Last years performance
28 Feb 2002
1
ORTS
Though the Union Budget for the year 2001-02 had proposed various measures such as a ten-year tax holiday for the development of new ports, coporatisation of the Jawaharlal Nehru Port and tariff rationalisation in the major ports, the Union government failed to implement any of these proposals in a comprehensive and constructive manner.
To attract private investment in the Indian ports sector and to enhance the already-saturated capacity of the major ports in India, the 2001-02 budget proposed a ten-year tax holiday, which can be availed of in the first 15 years of operation. This policy announcement was expected to give an impetus to fresh investment in the ports sector.
However, during the fiscal 2001-02, the Indian port sector failed to receive any concrete investment proposal either from the foreign ports developers or from the Indian private sector companies to develop new ports in the country or to add additional capacity in the existing majors ports.
The only notable development that occurred during the fiscal 2001-02 in the ports sector was that the P&O Ports of Australia had won the bid for the construction and operation of the new container terminal in the Chennai Port Trust. The biding process for this terminal had started around two years back.
It may be noted that though the privatisation of two new container terminals — one in Haldia port and another in Kandla port — were initiated in 1999, these projects have not been awarded to any port operator.
In his budget speech, Finance Minister Yashwant Sinha said that Ennore Port has already been corporatised and the Jawaharlal Nehru Port in New Mumbai is next in line, and with experience, other major ports can also be corporatised, enabling them to raise resources in the market.
However, during the 2001-02, the government could not take any policy initiative for the corporatisation of ports in India. JNPT was supposed to have been corporatised last year, but the cabinet clearance for JNPT corporatisation has not been given so far.
Similarly, the 2001-02 budget had also proposed the formation of the Tariff Authority for Major Ports to rationalise the existing tariffs further on a continuing transparent and fair basis. But, the issues like Terminal Handling Charges and other tariff related issues remain unsolved. The government also failed to address other major issues like Amendments to the Indian Ports Act, 1908, enabling privatisation in full swing, and the Major Ports Trust Act, 1963 for speeding up of corporatisation.
Issues such as labour reforms at the major ports (exit policy, mechanism for redeployment of labour, etc.) are still pending with the government. The budget for the year 2001-02 included the port services in the tax regime and brought them under the purview of the service tax. This service tax has been passed on to the users of ports and the user charges have been affected adversely.
PHARMACEUTICALS
The budget for the year 2001-02 had brought cheer to the domestic pharmaceutical industry. Finance minister Yashwant Sinha announced a substantial reduction in the Drug Price Control Order’s exposure in the industry and an extension of 150 per cent weighted tax benefits from R&D to other segments like biotech, clinical trials and the new patent filings.
The budget for the year 2001-02 also reduced the customs duty on formulations and the surcharge on corporate tax, from 13 per cent to 2 per cent and the expected decline in interest rates. However, the government implemented the major policy change announced in the budget 2001-02, the substantial reduction in the Drug Price Control Order’s exposure, only after 10 months (January 2002) of the announcement. So the Indian drug companies could not avail of the true benefits of this policy change during the fiscal 2001-02.
But, the extension of weighted deduction benefit given under the head of R&D expenditure to expenditure incurred on biotechnology research, clinical trials and regulatory approval has helped the pharma industry to a certain extent. It may be noted that several major and medium-level companies like Ranbaxy, Dr Reddy’s, Wockhardt, Unichem and Kopran have infused more funds into R&D and forayed into the biotech sector while many other companies like Lupin, Sunpharma, Zydus Cadila, and Nicholas Piramal, concentrated more on clinical trial and filing abbreviated new drug applications with foreign drug authorities.
However, grey areas still exist and it is not clear whether the extension of weighted deduction is applicable on expenditure done on clinical trials and regulatory approvals outside India. The reduction in the customs duty announced in the budget 2001-02 on formulation did not create any positive impact in the performance of domestic pharma companies due to the significant price difference between domestic formulations and on-patent formulations in the international market.
But, for multinational pharma companies operating in India, this policy change created a positive impact as many of them are importing life saving drugs in the finished format for sale in the Indian market.
In general, last year the demand for bulk drugs and formulations has increased due to an increase in domestic and export demand. The Indian pharma industry last year recorded a growth of around 7 to 8 per cent. In the domestic formulation market, prices were under pressure due to increased price competition from generic players.
POWER
The budget for the year 2001-02 offered fresh incentives to India’s power sector. The state electricity boards have been provided with special packages for restructuring through an enhanced outlay Rs 15 billion under the Accelerated Power Development Programme and an enhanced allocation of power from central sector power companies.
The budget has also increased the power sector outlay from Rs 100.65 billion in 2000-01 to Rs 123.75 billion in 2001-02. Customs duty has been reduced on project imports and surcharge of other inputs such as steel, imported coal and liquid fuels has also been removed. The 2001-02 budget also abolished the countervailing duty on LNG which was expected to result in a reduction in tariffs of independent power projects by Rs 0.05-0.08 per kwh.
However, the Indian power sector could not grasp the true spirit and content offered by the budget 2001-02 due to the high complexity of the sector and extremely poor financial health of the SEBs. In the segments of SEB restructuring and generation the performance of the industry was poor while in the area of transmission and distribution some healthy trends have been created.
Though the budget provided an adequate financial support of Rs 15 billion under the Accelerated Power Development Programme to the state governments for SEB unbundling and setting up of electricity regulatory commission, except Delhi, the restructuring exercise failed to take off in almost all the states. The Delhi state government accepted the restructuring proposal proposed by the SBI Caps and tenders have been floated for privatising the six distribution areas of Delhi Vydut Board.
Several other states, such as Andhra Pradesh, Haryana, Karnataka, Orissa, and Uttar Pradesh have already unbundled their respective SEBs through policy initiation. But, as far as privatisation of distribution is concerned the Indian power sector did not register any major progress. Andhra Pradesh, Karnataka, Rajasthan and Delhi were expected to finalise the process of privatisation of distribution in 2001-02.
Haryana is also likely to reinitiate the privatisation process in 2001-02. The year 2001 witnessed an increased demand for power over 8.5 per cent as compared to the 7 per cent demand registered in the year 2000-01. Due to the controversies involved with the Enron-promoted Dabhol Power Company and an increased demand there was a power shortage of over 1,000 mw in the western grid alone. Low generation of both thermal and hydel power during the last year have also resulted in a power shortage of around 8.5 per cent in the country.
The duty exemptions offered by the budget 2001-02 did not attract any independent power producers to set up new generation units. It can be noted that more than duty exemptions, IPPs are looking for a strong security mechanisms for investments in power sector. In the fiscal 2001-02, the financial institutions like IDBI and ICICI have cancelled their support to over 50 proposed power projects due to the failure of adequate escrow coverage from the respective SEBs.
Average power tariffs increased by 5 to 20 per cent in several states, such as Andhra Pradesh, Gujarat, Haryana, Karnataka, Maharashtra and Orissa. The tariff orders, issued by the SERCs, have placed increased emphasis on the reduction of T&D losses by the SEBs and distribution companies.
But, the government run power utility, PowerGrid Corporation has initiated very positive steps in the distribution segment with the help of the private sector. The Corporation has already floated
international tenders inviting private sector companies to participate in around 12 distribution projects. PowerGrid has also commissioned its first power distribution project (Thala project) in collaboration with Tata Power Ltd.
AGRICULTURE
Agriculture is in a deep crisis and this time it is not cyclones or other natural calamities but more due to the policies taken by the government. Historically, agriculture has been relegated behind industry and so has been the priority in reforms. The dismal growth rates of 0.9 per cent and 0.7 per cent recorded in the previous two years provided the "shock alarm."
The first honest admission of the man-made infirmities in the sector, the power of agriculture in national rejuvenation and a mature attempt at mid-course correction was evident in the National Agricultural Policy announced in mid-2000. Perhaps, time was too short thereafter for the Union Budget 01-02 to announce a long term prescription, even as the Finance Minister made some bold announcements, such as, rationalisation of subsidies, exemption of excise duty on processed foods etc.
Among the promises made in the last budget were also a higher role of state governments in PDS, curbing the restrictions on movement of foodgrains and scrapping of the Essential Commodities Act, 1955, etc. The government failed miserably in fulfilling all the promises it had made and just to make sure that it received no backlash from the opposition party and economists, the FM came out with some policy announcements just before the budget.
Unimpressed by the run-up announcements, Shetkari Sangathana leader Sharad Joshi said Finance Minister Yashwant Sinha doesn’t have the ability to move fast in this budget. Joshi said that last year Sinha had announced scrapping of the Essential Commodities Act, 1955, as it was a constraint on the farmer but there is no mention about constraint on agriculture in this year's run-up to the budget.
Joshi said the 12 commodities that were removed from the Essential Commodities Act were non-agricultural. He voiced that there is hardly any foreign market for commodities like wheat, wheat products, butter or coarse food grains. "That doesn't take us anywhere, unless the market continues to be under the quota system with a maximum limit of 7,00,000 tonnes," he said.
Foodgrain stocks have already crossed 60 million tonnes, as offtake from the public distribution system continues to be low. Experts say that the present crisis is a result of the government's fundamentally flawed procurement policy. There is a school of thought that says that the procurement prices are artificially high which is leading to the burgeoning stock-pile with the Food Corporation of India.
The accumulation of food stocks with the government has meant a huge increase on the outlay on food subsidy, not only to cover the cost of procurement at fancy prices but also to cover the proportionately higher storage, transportation, spoilage and pilferage costs of the FCI. According to experts, the entire operation of the FCI should to be abandoned, as there is a strong wastage in the procurement system. Instead, they have recommended that there should be certified warehouses by private corporations.
Analysts and traders said that reforms in the sector were a key to ensuring long-term economic growth as more than two thirds of India’s population of more than a billion people live off agriculture and related activities but it currently contributes only around 25 per cent to GDP.
As promised in the last budget, the government earlier this month removed restrictions on the movement and storage of foodgrains and edible oils, proposed complete decontrol of the sugar sector later this year and allowed free exports of grains. But these measures, though in the right direction, were "peripheral and marginal."
SHIPPING
Indian shipping industry was one of the highly neglected sectors in the budget for the year 2001-02. The marginal increase in the rate of depreciation from 20 per cent to 25 per was the main support provided by the 2001-02 budget to the shipping industry. The budget also offered reduction in surcharge on corporate tax, from 13 per cent to 2 per cent. This budget announcement was applicable to all corporate houses in India.
However, the financial performance of Indian shipping companies have improved during the current fiscal owing to the increase in freight rates and the seaborne trade of crude oil and oil products. The freight rates in the Aframax and Suezmax markets, which constitute a significant part of the Indian shipping fleet, are at their 25-year high. Buoyed by this uptrend, Indian shipping companies are increasing their fleet.
But the increase in rate of depreciation offered in the budget 2001-02 did not help the industry in any way as the industry acquired fewer ships and sold less ships in the last 11 months so could not avail of this sop fully. The ships acquired by the Indian shipping lines were less than eight while the number of ship sold were below 20. It may be noted the demand of the shipping industry for increasing the depreciation rate was 40 per cent from the current level of 20 per cent while the budget granted only 25 per cent, an increase of 5 per cent from the current depreciation rate.
India has 55 shipping companies, of which 19 deal exclusively in coastal trade and 29 in overseas trade while the remaining are in both. The main Indian shipping companies are Great Eastern Shipping Company Ltd, Shipping Corporation of India and Essar Shipping.
One of the main demands by the Indian shipping companies for the budget 2001-02 was the replacement of corporate tax by tonnage tax. This, if granted, will reduce the tax liability of companies to as low as half per cent on net income. This is also expected to boost investment in tonnage thereby leading to development of a larger national fleet. In shipping tonnage, India currently ranks 6th in Asia and 15th in the world.
Though the Union Budget for the year 2001-02 had proposed various measures such as a ten-year tax holiday for the development of new ports, coporatisation of the Jawaharlal Nehru Port and tariff rationalisation in the major ports, the Union government failed to implement any of these proposals in a comprehensive and constructive manner.To attract private investment in the Indian ports sector and to enhance the already-saturated capacity of the major ports in India, the 2001-02 budget proposed a ten-year tax holiday, which can be availed of in the first 15 years of operation. This policy announcement was expected to give an impetus to fresh investment in the ports sector.
However, during the fiscal 2001-02, the Indian port sector failed to receive any concrete investment proposal either from the foreign ports developers or from the Indian private sector companies to develop new ports in the country or to add additional capacity in the existing majors ports.
The only notable development that occurred during the fiscal 2001-02 in the ports sector was that the P&O Ports of Australia had won the bid for the construction and operation of the new container terminal in the Chennai Port Trust. The biding process for this terminal had started around two years back.
It may be noted that though the privatisation of two new container terminals — one in Haldia port and another in Kandla port — were initiated in 1999, these projects have not been awarded to any port operator.
In his budget speech, Finance Minister Yashwant Sinha said that Ennore Port has already been corporatised and the Jawaharlal Nehru Port in New Mumbai is next in line, and with experience, other major ports can also be corporatised, enabling them to raise resources in the market.
However, during the 2001-02, the government could not take any policy initiative for the corporatisation of ports in India. JNPT was supposed to have been corporatised last year, but the cabinet clearance for JNPT corporatisation has not been given so far.
Similarly, the 2001-02 budget had also proposed the formation of the Tariff Authority for Major Ports to rationalise the existing tariffs further on a continuing transparent and fair basis. But, the issues like Terminal Handling Charges and other tariff related issues remain unsolved. The government also failed to address other major issues like Amendments to the Indian Ports Act, 1908, enabling privatisation in full swing, and the Major Ports Trust Act, 1963 for speeding up of corporatisation.
Issues such as labour reforms at the major ports (exit policy, mechanism for redeployment of labour, etc.) are still pending with the government. The budget for the year 2001-02 included the port services in the tax regime and brought them under the purview of the service tax. This service tax has been passed on to the users of ports and the user charges have been affected adversely.
PHARMACEUTICALS
The budget for the year 2001-02 had brought cheer to the domestic pharmaceutical industry. Finance minister Yashwant Sinha announced a substantial reduction in the Drug Price Control Order’s exposure in the industry and an extension of 150 per cent weighted tax benefits from R&D to other segments like biotech, clinical trials and the new patent filings.The budget for the year 2001-02 also reduced the customs duty on formulations and the surcharge on corporate tax, from 13 per cent to 2 per cent and the expected decline in interest rates. However, the government implemented the major policy change announced in the budget 2001-02, the substantial reduction in the Drug Price Control Order’s exposure, only after 10 months (January 2002) of the announcement. So the Indian drug companies could not avail of the true benefits of this policy change during the fiscal 2001-02.
But, the extension of weighted deduction benefit given under the head of R&D expenditure to expenditure incurred on biotechnology research, clinical trials and regulatory approval has helped the pharma industry to a certain extent. It may be noted that several major and medium-level companies like Ranbaxy, Dr Reddy’s, Wockhardt, Unichem and Kopran have infused more funds into R&D and forayed into the biotech sector while many other companies like Lupin, Sunpharma, Zydus Cadila, and Nicholas Piramal, concentrated more on clinical trial and filing abbreviated new drug applications with foreign drug authorities.
However, grey areas still exist and it is not clear whether the extension of weighted deduction is applicable on expenditure done on clinical trials and regulatory approvals outside India. The reduction in the customs duty announced in the budget 2001-02 on formulation did not create any positive impact in the performance of domestic pharma companies due to the significant price difference between domestic formulations and on-patent formulations in the international market.
But, for multinational pharma companies operating in India, this policy change created a positive impact as many of them are importing life saving drugs in the finished format for sale in the Indian market.
In general, last year the demand for bulk drugs and formulations has increased due to an increase in domestic and export demand. The Indian pharma industry last year recorded a growth of around 7 to 8 per cent. In the domestic formulation market, prices were under pressure due to increased price competition from generic players.
POWER
The budget for the year 2001-02 offered fresh incentives to India’s power sector. The state electricity boards have been provided with special packages for restructuring through an enhanced outlay Rs 15 billion under the Accelerated Power Development Programme and an enhanced allocation of power from central sector power companies.The budget has also increased the power sector outlay from Rs 100.65 billion in 2000-01 to Rs 123.75 billion in 2001-02. Customs duty has been reduced on project imports and surcharge of other inputs such as steel, imported coal and liquid fuels has also been removed. The 2001-02 budget also abolished the countervailing duty on LNG which was expected to result in a reduction in tariffs of independent power projects by Rs 0.05-0.08 per kwh.
However, the Indian power sector could not grasp the true spirit and content offered by the budget 2001-02 due to the high complexity of the sector and extremely poor financial health of the SEBs. In the segments of SEB restructuring and generation the performance of the industry was poor while in the area of transmission and distribution some healthy trends have been created.
Though the budget provided an adequate financial support of Rs 15 billion under the Accelerated Power Development Programme to the state governments for SEB unbundling and setting up of electricity regulatory commission, except Delhi, the restructuring exercise failed to take off in almost all the states. The Delhi state government accepted the restructuring proposal proposed by the SBI Caps and tenders have been floated for privatising the six distribution areas of Delhi Vydut Board.
Several other states, such as Andhra Pradesh, Haryana, Karnataka, Orissa, and Uttar Pradesh have already unbundled their respective SEBs through policy initiation. But, as far as privatisation of distribution is concerned the Indian power sector did not register any major progress. Andhra Pradesh, Karnataka, Rajasthan and Delhi were expected to finalise the process of privatisation of distribution in 2001-02.
Haryana is also likely to reinitiate the privatisation process in 2001-02. The year 2001 witnessed an increased demand for power over 8.5 per cent as compared to the 7 per cent demand registered in the year 2000-01. Due to the controversies involved with the Enron-promoted Dabhol Power Company and an increased demand there was a power shortage of over 1,000 mw in the western grid alone. Low generation of both thermal and hydel power during the last year have also resulted in a power shortage of around 8.5 per cent in the country.
The duty exemptions offered by the budget 2001-02 did not attract any independent power producers to set up new generation units. It can be noted that more than duty exemptions, IPPs are looking for a strong security mechanisms for investments in power sector. In the fiscal 2001-02, the financial institutions like IDBI and ICICI have cancelled their support to over 50 proposed power projects due to the failure of adequate escrow coverage from the respective SEBs.
Average power tariffs increased by 5 to 20 per cent in several states, such as Andhra Pradesh, Gujarat, Haryana, Karnataka, Maharashtra and Orissa. The tariff orders, issued by the SERCs, have placed increased emphasis on the reduction of T&D losses by the SEBs and distribution companies.
But, the government run power utility, PowerGrid Corporation has initiated very positive steps in the distribution segment with the help of the private sector. The Corporation has already floated
international tenders inviting private sector companies to participate in around 12 distribution projects. PowerGrid has also commissioned its first power distribution project (Thala project) in collaboration with Tata Power Ltd.
AGRICULTURE
Agriculture is in a deep crisis and this time it is not cyclones or other natural calamities but more due to the policies taken by the government. Historically, agriculture has been relegated behind industry and so has been the priority in reforms. The dismal growth rates of 0.9 per cent and 0.7 per cent recorded in the previous two years provided the "shock alarm."The first honest admission of the man-made infirmities in the sector, the power of agriculture in national rejuvenation and a mature attempt at mid-course correction was evident in the National Agricultural Policy announced in mid-2000. Perhaps, time was too short thereafter for the Union Budget 01-02 to announce a long term prescription, even as the Finance Minister made some bold announcements, such as, rationalisation of subsidies, exemption of excise duty on processed foods etc.
Among the promises made in the last budget were also a higher role of state governments in PDS, curbing the restrictions on movement of foodgrains and scrapping of the Essential Commodities Act, 1955, etc. The government failed miserably in fulfilling all the promises it had made and just to make sure that it received no backlash from the opposition party and economists, the FM came out with some policy announcements just before the budget.
Unimpressed by the run-up announcements, Shetkari Sangathana leader Sharad Joshi said Finance Minister Yashwant Sinha doesn’t have the ability to move fast in this budget. Joshi said that last year Sinha had announced scrapping of the Essential Commodities Act, 1955, as it was a constraint on the farmer but there is no mention about constraint on agriculture in this year's run-up to the budget.
Joshi said the 12 commodities that were removed from the Essential Commodities Act were non-agricultural. He voiced that there is hardly any foreign market for commodities like wheat, wheat products, butter or coarse food grains. "That doesn't take us anywhere, unless the market continues to be under the quota system with a maximum limit of 7,00,000 tonnes," he said.
Foodgrain stocks have already crossed 60 million tonnes, as offtake from the public distribution system continues to be low. Experts say that the present crisis is a result of the government's fundamentally flawed procurement policy. There is a school of thought that says that the procurement prices are artificially high which is leading to the burgeoning stock-pile with the Food Corporation of India.
The accumulation of food stocks with the government has meant a huge increase on the outlay on food subsidy, not only to cover the cost of procurement at fancy prices but also to cover the proportionately higher storage, transportation, spoilage and pilferage costs of the FCI. According to experts, the entire operation of the FCI should to be abandoned, as there is a strong wastage in the procurement system. Instead, they have recommended that there should be certified warehouses by private corporations.
Analysts and traders said that reforms in the sector were a key to ensuring long-term economic growth as more than two thirds of India’s population of more than a billion people live off agriculture and related activities but it currently contributes only around 25 per cent to GDP.
As promised in the last budget, the government earlier this month removed restrictions on the movement and storage of foodgrains and edible oils, proposed complete decontrol of the sugar sector later this year and allowed free exports of grains. But these measures, though in the right direction, were "peripheral and marginal."
SHIPPING
Indian shipping industry was one of the highly neglected sectors in the budget for the year 2001-02. The marginal increase in the rate of depreciation from 20 per cent to 25 per was the main support provided by the 2001-02 budget to the shipping industry. The budget also offered reduction in surcharge on corporate tax, from 13 per cent to 2 per cent. This budget announcement was applicable to all corporate houses in India.However, the financial performance of Indian shipping companies have improved during the current fiscal owing to the increase in freight rates and the seaborne trade of crude oil and oil products. The freight rates in the Aframax and Suezmax markets, which constitute a significant part of the Indian shipping fleet, are at their 25-year high. Buoyed by this uptrend, Indian shipping companies are increasing their fleet.
But the increase in rate of depreciation offered in the budget 2001-02 did not help the industry in any way as the industry acquired fewer ships and sold less ships in the last 11 months so could not avail of this sop fully. The ships acquired by the Indian shipping lines were less than eight while the number of ship sold were below 20. It may be noted the demand of the shipping industry for increasing the depreciation rate was 40 per cent from the current level of 20 per cent while the budget granted only 25 per cent, an increase of 5 per cent from the current depreciation rate.
India has 55 shipping companies, of which 19 deal exclusively in coastal trade and 29 in overseas trade while the remaining are in both. The main Indian shipping companies are Great Eastern Shipping Company Ltd, Shipping Corporation of India and Essar Shipping.
One of the main demands by the Indian shipping companies for the budget 2001-02 was the replacement of corporate tax by tonnage tax. This, if granted, will reduce the tax liability of companies to as low as half per cent on net income. This is also expected to boost investment in tonnage thereby leading to development of a larger national fleet. In shipping tonnage, India currently ranks 6th in Asia and 15th in the world.
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