— J.G. Kulkarni,
President, IEEMA
J.G. Kulkarni recently took over as the new President of
Indian
Electrical & Electronics Manufacturers' Association (IEEMA). In an
interaction with Electrical Monitor, Kulkarni takes us through
recent trends in the electrical equipment industry, which incidentally
recorded its worst-ever performance in the first quarter of FY13.
Though not optimistic of an immediate turnaround, Kulkarni
reposes confidence in the Indian growth story and outlines his plan
of action for galvanizing the electrical equipment industry.
The electrical equipment industry recorded a decline in the first
quarter of FY13, which we understand was the first time in over a
decade. What is your take on the industry's performance for the
rest of the year?
The Indian electrical equipment industry, estimated at Rs.1.20
lakh crore in 2011-12, comprises two segments—generation
equipment; and T&D and allied equipment. The generation
equipment sector accounts for 26 per cent of the total industry
while the T&D equipment sector comprises the remaining 74 per
cent. Growth rate of the T&D equipment sector decelerated to 6.9
per cent in FY12 as compared to 13.7 per cent in FY11 and 11.3 per
cent in FY10.
Yes, for the first time in 10 years, the Indian electrical
equipment industry has seen negative growth of 2.4 per cent in the
first quarter of the current fiscal year FY13, compared to the 13.82
per cent growth in Q1 of FY12.
Due to sluggish domestic demand on account of the slowdown in
the power sector and a surge in imports of electrical equipment in
recent years, T&D equipment manufacturers are working at only
65 per cent of their built-up capacity. This is significantly impacting
the commercial viability of the domestic electrical equipment
industry. It has also been having an adverse impact on both the
top-line and bottom-line of the manufacturers.
Some steps are being taken by the Central government to
rejuvenate the power sector, like the package recently announced
by the government on financial restructuring of discoms. The
problems of fuel linkages, land acquisition, environmental
clearances, etc. are being looked into at the highest levels of the
government and we hope that solutions emerge at the earliest.
However, even if all these issues are tackled, it will take some
time for the situation to improve at the ground level. Therefore, we
do not expect the industry's performance to improve much, at least
in this fiscal.
What would be IEEMA's strategy in tackling the general
slowdown?
We, in the industry, should imbibe dynamic production techniques
to enhance cost efficiency, even while supplying products
conforming to highest standards of quality. Critical attention is
required in enhancing our cost competitiveness, especially to withstand overseas competition. We must broaden our horizons
and think of the entire world as our potential market by scaling up
our operations. We are encouraging our member companies to go
global as it will help them in optimally utilizing their built-up
capacities.
In our view, tackling inflationary pressures by following a tight
monetary policy and high interest rate regime have throttled
economic revival. Reduction in the cost of credit is necessary to
revive investment activity.
Please discuss IEEMA's view on the Steel Quality Control Order
requiring BIS-certification for electrical steel to be used in India.
We understand that the cut-off date has now been extended to
March 31, 2013.
CRGO is the most critical and major input raw material for
manufacturing transformers. Very few mills in the world have the
technology and capability to produce CRGO electrical steel.
Globally, there are only 14 manufacturers of CRGO electrical steel.
In our opinion, CRGO is a non-fatigue/non-ageing material and
is not responsible for premature failure of transformers, which
are on account of reasons like overloading, poor designing and
workmanship, etc. The majority of failures are in the distribution
transformer segment, and we should have stricter qualifying
norms and mandatory application of a minimum 3-star BEE rated
transformers to be purchased by all utilities.
IEEMA has taken up this issue vigorously at the highest levels in
the Ministry of Steel, Department of Heavy Industry, Ministry of
Power, Department of Commerce, BIS, NMCC, etc. requesting that
the implementation of this order should be put on hold till at least
10 out of the 14 foreign mills which supply CRGO electrical steel
obtain BIS license. Otherwise, it will lead to acute material
scarcity in the domestic market and jeopardize the plans of the
government for the power sector.
We are thankful to the government for extending the date of
implementation from September 12, 2012 to March 31, 2013, but it
has to be ensured that at least 10 mills obtain the BIS license by
then from the present three. Further, the validity of the license
issued by BIS to foreign mills should be for five years to make it
attractive for applicants.
We have also taken up with the government that the order
should be made applicable on imported transformers to ensure
foreign manufacturers also use only BIS certified CRGO so that
they do not get any unfair advantage.
We have also recommended that the basic customs duty on
import of CRGO electrical steel be reduced from the present 5 per
cent to nil, till the time domestic production of CRGO electrical
steel commences.
What could be practical limitations in implementing this order?
Unless the testing and certification facilities are upgraded, it may
be difficult to implement this order. There will be a shortage of
prime material in the domestic market which will lead to an
increase in prices. This order will not be able to check imports of
inferior material coming in as scrap. Cut laminations or core will
still come in without compliance to BIS standards.
The government has proposed a one-time bailout for state
electricity distribution companies. What is your view in this
regard?
The entire power sector value chain crucially hinges on financial
viability of the power distribution sector. The accumulated losses
of power distribution companies reached a level of Rs.1.9 lakh
crore, as on March 31, 2011. Due to the increasing financial
distress of the discoms, these entities are not undertaking any
capital expenditure. Discoms have been unable to sign power
purchase agreements with power producers, which has had a
dampening effect on the entire sector.
The recent announcement by the government of the package on
'Financial Restructuring of Discoms' should have a positive impact
the entire power sector. As part of the package, the government
has mandated concrete and measurable action by the discoms,
including annual revision in tariffs, bringing in private investment
in distribution, etc, which hopefully will be strictly monitored. If
what is envisaged is put in place, then it should help in
substantially reforming the ailing distribution sector. With the
debt restructuring and improvement in the financial health of the
discoms, banks will regain confidence in sanctioning loans to
them.
It is imperative that the discoms improve their operational
performance and become technically and financially efficient so
that the entire power sector value chain strengths.
Payment to suppliers of electrical equipment and EPC
contractors comes way down in the priority of state utilities at the
moment! Hopefully, once their financial health improves, the
disbursement of payments to suppliers will get expedited.
The government has finally imposed import duty on imported BTG
for power plants. Is IEEMA satisfied with the measure?
This issue has been debated and discussed for long at the highest
levels of the government. The Arun Maira Committee, in early
2010, recommended a levy of 10 per cent basic customs duty (BCD)
on imported power generation equipment for mega power
projects (MPP) or ultra mega power projects (UMPP). The decision
taken now is to impose a BCD of 5 per cent equivalent to that on
non-MPP generation equipment. The other components of the
import duty (CVD and SAD) are immaterial for comparison as these
are (or will be) equivalent to the taxes (central excise and state
taxes) levied on domestic manufacturers.
More than two-third of the XII Plan targeted generation
capacity addition has already been contracted out to foreign
suppliers, which will not be impacted by this recent decision.
Therefore, the decision, though welcome, has come very late and is also not enough.
We learn that imports of T&D equipment, including cheap imports
from China, is significantly hurting domestic manufacturing
industry. Tell us more.
Yes, during the last five years, India's imports of electrical
equipment imports have increased at a CAGR of 30.30 per cent,
and were around $15.7 billion (Rs.75,057 crore) in FY12. Import
duties on most products are quite low and are being further
lowered under the various FTAs signed by India. China's share in
Indian imports of electrical equipment has dramatically increased
in the last few years and in FY12 stood at 44.5 per cent of the total
from 15.3 per cent in FY06. Imports from China have grown at a
CAGR of 57.5 per cent in the last six years.
Imports of electrical equipment in the country have assumed
very threatening proportions and have now captured 43 per cent
of the market for electrical equipment in India, whereas there is
significant domestic overcapacity. Absence of a level playing field
for the domestic industry to compete with imported electrical
equipment, especially from China, is adversely impacting the
commercial viability of the domestic industry and can have severe
long term consequences.
What are the relative disadvantages of domestic production vis-àvis
imports?
Domestic electrical equipment manufacturing industry suffers a
cost disadvantage of about 14% vis-à-vis imports due to sales
tax/VAT, entry tax/octroi; higher financing cost; lack of quality
infrastructure; dependence on foreign sources for critical raw
material and components, etc.
On the other hand, the Chinese government gives their
manufacturers of electrical equipment export subsidies as high as
17 per cent of the export value, social security subsidies, lower
income tax rate (of 15 per cent) and access to financing at low
rates of interest. All this gives Chinese companies a 24 per centplus
unfair pricing advantage and allows them to price their
products very competitively. Further, China is also offering credit
to foreign buyers on very soft terms to finance their imports. As a
result, imports from China are escalating every year. This is
making the Indian industry non-competitive locally.
Disproportionate reliance on imported power equipment, with
uncertain quality and lifecycle, and with no domestic
manufacturing facility to provide immediate spares,
replacements, etc. especially for heavy equipment, is fraught with
long-term risk. The government needs to provide greater
encouragement to indigenous manufacturing as done by several
countries, including China.
It is widely perceived that the Indian electrical equipment industry
is not investing sufficiently in R&D. Please discuss.
There is slow pace of absorption of new technology by domestic
manufacturers of electrical equipment, and also user industries,
and low investment in R&D. According to estimates, less than 1 per
cent of the annual turnover of the industry is invested in R&D.
The prime customers/buyers of the electrical equipment
industry are utilities in generation, transmission and distribution
of power. Presently, most of these utilities are either owned by the
Central government or state governments. Their buying practices
do not encourage innovations and R&D. They have outdated
tendering procedures and contract awarding based on L1 bidder
and negotiations. They are driven by prices rather than quality
(low qualifying criteria), and provide no encouragement for field
trials of innovative products or technologies.
As a result, main focus of the manufacturers of electrical
equipment is on cutting costs and not on innovative technologies,
on piecemeal short-term tactical measures rather than evolving
any strategic action plan for their growth and development.
As IEEMA President, please summarize the three most important
items in your agenda.
The three areas of focus would be:
Promote Exports: Over the years, the Indian electrical
equipment industry has developed a diversified, mature and
strong manufacturing base, with robust supply chain, and a
rugged performance design of products. There is also an
emerging global reputation of Indian electrical equipment for
sourcing of base products and components and also of Indian
transmission and other EPC contractors.
India's exports of electrical equipment were around $4.6 billion
in 2011-12, but accounted for less than 1 per cent of the global
trade in electrical equipment. With the electricity sector being a
sunrise sector across the entire developing world, there exists
significant potential for India to tap the export markets. This will
also help the manufacturers in using their underutilized
manufacturing capacity on account of sluggish domestic demand.
Encourage Indigenous Manufacturing: In recent months,
particularly in the telecom and electronics sectors, there has been
a move by the government to initiate preferential market access to
domestically manufactured products on security grounds and in
government procurement. The power sector is of at least as much
strategic importance as these sectors, if not more.
The government needs to encourage indigenous manufacturing
and technology in the domestic electrical equipment industry by
stipulating a minimum percentage of the total procurement by any
utility to be of "Made in India" products.
We also need to protect the domestic industry's interests under
different FTAs that are being negotiated. These measures will
support Indian manufacturers and provide necessary safeguards
to the domestic industry that is facing non-market competition on
account of cutthroat below-cost entry level prices offered by
Chinese manufacturers.
Skill Development: The electrical equipment industry is facing a
major problem in getting skilled and employable manpower which
is technically competent, equipped with skills and ready to be
deployed. The industry is facing a looming skill gap, which is
widening every year. Due to lack of skilled manpower, electrical
equipment industry is suffering as it is affecting critical functions
like R&D, consultancy, design and detailed engineering work.