Energy issues may pull down infra growth: Economic Survey

Advocates import parity in fuel prices

The ongoing issues in the energy sector, particularly related to pricing, may pull down growth of the overall infrastructure sector, the Economic Survey has warned.

It recommended doing away with subsidies through import parity in domestic fuel prices and correcting policy imperfections for realizing the targeted $1 trillion infrastructure investment in the current Plan period.

The survey noted that a majority of the ongoing infrastructure projects costing Rs 150 crore and above are facing delays in the power, coal and the petroleum sectors.

“The action needed to remove impediments for infrastructure projects, especially in the area of energy, includes ensuring fuel supply to power stations, financial restructuring of distribution companies and clarity on New Exploration and Licensing Policy (NELP),” the survey said.

While India’s overall energy production will increase to 670 million tonne of oil equivalent (MTOE) by 2017, it will fall short of the demand by at least 29%—268 MTOE—which will have to be met through imports.

“Aligning domestic energy prices with global prices, especially when large imports are involved, may be ideal option as misalignment could pose both macro and micro-economic problems,” the survey, advocating “rational” energy prices, said.

The recommendation, hinting at further fuel price hikes, comes at a time when much of the “misalignment” in global and domestic fuel prices has already been bridged. The switchover to Gross Calorific Value (GCV)-based system increased coal prices last year. In petroleum sector, the Administered Pricing Mechanism (APM) was dismantled in 2002 followed by complete deregulation of petrol prices in 2010. Last month, the government allowed gradual price rise for reducing under-recoveries in diesel, too.

The survey revealed fresh data pointing at a sharp recovery in the power sector’s performance as coal production recovered to a growth of 6% in April-December 2012 from a decline of 3% in the same period last fiscal.

Thermal power generation increased 8.5% to 562 billion units (BUs) between April and December 2012, primarily at the back of a massive 14% jump in coal-based generation. However, generation gas-based power declined 25% and hydro power declined 14% during the period.

The rate of growth of bank credit for the power sector, which alone accounts for over a half of the total infrastructure sector’s credit, increased from 14% in the first quarter this fiscal to 22% in the third quarter ended December. Credit flow for the overall infrastructure sector, however, showed a marginal improvement from 13.5% in the first quarter to 16.5% in the third quarter, as telecom sector continued with its sixth consecutive decline.

The survey also pointed out the dismal FDI inflow in the infrastructure sectors due to “continued global risks and moderated business sentiment” so far this fiscal. Total FDI inflows in infrastructure contracted as much as 98% this year. Power, petroleum and telecom sectors led the decline in foreign investors’ sentiment.

Overall, the survey suggested immediate resolution of issues including financing of road projects, fund crunch for railways, high fuel charges and interest rates for airline operations and reduced cargo traffic owing to mining ban for the ports sector.