EPC World Budget Special

Run-up to Union Budget 2011: Low on expectation

Mumbai, Feb (EPC News): Amid rising concerns over the government’s fiscal position and the sustained inflation pressures, the Union Budget for 2011-12 is likely to throw some light on the government’s plans to address the core issues. However, given  that elections are due in five states the focus may shift to spending in social sector schemes like the National Rural  Employment Guarantee Act (NREGA), food security and right to education.

Sectoral wish list/expectations:

Capital goods and engineering: In view of the robust investment expected in the Indian infrastructure sector, particularly the power sector, the demand outlook for the capital goods sector remains bright. However, various infrastructural bottlenecks, political scams and organisational inertia have slowed down the pace of awarding of orders in recent times. Nonetheless, most of the companies have revenue visibility for more than two years in terms of their book-bill ratio. However, concerns on Chinese competition would persist unless the government intervenes by withdrawing import incentives. It is expected that the budget impact for this sector remains to be positive.

Cement: Given the poor execution of infrastructure projects, the overall volume growth of the cement industry is unlikely to meet the guidance of 9% for FY2011 and will be in the range of 7-8%. However, the supply discipline followed by the manufacturers so far has resulted in a strong cement realisation in the half year of FY2011, particularly in the southern region. Going ahead, analysts believe a pick-up in the cement offtake could break the supply discipline and bring the prices under pressure. In addition, the key concerns remain an oversupply of cement due to capacity addition and cost pressure in terms of higher coal prices and increased freight cost because of an increase in fuel prices and the lead distance.

Infrastructure: Given the heavy investment required in the infrastructure space, the government’s thrust on infrastructure spending will continue. Even in the last budget the government had increased fund allocation across sectors. However, due to various scams, political issues and high inflation the government’s focus had shifted from infrastructure spending over the past few months. Thus, the project award activity and the execution of projects have been very slow recently, resulting in lower infrastructure spending. However, going ahead, the analysts believe the project awarding activity should pick up once again after the budget.

Oil & Gas: The Indian oil & gas space has witnessed significant reforms in the form of petrol price de-regulation. However, the recent spike in crude oil prices and the mounting inflation pressure have resulted in uncertainty regarding the timing of diesel price de-regulation. The burden of the rising fuel under-recoveries would remain an overhang on the oil marketing companies (OMCs) and upstream companies (Oil and Natural Gas Corporation [ONGC], Oil India Ltd [OIL] and GAIL India). Reliance Industries Ltd (RIL) would benefit from improving refining margins but the declining gas production from the Krishna-Godavari D-6 block is a concern.

Power: During the April-January FY2011 period, India generated about 669 billion units of power and its energy deficit remained in the range of 8%. Against a target of 21,441 MW India has added fresh capacity of about 10,210 MW in the year till date, taking its total capacity to 170,228 MW. This deficit is attributed to several challenges at the execution level and the government could address the same to boost the company’s power generation capacity. The delay from the leading power equipment suppliers is likely to be resolved soon as new players are rolling up their sleeves and would continue to get some kind of support from the government. On the other hand, the shortage of coal in India is another issue at present. To add to that, the deteriorating financial health of the distributing companies (discoms) remains a concern.
 
EPC News Bureau