gw of power every year but are nowhere near it. These capacities came in anticipation of demand. But as long as there is need of that size, there is a future for that capacity. The private sector will have to wait it out longer.
What are the GE plans for India? Will you take part in some of the new initiatives of Indian Railways?
We feel good about the fact that in almost all of our businesses, we see the government taking bold steps. In the railway sector, for instance, there was clogging of orders and projects but decision making is happening now. They are in the process of coming out with large tenders. We will remain focused in diesel locomotives. In oil and gas, ONGC (Oil & Natural Gas Corporation) is working hard to meet its deadlines for exploration and drilling. In defence, the country needs equipment and the government is clearing bottlenecks. These are a fairly large opportunity. All these sectors are relevant to GE. In the power sector, we are in the wind energy space of renewables. Other than thermal power generation, the remaining space in infrastructure for GE is moving ahead.
In health care, demand is a function of how much money is in consumer hands. Health care in India is a private market. We would like to see more government spending. World over, the government is primary spender, whether it is hospitals or diagnostics; in India, it is private hands. We see a lot of our cylinders firing. The characteristic behind all these are, they are areas which need technology and capital. These are also global businesses and fits in GE's sweet spot.
How are your tie-ups working with Wipro, Triveni, BHEL and State Bank of India?
We are proud of our associations with the government and the private sector. We are comfortable with partnerships, which we use as a method for us to grow and will continue to do so.
Do you see any revival in the economy?
It is a mixed bag. Some macroeconomic indicators are positive but if you convert it into what is happening on the ground, there is some disconnect. The challenges continue. Interest rates are pretty high and credit offtake still low. Bank credit growth is only 10 per cent (yearly) because the cost of capital is high.
Also Read
Demand pick-up is not as robust as one would like. One way to stimulate demand from the consumer end is to bring down the cost of capital. At this level of cost, it gets very difficult.
The government also needs to get a fix on some populist themes. Even from a financing standpoint, government schemes with a fairly high coupon rate, like eight per cent net of tax, also sets the tone of what is the average cost of money available. Add to this the risk and the cost of capital goes up. There has to be a certain lowering of interest rates, through a combination of setting the right level and the right return in government securities. Besides, more than 75 per cent of our banking system is public sector. There should be a few large banks instead of many smaller ones, for driving infra growth.
Will the government effort to get foreign funds into infrastructure help improve credit flow?
The country is short of capital in terms of both equity and debt. The balance sheet of all infrastructure companies are stretched. We do not have an alternative but to make room for foreign capital. It is a great idea to get pension and sovereign funds - the capital is needed and is long-term, which matches the infrastructure flavour; besides, coupon rates are modest. They come in because they look at stability and surety of performance. That is the environment we would need to create. Therefore, if the government takes the sovereign risk and gets in funds into sectors like roads and railways, it will work. In power, however, it is riskier. But, within power, the transmission sector can attract such investment, since uncertainties are low.
Why is investment in the power sector not picking up?
We have a paradox. There is unutilised capacity but at the same time, there is load shedding; no power and diesel-generated power. Clearly, it means electricity boards are not willing to increase rates and buy more power. We have come to a point where if the demand-side and distribution side in the power value chain is not fixed, there will not be any investment on the generation side and even the good story we see on the renewable side will come to an end.
Will measures like the coal block auction and gas mechanism for stranded power plants revive activity?
In coal auctions, whatever hiccups we are seeing are a loss of time. The private sector has a responsibility of not trying to gain the system but to participate in the spirit of the auction and not to figure ways to be one-up.
For India, coal will remain a dominant fuel but it cannot be the only one. We will need to supplement it, particularly with gas-based and renewable power, especially for peaking power. At least for some time, gas-based plants will start working because of the package offered by the government. But, state electricity boards need to start buying this power at Rs 5.50 a unit.
In generation, we need to look at the constraints around land, water, amount of capital and cost of capital. The sources for funding available for coal-based generation are getting limited. For instance, the Norwegian sovereign wealth fund has said it is withdrawing from coal-based generation.
How can domestic manufacturing in the power sector be promoted?
Wind (energy) manufacturing is localised. It's on the solar side that imports happen. Worldwide in solar manufacturing, nobody is making money. We need to come up with the right solution for better predictability of renewable power. From a manufacturing perspective, we need to step up the electronic industry, which plays a part in all manufacturing.
On thermal, we have 30-35-Gw manufacturing capacity but no demand. As a country, we need to add 10-12 Gw of power every year but are nowhere near it. These capacities came in anticipation of demand. But as long as there is need of that size, there is a future for that capacity. The private sector will have to wait it out longer.
What are the GE plans for India? Will you take part in some of the new initiatives of Indian Railways?
We feel good about the fact that in almost all of our businesses, we see the government taking bold steps. In the railway sector, for instance, there was clogging of orders and projects but decision making is happening now. They are in the process of coming out with large tenders. We will remain focused in diesel locomotives. In oil and gas, ONGC (Oil & Natural Gas Corporation) is working hard to meet its deadlines for exploration and drilling. In defence, the country needs equipment and the government is clearing bottlenecks. These are a fairly large opportunity. All these sectors are relevant to GE. In the power sector, we are in the wind energy space of renewables. Other than thermal power generation, the remaining space in infrastructure for GE is moving ahead.
In health care, demand is a function of how much money is in consumer hands. Health care in India is a private market. We would like to see more government spending. World over, the government is primary spender, whether it is hospitals or diagnostics; in India, it is private hands. We see a lot of our cylinders firing. The characteristic behind all these are, they are areas which need technology and capital. These are also global businesses and fits in GE's sweet spot.
How are your tie-ups working with Wipro, Triveni, BHEL and State Bank of India?
We are proud of our associations with the government and the private sector. We are comfortable with partnerships, which we use as a method for us to grow and will continue to do so.