Core concerns

While industry has managed to grow at a steady pace for the past year and more, it was always obvious that the infrastructure constraint would begin to bite before long, and the latest numbers on the core sector demonstrate just this. Overall core sector growth last month was just 3.6 per cent, compared to 10.5 per cent in the same period last year.

How this will impact industrial growth is obvious, given that this sector has a weighting of around 27 per cent in the index of industrial production. Within this, growth in electricity fell from 10.5 per cent in April 2004 to 2.9 per cent in April 2005.

As a result, the gap between the demand and supply of electricity has increased by a whopping 56 per cent, from a little over 3 billion units a year ago to around 4.7 billion units in April 2005.

The largest deficit is in the western sector, where the shortage has risen from 11 per cent of demand in April last year to nearly 17 per cent, and the largest shortages are to be found in Madhya Pradesh (the rise is from 13 per cent to 25 per cent) and Maharashtra (from 11 per cent to 19 per cent).

Much of this shortage, it is obvious, is due to the fact that there hasn't been the build-up of power capacity that was required, and this is directly related to the problems of insolvent buyers, the state electricity boards (SEBs), and the fact that they have not been able to check rampant power theft.

While the Electricity Act of 2003 sought to tackle this to a certain extent by allowing "open access", which meant that someone could set up a power plant in Maharashtra and supply power to a unit in Karnataka, this hasn't worked out as intended as electricity regulators have generally preferred not to disturb the monopolies of SEBs. Clearly, some central intervention is required.

Other serious problem areas, even within the current capacity that is available, relate to the unavailability of both natural gas and coal. In Maharashtra, which has seen such a shortage that electricity was switched off to Mumbai's neon signs, the SEB says coal shortages are responsible for 3,000 MW of power outages.

Indeed, the 10th Plan estimates that there will be a 12 per cent shortage of coal across the country by next year, even if the planned investments by Coal India materialise; in the past, this has not been the case.

Apart from the issue of allowing private sector investment in non-captive mining, which has been hanging fire for years now, no large investments in these areas will take place until the subsidy regime is fixed. Gas prices have been freed, but this has not been done for the power sector since that will hike power costs/prices.

These issues cannot be fully addressed overnight, but the government needs to come up with a credible time frame for eliminating it and then demonstrate that it means what it says. Lack of power capacity creation due to subsidies in the fuels sector (coal and gas) is what will now slow down the general economic tempo.