Companies & Sectors
State finances and health of state electricity boards better than feared, says BNP Paribas

 State governments’ fiscal rectitude, with the notable exceptions of West Bengal, Kerala and Punjab, stands in stark contrast to New Delhi’s profligacy, says BNP Paribas equities research report  

Much attention has been focused on the inability of the government to manage its finances, especially New Delhi’s inability to curtail subsidies. But, as the famous adage goes, “whatever is true of India; the opposite is equally true”, says BNP Paribas in a recent research note. New Delhi’s inability to rationalize subsidies has rendered the fiscal responsibility legislation moot. However, state governments’ fiscal rectitude, with the notable exceptions of West Bengal, Kerala and Punjab, stands in stark contrast to New Delhi’s profligacy, finds BNP Paribas.
Indian states have wide-ranging responsibilities from education, healthcare, law & order, justice and agriculture. But their revenue sources are much more limited—major revenue sources for states are value-added taxes; taxes on alcohol; narcotics; entertainment and gambling; motor vehicle taxes and stamp duties. As a result, states are dependent on the central government for financial resources—more than 40% of the states’ revenue comes from central government transfers.
After a blip because of the global financial crisis and implementation of the Sixth Pay Commission recommendations (which increased civil servants’ pay), state finances have shown a stark improvement. They have managed to bring down their fiscal deficits from 2.9% of GDP (Gross Domestic Product) in FY10 to 2.5% of GDP in FY13 (budget estimate—BE) while a revenue deficit of 0.5% of GDP has been turned into a revenue surplus of 0.2% of GDP in FY13 BE. Most states have met the Thirteenth Finance Commission target of revenue deficit of 0% and of fiscal deficit of 3% of GSDP (Gross State Domestic Product) by FY12. The central government’s fiscal deficit of 5.8% of GDP for FY13 is far from the finance commission’s target of 4.2% of GDP.
Interestingly, almost all states, including the fiscally stressed states of Punjab, West Bengal, and Kerala, have forecast a fiscal deficit of less than 3% of GSDP in FY13. Each of these states has also budgeted for a sharp reduction in the revenue deficit for FY13. That sounds too good to be true, but it is true, according to BNP Paribas.
The other major concern is the strain of state electricity board (SEB) losses on state budgets. Media reports suggest that as part of their financial restructuring, respective state governments may have to assume part of the SEB debt. Can SEB losses upset the apple cart? No, according to BNP Paribas.
Media reports suggest that a Planning Commission panel has proposed that state governments absorb half the debt of the SEBs and convert it into state government bonds. Will this derail the process of fiscal consolidation of the states? Barring Jammu & Kashmir, states’ deficit and debt dynamics remain manageable even after assuming half of the accumulated losses of the SEBs. The states which have the biggest accumulated SEB losses—Rajasthan, Tamil Nadu, Uttar Pradesh and Madhya Pradesh—will comfortably maintain fiscal deficit at about 3% of GSDP (FY13E) even including the servicing cost of SEB debt. Even their debt-GSDP ratio, with the exception of Rajasthan and Jammu & Kashmir, will not increase materially. While the concern of quality of loans to private developers remains, it is believed that investor concerns over SEB loans may be misplaced, according to BNP Paribas. 


Who is hurting Andhra Pradesh in the KG Basin gas supply, asks Sarma

According to the former secretary, the decision to divert gas from KG Basin to Ratnagiri is aimed at whitewashing the dishonesty implicit in the erstwhile Enron project at the expense of consumers from AP

EAS Sarma, former secretary of the Government of India (GoI), has alleged that there are irregularities committed in the pricing, allocation and the management of the natural gas from Krishna Godavari (KG) Basin to the detriment of the public interest at the macro-level and to the detriment of Andhra Pradesh at the state level.
Mr Sarma, in a letter to Jaipal Reddy, minister for petroleum & natural gas (MP&NG) and Vinod Rai, Comptroller and Auditor General (CAG), has said that the manner in which the MP&NG has gone about in the allocation and pricing of natural gas from KG Basin raises important public finance concerns, which deserve a close scrutiny.
Earlier, the Empowered Group of Ministers (EGoM) had prioritised gas allocation to fertilizer plants as well as the Ratnagiri plant which was given special status as it was taken over by the Central and Maharashtra governments after the collapse of Enron.
Mr Sarma, in a separate mail to the CAG, said, "I understand that your office will be auditing RIL’s accounts shortly. I believe that, if your office confines itself to the accuracy of the capital expenditure details alone, and miss out on the larger diseconomies imposed by the MP&NG, you will be missing the wood for the trees. While auditing the capital cost figures is certainly important, the diseconomies also assume importance in view of the huge cost implications. Your intervention in such matters should be suo moto, as you have the Constitutional obligation to inform the Parliament on this.”
Yesterday, Mr Reddy while advising the Andhra Pradesh (AP) government to make an appeal to the prime minister and the EGoM for reviewing the decision said the state should go for power generation by regasified liquefied natural gas (RLNG) to overcome the power crisis.
However, Mr Sarma said, “Whoever has advised you (Mr Reddy) to make such a laughable statement are illiterate in economic logic and inconsiderate to protecting the legitimate interests of AP.”
“Purely on economic considerations, the natural gas produced in KG Basin should be used as close to the gas producing fields as possible, either for generating electricity or for manufacturing fertilisers, since the transmission of electricity through high tension transmission lines and transportation of fertilisers by rail, are any day cheaper than transporting gas to distant areas like Maharashtra and Delhi,” the former secretary said.
He said, “This implies that the consumers of electricity and fertilisers in AP are forced to pay an exorbitant price to help the political executive at the Centre to appease the consumers in Maharashtra and Delhi and also pander to the wishes of Reliance Industries (RIL).”
There is also an element of outright dishonesty in suggesting that AP should buy RLNG from the Middle East, Mr Sarma said, adding that it was Enron’s Dabhol plant that was supposed to get highly expensive LNG from Qatar. However, the electricity from it had turned out to be so expensive that erstwhile Maharashtra State Electricity Board (MSEB) could not sell it to its own consumers or export it to any state outside.
“I was a part of the Godbole Committee that examined this issue in detail and I am fully aware of the circumstances that led to Enron’s collapse, the high-level corruption among the politicians of Maharashtra and the Centre and the handing over of Dabhol to NTPC/GAIL under the name, ‘Ratnagiri’ power station. The decision to divert gas from the KG Basin to Ratnagiri is aimed at whitewashing the dishonesty implicit in the Ratnagiri project at the expense of AP consumers,” he alleged.
Mr Sarma said, “The political leaders at the Centre and in AP joined hands with RIL to sacrifice the interests of AP to benefit the company and obfuscate the issue of corruption at all stages.”
According to the former secretary, the cost of production of KG Basin gas is hardly $0.60 per million metric British thermal units (mmBtu). RIL had offered to supply it to NTPC at $2.34 per mmBtu. “Still, the Group of Ministers headed by Pranab Mukherjee had fixed the price at $4.20 per mmBtu. I have all the GoM correspondence on the subject, obtained under RTI Act. Who has profiteered as a result of this? Who are the politicians who benefitted from this?” Mr Sarma asked.
He alleged that RIL has initially inflated the gas deposits and the production profile to boost up investment in the company from the savings of several small shareholders. “The company has inflated the capital expenditure figures to get the same reimbursed from the government through ‘cost’ gas, to the detriment of the public exchequer. Later, it became evident that neither the deposits nor the production levels were anywhere near the original assurances. Who is behind this scam?” he said. 


CRISIL cuts India’s GDP growth forecast to 5.5% from 6.5%

CRISIL Research cited adverse impact of rainfall deficiency and worsening Eurozone outlook for the downgrade

CRISIL Research has cut India’s real GDP (gross domestic product) growth forecast for 2012-13 to 5.5% from its earlier forecast of 6.5%. The downward revision in India’s growth forecast factors in the adverse impact of rainfall deficiency (an expected deficiency of 15% for June-September 2012 monsoon season, as per Indian Meteorological Department) and worsening of the Eurozone growth outlook. 
Despite slowing growth, the research agency has revised up its average WPI inflation forecast for 2012-13 to 8% from 7% released earlier, to reflect the adverse impact of deficient monsoon on food inflation.
The revised growth forecast assumes that the stretched fiscal situation will limit the ability of the government to give a generous stimulus to the economy. If it does so, then growth will go up but so will the fiscal deficit. Similarly, high inflation will tie the hands of the Reserve Bank of India (RBI) in aggressively cutting rates to stimulate the economy.
The revised growth forecast does not take into account any substantial fiscal stimulus that may be provided to the economy to arrest and reverse a growth slowdown. A fiscal stimulus may create some upside to industrial and services growth. Upside to growth can also arise from sorting out policy-related issues in mining and power sectors.
According to the IMD, rainfall for the south-west monsoon season is likely to be around 15% deficient, close to the 20% deficiency recorded in June-July. Even if there is a partial recovery in rainfall in the coming weeks, an overall deficiency of 15% would imply that 2012-13 will end up as a drought year and will result in a substantially lower sowing not only in the Kharif season, but will also adversely influence the Rabi crop. As a result, agriculture GDP would not grow this year and would record ‘zero’ per cent growth compared to CRISIL’s earlier estimate of 3% under the assumption of normal monsoon.
On the global front, CRISIL’s forecast takes into account the worsening of the Eurozone economy. According to S&P’s revised forecast, the Eurozone economy will shrink by 0.6% in 2012 compared with the previous forecast of ‘zero’ per cent growth. The deterioration in the economic outlook for Europe, including a recession-hit UK, implies that India’s IT/ITES sector, which exports around 20%-25% of its exports to the region, will experience a slowdown. India’s merchandise exports (clothing, iron & steel, electronics and gems & jewellery) too will decelerate further (Eurozone accounts for 15% of India’s total exports).
While the growth forecast has been revised downward, WPI inflation forecast has been revised up to 8% to reflect the higher-than-anticipated increase in food inflation. Besides, a weak rupee will continue to offset the gains from lower global crude oil, commodity and metal prices, and keep the cost of imported items high. On the flip side, lower GDP growth in both India and the Euro zone will result in a decline in manufacturing inflation. The flaring up of food inflation will, however, raise inflationary pressure.
The lower GDP growth will impact government revenue growth, which would be lower than estimated earlier. This is expected to push up the fiscal deficit forecast to 6.2% from the earlier forecast of 5.8% of GDP. This deficit forecast does not take into account any substantial stimulus that may be given to the economy to boost growth. Given the higher fiscal deficit and, consequently, higher government borrowings, the pressure on the 10-year G-sec yield would remain high. “We expect the yield at around 8%-8.2% by March-end 2013, even if the repo rate is cut by further 75-100 basis points by the RBI in the rest of the fiscal year”, CRISIL Research said in its report.




4 years ago

all rating agency is scam. this forcast is without visiting the area of india and without knowing how farming does. sitting on computer they derive this. this forecast will 100% goes wrong.

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