Global Slow down and Indian Energy Sector

1

• Global Slow down and Indian Energy Sector
• - Impact, Survival and Opportunities
• Dr. R.P. Singh
• 4th March 2009

2

• I am a strong believer in the popular saying
• What is worst in the past , that can be the
  best for the future.

3
Global slow down vis a vis impact on India

• The global crisis is unprecedented in magnitude
  and complexity because of
• - financial system crisis, and
• - a global economic slowdown
• The mutual reinforcing effects make future
  outcomes very hard to predict, potentially very
  negative and likely to last longer than crises in
  the past

4
Why is this crisis different?

• 1. Highest ever leveraging in combination with
  asset write downs
• Current debt levels amount to more than three
  times GDP in the US and Europe. Historically,
  they had been 150-200
• Cumulative Asset write-downs till mid Nov08
  stood at USD 966 billion globally this could have
  further gone up by an additional USD 200-400
  billion in capital for banks to recover losses
• This has resulted in unprecedented systemic
  credit market failure
• Never before have such a large number of credit
  markets come to a standstill at the same time,
  nor has the decline in the credit market activity
  ever been so sharp.e.g.
• The US long term commercial paper market fell
  from USD 1.6 billion in May 2008 to USD 81
  million in October 2008.
• THIS LEAVES LITTLE CAPITAL RAISING ABILITY TO
  FINANCE BUSINESS GROWTH, CONSUMER DEMAND OR
  GLOBAL TRADE.

5
Why is this crisis different? contd..

• 2. All economies and markets hit.
• All developed economies (e.g.,the EU, US, Japan)
  face major economic slowdown due to decline in
  consumption
• Most emerging markets confront economic decline
  due to sharp reduction in export demand, lack of
  commensurate increase in domestic consumption,
  and a slowdown in investment due to credit crunch
• The widespread nature of this phenomenon limits
  the possibility of recovery through strong demand
  or capital injection from other regions

6
The result

• The above two negative trends mutually reinforce
  each other, leading to acute economic contraction
• The economic contraction leads to further
  defaults, putting additional pressure on the
  banking system
• Even as banks struggle to restore solvency, they
  face further write-downs from declining asset
  values and credit exposures

7
Impact on Indian economy

• Relative insulation of the Indian banks and
  financial institutions from the toxic assets and
  investments of the developed world and moderate
  dependence of the industrial sector on exports
  made most to believe initially that India would
  not face much of the problem
• Emerging reality is turning out to be somewhat
  different. The confidence is weakening as the
  government also accepts that the consequences of
  the crisis will spill over to the Indian economy
  as well.
• Reduced GDP growth rate for the third quarter of
  2008-09 at only 5.3
• The full year 2008-09 growth rate is now
  estimated to fall below 7 per cent
• The industrial and agriculture growth rates
  turned negative in the third quarter against
  8.5 growth rate notched by the industrial sector
  in 2007-08

8
Impact on Indian economy contd..

• Indias real economy can be classified into three
  broad categories
• Sectors with weak demand outlook and potential
  over-supply
• Sectors with core demand intact but in need of
  large amount of capital
• Less capital-intensive or well funded sectors,
  with core demand intact

9
Impact on Indian economy contd..

• 1. Sectors with weak demand outlook and potential
  over-supply
• Textiles, metals and mining, iron and steel,
  automotives, chemicals, cement, real estate,
  media, and trade
• These account for about 33 of GDP and 37 of
  bank credit
• Some of these sectors are highly export
  dependent, other have output prices based on
  global commodity markets. Textile revenues could
  decline by 40 and capacity utilisation in iron,
  steel cement by 85
• Many of these sectors face a shrinking of demand
  relative to anticipated levels, and / or a sharp
  decline in sales realisation
• They are not in expansion mode but continue to
  require funding for working capital to complete
  ongoing projects
• A strong domestic demand stimulus is required to
  catalyze growth in these sectors and improve
  their risk perception
• A more than 30 decline likely in
  demand for real estate as compared to growth of
  40 last year

10
Impact on Indian economy contd..

• 2. Sectors with core demand intact but in need
  of large amount of capital
• These sectors include infrastructure/EPC,
  power, petroleum, coal, fertilisers,IT/ITES and
  pharmaceuticals
• These account for about 24 of GDP and 21 of
  bank credit
• In the power sector, a peak capacity shortfall
  persists of more than 17, but financial closure
  is delayed on key projects (UMPPS) and some bid
  projects are rendered unviable by higher interest
  rates
• High capacity utilisation in ports and roads
  drives continued growth in demand creation of
  projects by government is a supply-side
  bottleneck
• Order booking for EPC players declines by 15 to
  20 as lack of capital slows down projects
• High inventory build-up in retail, short credit
  lines from suppliers (e.g. inventory at 70 of
  six months sales as against 35 earlier in
  apparel category
• Growth in these sectors would have
  multiplier effects for other input sectors
  (e.g., cement, steel, chemicals)

11
Impact on Indian economy contd..

• Less capital-intensive or well funded sectors,
  with core demand intact
• These sectors include food processing and FMCG,
  telecom, health services, government services,
  agriculture
• These account for about 34 of GDP and 36 of
  bank credit
• They have a strong growth outlook, and can
  sustain their operations even in the credit
  crunch, due to either low capital intensity
  (FMCG), adequate funding (telecom) or the ability
  to raise resources on a preferred basis
  (government, agriculture)
• Governments fiscal stimulus measures to
  increase broad- based purchasing power are
  likely to help sustained consumption of these
  necessities even in a downturn
• A sharp deterioration in any one could transmit
  to other areas with consequences such as
  overshooting interest rates, unanticipated
  foreign exchange losses for exporters and
  importers, sector specific bankruptcies, and
  selective stress on weak banks

12
Impact of the crisis

• The impact of the crisis is through five
  interconnected and mutually reinforcing forces
• Deteriorating real sector performance in FY
  2009-10 and 2010-11
• Continuing volatility in rupee and foreign
  currency, given external sector constraints
• Fall in domestic savings and foreign capital,
  impacting GDP growth
• Large gap in infrastructure capital formation
• Need for banking recapitalisation

13
Large gap in infrastructure capital formation

• Indias infrastructure investment target is USD
  500 billion in 11th five year plan
• Of this USD 430 billion is allocated in power,
  roads, railways, water, ports, airports and
  irrigation
• It is expected that India would be left with a
  shortfall of USD 150 billion to 190 billion
  against its target
• Public Private Partnerships and public sector
  projects (excluding government projects) would
  face a gap of USD 50 billion to USD 60 billion in
  resources from banks, insurance and pension
  funds, and capital markets
• Even more critical will be the pace at which
  infrastructure projects are created in the
  economy.
• It is expected that India will fall short of its
  targeted spend, not merely because of lack of
  finance, but also slow pace of creation of bid
  out projects by relevant authorities and
  subsequent issues in land acquisition and
  clearances

14
Energy Sector

• Electricity consumption is not affected by
  economic slowdown
• Consumption related to industrial production and
  commercial activities drops and household
  consumption is not significantly touched
• Rise of population and ongoing urbanisation,
  necessitate rise in electricity demand even in a
  slowdown in the developing economies.
• The long term data time series data show a
  continuous rise in electricity consumption in the
  USA irrespective of the several major downturns
  in the economy.
• Therefore, it is unlikely that the demand for
  electricity will drop globally even if a serious
  economic crisis sets in.

15
Turning a crisis into opportunity

• We can make right moves over the next 12 to 18
  months
• Even at 5-5.5 GDP growth, India will be one of
  the fastest growing economies in the world
  (2008-09 to 2010-11)
• With high growth rate India is better positioned
  to attract pools of global capital
• Despite its high fiscal deficit India can sustain
  a large additional physical stimulus to increase
  domestic demand through a) incremental PSU
  disinvestment b) marginal relaxation of FDI cap
  on banking and liberalisation of the insurance,
  telecom and civil aviation sectors and c)
  creation of framework from mining sector and
  spectrum allocation
• Indias conservative financial sector with better
  regulation and market governance compared to
  other countries

16
Strategies to sustain growth of Infrastructure
sector

• Government to play an active role, not only as a
  monitor but as an active partner
• Government must speed up project implementation
  across power, transportation etc.
• Encourage Public Private Partnership to garner
  more finance
• Divest Public Sector Undertakings stakes
• The Corporate sector, however, may look into
  following
• - Purchase and supply chain management
• - reducing and rationalising IT expenditure
• - working capital optimisation
• - CAPEX optimisation through a combination of
  deferrals and CAPEX redesign
• - Energy Conservation
• - Acquire Energy Resources across the globe
• - And above all ring fence the best talent and
  aggressively tap talent from vulnerable
  competitors

17

• Churchill in his first speech as Prime Minister
  on Victory speaks
• What is our aim? I answer in one word.
  victory- victory at all costs, victory is in
  spite of all terror, victory however long and
  hard the road may be, for without victory there
  is no survival