Business Standard

Flush with funds, but unable to spend

NMDC blames delayed clearances & logistical issues for the lag

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India’s slowed to 6.5 per cent in 2011-12 against 8.4 per cent in the previous two financial years. The index of industrial production, too, slowed down sharply to 0.1 per cent in April against 5.3 per cent in the same month last year. All indicators seem to point towards a general stalling of business activities.

The is a prime suspect. So is the mining crisis that was precipitated by the Supreme Court ban on operations in Bellary, Karnataka. Yet, an analysis of two of India’s largest mining companies — (National Mineral Development Corp) and Coal India Ltd (CIL) — which meet the basic raw material requirement for most of the industrial activity in key sectors including power, cement and steel has shown an unprecedented inability to deploy funds given to them, says a Parliamentary panel in May this year. This, say experts, is having an adverse effect on industry.

Why has it been so difficult for these companies to spend money allotted to them under the 11th five year plan period?
 

WITH FEW OPTIONS
  • India's mining sector has plunged into an output and investment crisis 
  • An analysis of NMDC and Coal India reveals major lapses in capital expenditure
  • The reasons for the dismal performance go beyond the recent clampdown on illegal mining activities 
  • Delays in equipment procurement, Maoist activities, land acquisition hurdles, green clearances and law and order issues have played spoilsport 
  • The dip in growth and investment is in sharp contrast to the accumulating cash pile of these two companies

First, let’s look at the figures. NMDC had an approved outlay of Rs 7,147 crore for the eleventh plan period ended March 2012, but the miner managed to spend just Rs 3,083 crore, a mere 43 per cent of the total. Even for the financial year 2011-12, the company reduced its spending target from the budgeted Rs 3,309 crore to Rs 2,020 crore, while the actual expenditure stood at only Rs 1,534 crore.

Similarly, Coal India, India’s state-owned and world’s largest coal producer, fell short of meeting its expenditure target last financial year. While had planned to spend Rs 4,220 crore, only Rs 2,759 crore was spent by February this year, the panel has noted in a separate report. The company’s production remained flat.

In NMDC’s case, the inability to spend has meant a gridlock for a list of crucial projects, including the Rs 898 crore Kumaraswamy iron ore mining project in Karnataka. The company has been able to spend only Rs 72 crore in the seven million tonne per annum (mtpa) project against the allocated Rs 279 crore. Expenditure has also fallen short at the Rs 572-crore pellet plant at Donimalai in Karnataka.

Then, there is the three mtpa steel plant at Nagarnar in Chhatisgarh where NMDC had planned to invest Rs 2,615 crore in the project during the last fiscal. However, the expected expenditure had to be brought down to Rs 1,352 crore later while the actual expenditure in the project stood at a mere Rs 81 crore by December.

The reasons for this? “During the 11th Plan, NMDC has incurred an expenditure of Rs 3,083 crore — 43 per cent of the outlay — mainly due to the delay in grant of forest clearance for the steel plant and Deposit 13 (at Bailadila) and non-finalisation of the Rowghat railway line,” NMDC's acting Chairman told Business Standard in an e-mailed reply.

The company also blames the iron-ore mining ban in Karnataka for the slowdown in investment in the Kumaraswamy project. “Orders for all major packages of around Rs 410 crore have already been placed. However, expenditure has been less than the envisaged target mainly due to the mining restrictions imposed,” says Verma, who is also the chairman of steel maker SAIL. This has had a less-than-salubrious effect on NMDC’s numbers. The company recorded a marginal one per cent dip in its overall earnings at Rs 11,261 crore in 2011-12, the second such decline after the financial crisis days of 2009-10.

Coal India points at other reasons for its lag in fund utilisation. One is the way the company does budgeting for its projects. “Even if there is a low possibility of a project getting materialised in a year, we provide for it in the expenditure plan to avoid delays in case the project is commissioned before time,” a senior official from the company told Business Standard.

Other reasons include delayed procurement of heavy earth moving machinery, unprecedented rains, deficient supply of explosives, delayed green clearances, law-and-order problems as well as the lowest-bidder tendering process, which the company says causes delays.

Another major reason for the poor fund utilisation by CIL is the dismal progress on the overseas coal assets acquisition front. The company has been earmarking Rs 6,000 crore annually for the past two financial years, but has failed to clinch a single deal in the global market. Both NMDC and CIL are among the government’s cash-rich public sector undertakings. While Coal India is sitting on a cash reserve of Rs 58,000 crore, NMDC possessed a cash surplus of Rs 20,200 crore as on March 2012.

Experts believe the reasons for the slowdown in the performance of the mining companies goes beyond statutory clearances. “One of the main reasons is the dip in demand from China and other ore importing nations, as they have pulled down steel capacity creation. Around 54 per cent of NMDC’s iron ore is exported,” Kishor P Ostwal, chairman and managing director of Mumbai-based CNI Research, said. The ban on mining in Karnataka has added to the woes.

Is there any respite for both the industry and these companies looking ahead? “The issues of forest clearances, land acquisitions and maoist activities will continue going forward,” says Amrit Pandurangi, a noted infrastructure expert and senior director at Deloitte Touche Tohmatsu India. “The government’s entire focus should be on resolving these ground-level issues, else infrastructure projects will not move ahead,” he adds.

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