Pre-Budget 2008-2009 Analysis by Investorline

Pre-Budget Analysis

WITH JUST few days to go for the annual budget of 2008-09, it is time to speculate as to what changes can be expected in this budget. Budget is an important & most awaited event in the economic life of our country, with key pronouncements on taxes, financial allocations and benefits, and on developmental agenda. But what changes can be expected? There are questions galore and the expectations from the Finance Minister are sky-high. Will this be the budget where building the infrastructure backbone of the economy be further advanced by extending support to the Bharat Nirman program? Will the budget bring in cheers to millions through a much-awaited cut in income tax rates? Or will the Finance Minister succumb to the electoral necessities and present a 'populist' budget? Will there be any measures to counteract the effects of the recession of the United States economy?

Economic Outlook:

The Indian economy has been one of the best-performing economies globally in CY07. The Government of India and the Reserve Bank of India (RBI) have been able to mitigate the threat of rising inflation and inflationary expectations through several fiscal and monetary measures. According to the Central Statistical Organisation estimates, the economy is on course to grow by 8.6% in 2007- 08. The government, in its bid to sustain the high growth, is looking at policy adjustments to capture the mood of the nation. This is especially in view of recent global uncertainties and developments. In earlier Bugdets, more emphasis was laid on reducing the inflation rate, but it is expected that in the current budget emphasis would be laid on both controlling the inflation as well as sustaining high GDP growth rate. Needless to say, these twin issues will remain high on the priority list of the Finance Minister, as he gives final touches to the Budget document. Along with these, increased allocations for a balanced and inclusive growth will be important for him in his last full Budget before the general elections in 2009. For the first time, direct tax collections have surpassed indirect tax collections which are in line with the developed economies across the globe. During the first nine months of the current fiscal, personal income-tax collections rose by50%and corporate tax revenues by 39.84% compared with the same period last year. Such a phenomenal increase in the net tax collection could be attributed to strong economic growth, better tax administration and relatively improved compliance levels. Finance Minister had indicated that there could be a significant revamp in the taxation schemes. The direct taxes could be reduced from the existing 33.6 per cent, inclusive of surcharge to about 25 - 30 per cent. Thus, the reduction in the direct taxes would come as a sigh of relief to the several individuals as well as corporate who are affected by the direct taxes. Reducing the tax rates could also provide an incentive to taxpayers to declare their entire income honestly so that the overall tax collections can be improved. Plus the surcharge on tax, which is paid, by individuals and association of people who have an annual income greater than Rs 10 lakh is expected to reduce. Currently, there is 10 per cent surcharge on personal and corporation income tax, which may plummet in this budget. It could come down to as low as 5 per cent. Partnership firms and domestic organizations, whose income is greater than Rs 1 crore would also benefit from this. With such positive signs on the tax compliance and collections front, the common man is definitely looking at great expectations from the finance minister.

Domestic and global developments that will shape Budget 2008-09:

We are probably in the midst of the strongest growth run in the post-independence India. All the structural factors necessary for a sustained high growth phase seems to be in place but some cyclical headwinds are probably making our journey a little more turbulent than what we would have otherwise liked. The key concerns for the 2008-09 year are: a) possible inflationary pressure from food and oil, b) a slowdown in the growth rate from the heights of the past two years, c) increased pressure on fiscal, and d) the continued availability to funds to complete the ongoing investment cycle at viable interest rates. Our achievement on growth front, over the Tenth Plan period was very close to target and it is no surprise that the Eleventh Plan wants to take us closer to our aspirational target of double-digit growth. While the growth process has gathered its own momentum, Union Budget 2008-09 is expected to remove the hurdles towards conquering the next frontier by extending the reforms process to reap long-term gains. In the short run, maybe a little demand fillip will do wonders for an economy where incoming data have been flashing some intermittent signs of growth concerns. Let us take a look at the economic and political backdrop against which the contours of the Union Budget 2008-09 will be drawn up.

1) Focus on GDP Growth & Sustained Balanced Growth:

With regards to the composition of GDP, the percentage shares of various sectors have largely changed. The percentage share of the agriculture in the total GDP has declined, on the contrary the percentage share of services in theGDPis rising faster. The percentage share of various sectors of India's Economy in the total GDP in the earlier years is as follows:

As to the above diagram, the contribution of India's agriculture to the total GDP of the country is experiencing a declining trend. On the contrary the percentage share of services sector to the total GDP is rising at a faster pace. In the latest data we can see that the share of services has increased to 55.1% and that of agriculture has reduced to 18.5%. Keeping in view the poor performance of the agriculture in India's Economy, the upcoming Budget 2008-09 is expected to come with more perks for the farmers in India. More over the Budget 2008-09 is expected to draw more attention on consumption led growth, which is needed for strengthening and sustaining the economic growth of the country. India's GDP growth has averaged about 8.8% over the past four years. This has been made possible by continued investments over these years, ably supported by growing consumption. The main focus of the government is to maintain the GDP growth rate as the recent weakness in global economies has added an element of uncertainty to the prospects of sustained high growth rates in the future. The target GDP growth rate for the Eleventh Five Year Plan is9%and this year's budget is expected to contain such measures, which will facilitate sustenance of healthy GDP growth rates. Towards this, continued measures for the power, roads, highways, ports and other infrastructure are expected. The fund requirement for this purpose is put at more than $450 bn (Rs.18 trn) over the 2007-12 Five Year Plan. Of these, the estimated requirement in the transport infrastructure segment alone is over Rs.6 trn comprising railways (Rs.2.5 trn), roads (Rs.3 trn), ports (Rs.740 bn) and airports (Rs.350 bn).

2) Political Angle to the Budget:

One thing we cannot ignore is that this will be the last budget of the current coalition government. The Lok Sabha election is due, in 2009, and the United Progressive Alliance, with the dispute over the nuclear deal with the Left, has been on the brink of divorce. Thus, the FM might not present a budget that could stir up a political storm and bring the ruling government down. He would rather play safe. We might expect a popular budget with the aim of appeasing specifically targeted sections of the voting community. Thus vote bank politics could again play a vital role in this year's annual budget. However, Finance Minister P Chidambaram would be in a tight corner to maintain a fine balance between fiscal discipline and political demands arising from the next General Elections. With the first year already gone without a Plan in place, political constraints in the second year of the Plan, will further diminish the chances of the Eleventh Plan (2007-11) being implemented in letter and spirit. This being the terminal year for the Fiscal Responsibility and Budget Management Act (FRBMA), the Finance Ministry will not be in a position to create extra resources needed to meet both political requirements and economic demands for growth. Indications are that the Budget will depend heavily on generating extra funds through Public Sector Undertakings. However, the Budget would have to make provision for the schemes already announced during the course of the year. Thus, funds would have to be provided for the Skill Development Mission, schemes relating to the agricultural sector like Rashtriya Krishi Vikas Yojna and the Food Security Mission, clubbed with additional commitments in the education and health sectors. Availability of funds will be further constrained, as both the Central government and States will have to earmark funds for implementing the Sixth Pay Commission Report. With the Railway Ministry already being asked to keep apart Rs 9,000 crore for this purpose, indications are that the burden on the Central government alone would be to the tune of Rs 30,000 crores. Mr Chidambaram would thus have to keep a careful watch so that inflation does not get out of hand while ensuring that positive trends in the core sectors of the economy are not adversely affected beyond a point. In short, the Budget is set to witness a tug of war between demands economic growth and political wish lists.

3) Focus on Inflation Control:

Headline inflation for most part of FY08 has been benign to say the least. This could be a positive outcome of a judicious mix of fiscal and monetary policies and could be highlighted as one of the success stories of last year's budget. Inflation management has been accorded top priority by policymakers across the globe. The conscious policy choice of reducing import duties and banning futures trading in some agri commodities has helped in reining in headline inflation numbers. Global inflation has been on an uptrend in the later half of 2007, riding on crude oil reaching the magical 3 figure mark and food prices forcing inflation to reach multi-year highs in both developed and developing nations. The apparent immunity of Indian inflation to these global developments should not be thought of as resilience. Although a rapidly appreciating rupee has mitigated some of the impact of imported inflation, there is still incomplete pass-through. Some harsh decisions need to be taken as early as possible to align domestic prices with international prices in both the energy and food sectors because increasing off-balance sheet exposure (oil bonds) is making the financial health of the government a little more fragile.

4) Education & Rural Development:

Education and Rural development would get top priority in the coming Union Budget as said by the Finance Minister. Education sector is being given importance as literacy alone could make India a super power. The UPA Government in the last three years had allocated Rs 28,600 crore for the education sector lending, of which Rs 17,636 crore had already been distributed. The amount was four times more than what was allocated during the BJP-ledNDA regime, the Finance Minister said. The government could announce a special scheme in the coming Union Budget. “It (the scheme) may be christened Rashtriya Madhyamik Shiksha Abhiyan (RMSA) and may be in line with the 11th Plan (2007-12) objective of improving gross enrolment ratio and also to reduce inequalities. A tentative allocation of Rs500 crore for preparation work for the scheme is being worked out to be announced in the Union Budget of 2008-09,” said a senior government official, who did not wish to be identified. The Centre plans to spend Rs 35,567 crore on improving secondary education in the 11th Plan and will contribute75%of the total funds required for the programme, with the states putting up the rest. In the 12th Plan, this ratio is expected to be 50:50. Rural development may get substantially more funds in this budget - about Rs 50000 crore from Rs 41000 crore last year. Allocations for rural development in the national budget have been rising steadily in India. In 2004-05, it was Rs 16000 crore, which went up to Rs 24700 crore in 2005-06 and Rs 31000 crore in 2006-07. It was Rs 41000 crore in the 2007-2008. Substantial increase is likely to be announced in the social sector schemes and those relating to rural development, including the Horticulture Mission, Rural Water Supply Scheme, Rural Sanitation Programme, Sarv Siksha Abhiyan, National Rural Health Mission, NREGP, Indira Awas Yojna (rural housing), Pradhan Manrti Gram Sadak Yojna, Accelerated Power Development Programme(APDP), Integrated Child Development Scheme, Jawaharlal Nehru Urban Renewal Mission, Rashrtriya Krishi Vikas Yojna, and Backward Region Grant Fund.

5) Capital Flows:

The other macroeconomic factor, which has dominated economic debates in the last year or so and will be a crucial consideration for this year's budget, is the deluge of capital flows that the country has received. Finance Minister has himself dubbed them as 'copious' and it seems that this process of receiving foreign flows is going to sustain for some time to come. While in FY07 there was a BoP surplus of USD 35bn on the back of around USD 46bn of capital flows, it will not be a surprise if both these numbers would double in FY08! Monetary policymakers have been torn between letting the rupee appreciate and intervening in the currency markets to inject more rupee liquidity, which could be potentially inflationary in nature. Rupee has been one of the strongest appreciating currencies in the Asian region in 2007 even while RBI has continued its policy of back-to-back intervention and sterilization of the rupee liquidity through issuance of Market Stabilization bonds and CRR hikes.

6) Stock Markets:

Riding on robust economic growth and extremely positive business sentiment, the buoyant and largely bullish stock market, has also contributed significantly to the excellent growth in tax collections, with collection of securities transaction tax (STT) growing by a sharp 57.61% in the current fiscal. To top it, increased investor interest in equities induced by strong economic fundamentals, robust flows from foreign institutional investors and an attractive short-term capital gains tax rate have also contributed to the increased tax collections. People are investing like never before and the per capita income has increased manifold. The government must be keen to capitalize on this investment boom and strike a balance between inflation and growth.

7) Mutual Fund Industry:

Indian Mutual Fund industry has recorded and astonishing growth of 71% in AUM in this year. The AUM increased from about 3.21-lakh crore in Dec 2006 to 5.49 lakh crore in Dec 2007. The mutual fund industry has become more mature now and has given more products this year. TheMFindustry also has certain expectations from the coming budget. Its wishlist includes: Indian mutual fund firms have asked the government to allow them to offer investors multiple tax planning equity funds, seeking relaxation of a rule that limits the options they can offer to customers. A regulation framed in 2005 restricts them to just one such fund or equity linked savings scheme (ELSS), limiting options for investors who have been increasingly using them to save tax. Two years ago, India allowed savers to claim tax benefit on investment of up to 100,000 rupees in ELSS, making them hugely popular among investors with assets of such funds rising nearly 25 times to 154 billion rupees in past three years The industry also wants fund of funds (FoFs), which invest in equity schemes, and other funds investing in overseas equities to be treated as equity funds to enable them to pay less tax. Indian regulations classify funds investing more than 35 percent of assets in foreign equities and FoFs as debt funds and subject to higher taxes, making them unattractive. Dividend Distribution Tax on corporates and equity and non-liquid Mutual Funds to be reduced to 10%from 15% at present. Dividend Distribution Tax on money market and Liquid Mutual Funds to be reduced to 10% from 25% at present. Sec 80C deduction level to be raised from Rs1 lakh to Rs3 lakh. Howmuch of this wishlist gets achieved waits to be seen, given our coalition based policy.

8) Managing the Exchange rate shock:

The recession of the United States economy has meant that the rupee has appreciated a great deal. The exporters are feeling the brunt as their profit margins continue to go down. It is predicted that this trend is likely to continue. The RBI is expected to address this issue through its monetary policy and tax cuts in order to reduce the load on the exporters can also be expected. The suddenness and the magnitude of the exchange rate shock has affected several sectors in the economy which were export dependent with limited import content and did not have enough profit margins. Anecdotal and industry estimates suggest possibility of huge job losses in several industries including textiles and the approach of Finance Minister to address this issue could be one of the highlights of Budget 2008-09. Most likely this is going to be the last budget of Finance Minister before the general elections. So there will be expectations from him to satisfy a large number of pressure groups who will be the key to electoral success. It will be the Finance Minister's endeavor to see that the resultant force of these often opposing demands does not lead to a lopsided budget, which will be a setback for economic reforms. The last piece in the backdrop for this year's budget will be the slowly unfolding global developments. After almost 4 years of unprecedented global growth, there is a possibility that the global economy might enter a phase of moderation in 2008, mainly on the back of a severe slowdown in the US economy. At a macro level budget policy formulation by the Finance Minister will have to take into account all the above factors.

1) Indirect Taxes:

In the previous Budget, the peak import duty was brought down to 10%. The Government is committed to bringing down import duties to Asean levels. In addition to this, currently there is an overriding concern of rising inflation. On the other hand, adequate protection is needed for several emerging/weaker sectors. Moreover, the Finance minister also has to consider the revenue implications. The slowing global growth can impact India's GDP growth, going ahead and consequently tax collections also. Taking into account these factors, we expect moderation in import duties with continued protection to few sectors. The Finance Minister has already indicated that diverse rates of excise duty on various goods are expected to converge at the Cenvat rate of 16%.We expect further steps in this direction. Growth in excise duty collections in the first nine months of FY08 has been about 5.1%, which is lower than the target growth of about 11% for the fiscal. Thus, there may not be significant reduction in excise duty rates.We also expect the CST rate to be further reduced from 3% levels, in line with the process started in the previous Budget. The contribution of service tax to overall tax revenues of the Government is lower when compared to the fact that services account for more than 50% of the GDP. For 9MFY08, collections from service tax were up about 37% YoY v/s a targeted rise of 32% for FY08. We believe the Finance Minister will bring in more services under the tax net to increase the contribution of services to tax revenues

2) Direct Taxes:

Direct taxes have been the high point of FY08, with collections having grown by40%in the first 10 months against the fiscal target growth of 17%. Exceeding indirect tax receipts for the first time, direct tax collection now looks set to cross Rs 3 lakh crore or (Rs 3 trillion) this fiscal. The budget estimate of a tax (both direct and indirect) to GDP ratio of 11.8% is likely to be exceeded. The government had set a target of Rs 2.67 lakh crore for direct tax receipts for this fiscal. The Government's initiatives for bringing in more people under the tax net have paid dividends with an increase in the number of taxpayers. The rising income levels of Indians have also resulted in more taxpayers. In the backdrop of a strong growth in tax collections, some relief to smaller taxpayers in the form of a higher exemption limit can be expected. Investments in long-term savings instruments may be encouraged with specifically directed tax exemptions. Some reduction in dividend distribution tax (DDT) is also expected.

Issue of Tax Compliance in Budget 2008 (expected)

On 6th of December 2007, the Finance Ministry announced the issue of tax compliance in budget 2008. It is learnt that the taxpayers would be benefited reviewing the direct tax rates and increasing the voluntary compliance. The level of tax compliance is increasing significantly for the last two or three years. During the fiscal year 2006-07, almost 31.9 million tax payers of India have filled their income tax returns, which is not an exciting figure at all keeping in mind the population in India. Government would like to get in more and more people to pay taxes in this fiscal. But the government has announced that it will focus more on the tax compliance issues. The Finance Ministry will not increase the maximum marginal rate of personal income tax further, for it may result in voluntary compliance. The Advisor to the Union Finance Minister of India has said that, the government will now be able to keep track on the ups and downs of voluntary compliance. Maximum marginal rate of personal income tax will be 30%. However, the base of the taxpayer is not large, as it ought to be because a big portion of the population of the Indian economy lies below the poverty line.

Sector Wise Expectations:

Automobilies:

Industry expects a uniform excise duty rate of16%for all cars- large and small. Currently, small cars are levied16%excise duty whereas all other cars and SUV's are levied 24%. Expectations of reduction of excise duty rate on two-wheelers from 16% to 12%or 8%.

Banking:

The moderating credit growth (22-23% YoY) and a relatively higher deposit growth would make RBI comfortable. The headline inflation has also moderated in the last couple of months. The interest rates have almost peaked and are likely to move southward from the next quarter purely due to demand and supply factors. Even though RBI has not given any signal by cutting benchmark rates, banks are expected to start reducing rates in due course of time. This is also evident from recent moves by many banks like SBI, Canara Bank, Allahabad Bank and Bank of India. Industry expects Relaxation in lock in period for savings to qualify for tax benefits, increase in ceiling for TDS on fixed deposits, tax exemptions on infrastructure financing. If the above expectations are fulfilled, it would have a positive impact on the sector as a whole and would help banks correct their asset liability mis-match. Increase in FII/FDI limits in PSU Banks from currently 20% to 49%. This would be a positive move, as it will help these banks raise capital for funding their growth and meeting the Basel II norms.

Capital Goods:

In the power sector, India expects to add a capacity of 80,000MWby 2012 and provide power for all. To attain this ambitious target, the Government had outlined a proposal for nine ultra mega power projects (each project having a capacity of 4,000 MWor more). Till date, only two of theseUMPPs have taken off. Investments in key industrial sectors are expected to soar to Rs.6924 bn over the next five years as compared with Rs.2274 bn worth of investments made over the past five years. Over the next five years, growth in investments will be driven by strong capacity additions, led by healthy growth in demand and high existing operating rates across some of the key industries. Reduction in excise duties on power equipment: Currently, while there is zero customs duty on mega power projects and 5% customs duty on non-mega size projects, excise duty continues to stay at 16%. Project developers are demanding reduction in excise duty to 8%, which is intended to translate into lower operational cost for consumers. Reduction in excise duty on energy efficient ACs: With a view to promote energy conservation, it is expected that the Government may reduce excise duty from 16% to 8% for ACs meeting Bureau of Energy Efficiency (BEE) standards. This should benefit consumer durables manufacturers like Voltas and Blue Star.

Construction:

Union Budget 2008-09 is expected to be positive for the infrastructure sector with higher budgetary allocations in different segments such as roads, irrigation, ports, airports, power etc. With infrastructure development requiring around $492 bn in the next five years, companies with significant experience in executing projects in this key segments are likely to benefit significantly.

Information Technology:

The IT/BPO services industry is expected to achieve 25% growth in FY08 to about $50 bn. Of these, exports are expected to grow by more than26%to nearly $40 bn. The sector has been facing significant challenges in FY08. Over the past three quarters, the challenge has been in the form of an appreciating rupee. The rupee has appreciated by about 10% in FY08, posing challenges for the sector and more so, for smaller companies. Since Q3FY08, the economic growth in the US has been slowing with an increasing probability of a recession. In case there is a prolonged recession in the US, the volume growth for Indian IT services/BPO sector can be impacted. Industry on the whole expects extension of tax exemption beyond FY10 & also Deemed fringe benefit at higher levels v/s IT service companies- should be treated at par. Nasscom expects extension of the Software Technology Parks (STPI) scheme beyond 2009.

FMCG:

India continues to remain a domestic consumption driven economy. To some extent, this insulates the Indian economy from global shocks in the form of a possible US recession or a financial credit crunch gripping other developed economies. Last year, the FMCG sector grew to Rs.750 bn at 10-15%, backed by growth in urban markets and a surge in demand for premium products. There are indications that the Sixth Pay Commission, expected to be passed this year, will recommend salary hike. This will put more purchasing power in the hands of the 4mn strong central government work force and induce households to upgrade to premium brands in personal care and non-durable consumer goods. Industry expects Relief on existing 16% excise duty on soaps and detergents & hoping reduction in the CST from 3% to 2%. Other expectations include reduction in VAT across food processing industry from 12.5% to around 4%. Reduction in CST will help boost consumption and demand buoyancy and would prove to be beneficial for food processing industry.

Healthcare:

Healthcare has emerged as one of the largest service sectors in India. Strong economic growth, along with increasing percapita income, growing healthcare awareness and expanding insurance coverage is creating a new and continuously expanding group of consumers. In the coming Budget the sector is hoping for incentivizing research and development, hoping to receive more tax benefits in order to enhance healthcare service/delivery. Significant medical needs of the Indian population provide huge potential for Indian healthcare service/delivery sector. This sector requires enormous investment over the next five years (approximately US$5 bn for bed additions). The Finance Minister may provide a boost to the sector's prospects by qualitative measures like, infrastructure status, increasing health spending allocation and providing incentives for the sector to grow.

Media:

From a longer-term perspective, it can be said that on the back of greater spending power, growing consumerism – offshoots of the healthy economic growth being projected -consumer discretionary sectors like media and entertainment will continue to enjoy healthy growth prospects. India's evolving demographics, with a high proportion in the income earning age, is expected to support consumption growth. Broadcasters are subject to levy of service tax@ 12.24% unlike print media that is exempt from the levy of service tax, therefore broadcasters expect parity to be drawn between the print and electronic medium. Multiplex alongwith the retail industry expects the removal of 12.36% service tax or allow set off against sales tax. Other expectations include reduction in excise duty and customs duty on equipments like set top boxes.

Metals & Mining:

Indian steel consumption is growing at a record rate of 12.6%. This is almost twice the 6.6% growth in supply (April-December 2007 period). India will turn net importer of steel for the first time in a decade as Indian steelmakers are struggling with greenfield expansions, primarily due to problems in mine allocations and land acquisition. Steel product prices are expected to rise sharply(>15%) during the year. However, unlike in the past, it would not boost the net profits of most of the Indian steel companies as the price rise is mainly driven by sustained raw material cost pressures. The environment is extremely positive for companies engaged in key raw materials of steel like coking coal, ferroalloy ores and iron ore. These companies are price takers and dependant of international product prices. Coal is fast emerging as a scare commodity. There has been sharp surge in coal prices globally driven by a massive fall in inventory levels and emerging supply constraints. Industry expects that customs duty of5%should be scrapped on import of coke and refractories. This move is very necessary for the Indian steel industry as it is unable to cope up with the sharp jump in coke prices, which is one of the critical raw materials and Indian industry is import dependent at large. Other expectations include cut in Import duty of nickel from present 5% to 2% & also reduction in ceiling on chrome ore xport. Current ceiling of 0.40MMTto be reduced to 0.30MMT.

Oil & Gas:

The Oil Ministry is seeking a series of tax and duty changes related to petroleum products retailing and energy exploration in a bid to reduce prices, subsidies and attract greater investment. Oil - FY08 has been negative for the Indian oil industry. With rising crude prices, the industry did quite well at the upstream front. However, the downstream sector faced severe problems regarding subsidies, taxes and pricing. OMCs continue to remain dependent on oil bonds. The practice of issuing oil bonds does not resolve the problem as it only defers the resolution while compounding economic and financial costs. Gas - The country's natural gas supply by FY10 is likely to more than double from current levels due to expected supply from the KG basin. Currently, a majority of the gas consumption in India is industrial, with city gas distribution (CNG and PNG) accounting for less than10%of the total consumption. Key expectations from this budget include equalization on import duty, which is presently 5% for crude and 7.5% for petroleum products.

Pharmaceuticals:

The pharmaceutical industry is facing several challenges like an appreciating rupee against foreign currencies, domestic pricing pressure and pressure on finding and developing new molecules. Given the huge potential held by the Indian Pharma sector, the Finance Minister is likely to give a boost to the sector's prospects by qualitative measures like reduction in duties, extending time line for exemption in respect of profits of a 100%EOU, tax exemption on income from intellectual properties. Industry expects to extend income tax exemption by another 5 years or till 2012, relaxation in certain conditions to avail 150% weighted average deduction on R&D expenditures. Expenditures on clinical trials and patent filings should be eligible for tax benefits.

Power:

In the Eleventh Five Year Plan period, the Government is aiming to add 78 GWcapacity and another 80 GWduring the Twelfth Five Year plan. Of the Eleventh Five Year Plan's additions, 50GWof capacity is already under construction and the orders for the rest are expected to be placed in the next six months. The Government has awarded three ultra mega power projects (UMPPs) and has plans to award another four projects. The recently awarded UMPPs and the other upcoming ones are expected to get an extension of tax holidays from 2010 to 2017, though they will continue to pay the Minimum Alternate Tax (MAT). The decision to extend is mainly due to noncommissioning of any of theUMPPunits by the stipulated period. To partially offset sharp spikes in prices of imported natural gas, the government is likely to withdraw the 5% customs duties for theLNGthat is used in the power generation projects. The above move will be welcome one for the power sector.

Aviation:

India's air carriers want the sales tax on jet fuel to be slashed to a uniform rate of four percent across the country and import duty to fall to five percent in the forthcoming budget to ease cost pressures. Jet fuel, which is almost three fourths costlier than international benchmarks, accounts for 40 percent of the operating cost of an Indian airline.

Pre-Budget 2008-2009 Analysis Report by Investorline (NJ IndiaInvest)

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Industry News- 20th Feb 2008

Industry News- 20^th Feb 2008

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Insurance workers' association demand

Coimbatore: The Coimbatore Region unit of the General Insurance Employees' Association has demanded the merger of four public sector general insurance companies and condemned the move of the Central Government to increase foreign direct investment in the insurance sector. These were among the resolutions passed at the 14th conference of the women's sub-committee of the regional unit of the association held in the city. The association wanted the Bill for 33 per cent reservation for women passed in Parliament immediately. It also called for the restoration of appointments on compassionate grounds.

India's IT sector confident can ride out global slowdown

India's top technology and outsourcing body said it is confident it can ride out the challenge of a stronger rupee and a global economic slowdown as it wrapped up its annual meeting here. India's flagship outsourcing industry is grappling with a rupee that rose 12 percent last year lowering the local equivalent of every dollar earned and a potential recession in its main market, the United States. The sector expects to meet or even exceed its software export target of 60 billion dollars and overall software and services revenue goal of 73-75 billion dollars by 2010, Mittal said in an interview.

India's IT sector with its skilled, low-cost work force that has planted the country on the global business map, is keeping its fingers crossed that the international slowdown will turn out to be a blessing. It is hoping the financial turmoil in the US and elsewhere could drive businesses to farm out more work to cheaper Indian firms even as they pare overall technology budgets.

IT industry a Public Utility Service only on paper, finds survey

According to a recent survey, an overwhelming majority of IT professionals in West Bengal believe that the 'Public Utility Service' status, accorded to the IT sector by the state government, has not benefited the industry owing to frequent bandhs. The survey was conducted by the Indian Chamber of Commerce (ICC) on the IT and ITeS industry in West Bengal. Almost 75 per cent of the respondents said no when urged whether the sector really enjoys the status of a Public Utility Service, which means that it can operate on a 24x7 model and could not be disrupted by strikes/bandhs. Another interesting finding of the survey was that 78.2 per cent of the respondents felt that having a trade union and the right to strike in the IT and ITeS sector was inappropriate.

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Mutual Fund NFO- HDFC Infrastructure Fund

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HDFC Mutual Fund has launched a 3 year close-ended equity scheme, HDFC Infrastructure Fund.

Investment Objective

The investment objective is to seek long term capital appreciation by investing predominantly in equity & equity related securities of companies engaged in or expected to benefit from the growth and development of infrastructure.

Investment Strategy

The scheme shall invest into Infrastructure and related sectors as identified by the Fund Manager. For Eg. Engineering and Construction, Infrastructure asset owners and Banks etc. The scheme may also invest upto 35% of the fund in non-infrastructure related companies. The Scheme shall invest across all market capitalization. The balance, if any, shall be invested in debt securities and money market instruments.

Why Infrastructure at this time?

• Indian economy has recorded a growth of 8%+ over the past four consecutive years and is expected to maintain the same growth momentum in the future.
• To sustain high growth rate there is an urgent requirement for substantial investments in the country’s underlying infrastructure sector.
• As a result of capacity constraints certain segments of the sector are already facing significant challenges. Government is actively emphasizing the need for faster infrastructure build up by taking into consideration both the public & private sector participation.
• In order to attain sustained economic prosperity it is necessary for the government to remove existing bottlenecks that hampers the growth of the industry. Government is doing so by encouraging public – private participation & also by encouraging investments in roads, ports, airports, electricity etc.
• As compared to china – India’s spending on infrastructure sector as a share of GDP is substantially low. China spent US $ 160 billion or 10.6% of its GDP in 2006, whereas India’s spending on infrastructure sector was just 4.5% of GDP.
• At present government is aiding fast project approvals and implementation. Government is showing urgency to ensure commercial viability and visibility across sectors.
• Private sector has realized the size and economical potentiality of the opportunity and hence is eager to participate in the sector. The momentum of private participation is picking up with developments of emerging financing concepts like ‘Public Private Partnerships’ and ‘Viability Gap Funding’ taking root.

Key Advantages

• The fund will give an opportunity to invest in the growing infrastructure sector.
• Theme based focus – not sector based and hence provides flexibility to the fund manager.
• Closed ended format is preferable for thematic funds – as in an open ended scheme inflows to the fund tends to increase when the sector/ theme is at its peak.

Scheme Features

• Asset Allocation:
• Equity & Equity related Securities of infrastructure/ infrastructure related companies: 65–100%
• Equity & Equity related Securities of companies other than that mentioned above: 0–35%
• Money Market Instruments/Debt including Securitized Debt:0-35%
• Investment Options: Growth & Dividend (payout & reinvestment). – Dividend Reinvestment will be only after the scheme is converted into an open ended scheme upon maturity.
• Benchmark Index: S&P CNX 500.
• Minimum Investment amount: Rs 5000/- and in multiples of Rs.5000/- thereafter.
• Minimum Application Amount: Rs 5000/- and Rs. 100/- thereafter.
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NFO opens on January 8th 2008

NFO closes on February 21st 2008

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• It will primarily target the Engineering & Construction, Infrastructure asset owners and Banks as these are poised for high growth – An edge to the portfolio

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Industry Overview- Power Sector - 19th Feb 2008

Certain information in this section has been extracted from publicly available documents prepared by various sources, including officially prepared materials from the GoI and its various ministries and various multilateral institutions. Such information has not been prepared or independently verified by us or any of our advisors. Unless otherwise indicated, the data presented excludes captive capacity and generation. The term "units" as used herein refers to kilowatt hours (kWh).

INDIAN ELECTRICITY DEMAND

Historically, the power industry in India has been characterized by energy shortages.

On a per capita basis, energy consumption in India is relatively low in comparison to much of the rest of the world, including other developing nations. According to data from the Key World Energy Statistics (2007), India's per capita electricity consumption was 612 units per year, as compared to a world average of 2,596 and yearly per capita consumptions of 2,980 units in Middle Eastern countries, 1,695 units in Latin America countries, 1,802 units in China, 646 units for Asian countries and 563 units for African countries. However, according to data from the MoP, per capita consumption of energy in India is projected to increase to 932 units per year by Fiscal 2012.

As India's economy continues to grow, it is expected that India's energy consumption will grow as well. The GoI has adopted a system of successive Five Year Plans that set out targets for economic development in various sectors, including the power sector. According to the Planning Commission of India, the Indian economy has grown at an average of 8% for the past three years. The Eleventh Plan, which covers Fiscal 2008 through 2012 targets an average growth rate of 9% for the plan period, and according to data from the MoP, in order for India to maintain a sustained growth of 8% to 9% per annum through the next 25 years and meet the energy needs of all citizens, India would need to increase its primary energy supply by three to four times and electricity generation capacity by about six times.

In order to match the increasing demand for power within India, substantial increases in generation capacity will be required, which will require additional improved transmission and distribution systems, all of which will require significant investment. According to data from the CEA, as on September 30, 2007, India's power generation systems had a total installed capacity of 135,782 MW. According to data from the MoP, an additional 78,577 MW are required to meet the projected demand during the Eleventh Plan. According to the Report of the Working Group on Power for Eleventh Plan, the overall requirement of funds in the Eleventh Plan for the power sector has been estimated at Rs. 10,316,000 million.

REGULATORY, LEGAL AND POLICY ENVIRONMENT IN THE POWER SECTOR

In recent years, in light of India's persistent power shortages, the GoI has taken significant action to restructure the power sector to improve its commercial and financial viability and to attract investments in this sector.

General

The most significant reform package has been the introduction of the Electricity Act, which has modified the legal framework governing the electricity sector and has been designed to address systemic deficiencies in the Indian power sector and to attract capital for large-scale power projects. The Electricity Act is a central unified legislation and replaces the multiple legislations that previously governed the Indian electricity sector. The objective is to introduce competition, protect consumer's interests and provide power for all. Under the Electricity Act, the regulatory regime is more flexible than under prior legislation and allows regulatory commission's greater freedom in determining tariffs. Additionally, the Electricity Act also provides for rural electrification, open access in power transmission and distribution, de-licensing of power generation and distribution and power trading.

The GoI notified the National Electricity Policy in February 2005. This policy aims to accelerate the development of the power sector, to provide supply of electricity to all areas and to protect the interests of consumers and other stakeholders, with attention on the availability of energy resources, the technology available to exploit these resources, the economics of generation using different resources and energy security issues. The salient features of this policy include:

* The access to electricity for all households in the next five years from the date of the policy;

* The availability of power to fully meet demand by 2012;

* The supply of reliable and quality power in an efficient manner and at reasonable rates;

* The increase of per capita availability of electricity to over 1,000 units by 2012;

* Minimum lifeline consumption of 1 unit per household per day as a merit good by year 2012;

* The financial turnaround and commercial viability of the electricity sector; and

* The protection of consumer interests.

The GoI notified the National Tariff Policy in January 2006. This policy aims to ensure financial viability of the power sector, attract investments, ensure availability of electricity to consumers at reasonable rates, and promote transparency and consistency in regulatory approach for tariff setting.

Rural

The GoI undertook a number of initiatives over the years for rural electrification, including Kutir Jyoti Yojana, Minimum Needs Programme, Pradhan Mantri Gramodaya Yojana, Accelerated Rural Electrification Program, Accelerated Electrification of One Lakh Villages and One Crore Households. However, to further strengthen the pace of rural electrification and with an objective to electrify all villages and provide access to electricity to all rural households by year 2009, the GoI launched the RGGVY in April 2005 as a new comprehensive programme merging within it all the ongoing schemes.

In order to achieve the electrification of villages, the scheme envisages the creation of a rural electricity distribution backbone with at least one 33/11KV sub-stations of adequate capacity in geographical blocks where these do not exist, a village electrification infrastructure with distribution transformers of appropriate capacity in villages and other habitations and decentralised distribution generation systems based on conventional sources where grid electricity supply is not feasible or cost effective. This infrastructure would service the requirements of agriculture and other activities in rural areas including irrigation pump sets, small and medium industries, local industries, warehousing, healthcare, education and information technology in order to facilitate overall rural development, generate employment opportunities and alleviate rural poverty.

The GoI also notified the Rural Electrification Policy in August 2006. This policy aims at improving the access and quality of electricity supply in rural areas. The salient features of the policy are:

* The provision of access to electricity to all households by year 2009;

* The supply of reliable and quality power at reasonable rates;

* Minimum lifeline consumption of 1 unit per household per day as a merit good by year 2012.

APDRP

To improve the distribution of power and accelerate the distribution of power reforms, in March 2003 the GoI formulated the APDRP. The objectives of this programme are to improve the financial viability of state power utilities, reduce aggregate technical and commercial losses, improve customer satisfaction and increase the reliability and quality of the power supply by reducing outages and interruptions.

APDRP seeks to reform the power distribution sector by providing investment and incentives to SEBs and SPUs and distribution companies to strengthen and improve sub-transmission systems and distribution networks. Under APDRP, the GoI provides funds as additional assistance in form of grants to states that have committed themselves to a time- bound programme of reforms. The additional funds allocated to SEBs and SPUs are to be utilized for upgrading and modernizing certain sub-transmission and distribution networks.

The GoI provides funds to SEBs and SPUs under the programme in two components. The first component is an investment component pursuant to which certain distribution projects are eligible for partial financing in the form of grants from the GoI; currently SEBs and SPUs in special category states are eligible to receive 90% of the cost of the project in the form of a grant and SEBs and SPUs in non-special category states are eligible to receive 25% of the cost of the project in the form of a grant. In each case, the balance of the funding for the project must be arranged by the SEB and SPU in the form of internal or external financing or through other means. The second component is an incentive component, whereby the MoP provides to the states a grant of 50% of the SEBs' and SPUs' actual cash loss reduction

At the Conference of Chief Secretaries/Power Secretaries of States/Union Territories on power sector issues held in April 2007, it was proposed to revise the APDRP under the Eleventh Plan, in order to complete the already sanctioned schemes and to cover the balance of district headquarters and major towns.

STRUCTURE OF THE INDIAN POWER SECTOR

The following diagram depicts the structure of the Indian power industry for generation, transmission and distribution and consumption:

Generation

Generation generally refers to the bulk production of electric power for industrial, residential and rural use. According to data from the CEA, as on September 30, 2007, India's power generation systems had a total installed capacity of around 135,782 MW of which central power sector utilities accounted for approximately 34%, state sector entities accounted for approximately 52.25% and private sector companies accounted for approximately 13.75%.

The table below shows total installed generation capacity by sector and type of generation as on September 30, 2007.

(Figures in MW)

Sector Hydro Thermal State 25,144 43,795 Central 7,887 34,159 Private 1,230 9,272 Total 34,261 87,226

Nuclear R.E.S (1) Total

0 2,008 70,947 4,120 0 46,166 0 8,167 18,669 4,120 10,175 135,782

Source: CEA, www.cea/nic.in/power_sec_reports/executivesummary/2007_09

(1) Renewable Energy Sources, which include small hydro projects, biomass gas, biomass power, urban and industrial waste power and wind energy.

Each successive Five Year Plan has had increased targets for the addition of power generation capacity. The Ninth Plan targeted a capacity addition of 40,245 MW of which 73.4% was to come from thermal capacity, 24.4% was to come from hydro capacity and 2.2% was to come from nuclear capacity. According to the MoP, approximately 47.8% of the planned capacity was added during the Ninth Plan. The Tenth Plan for Fiscal years 2002 to 2007 targeted a capacity addition of 41,110 MW, which was subsequently revised to 30,641 MW; however, at the end of the Tenth Plan period, only 21,180 MW of capacity was added.

According to data from the MoP, the additional capacity required to meet the projected demand during the Eleventh Plan is estimated at 78,577 MW. Of this estimated capacity, addition of 78,577 MW during the Eleventh Plan, the estimated contribution by each of the central, state and private sector is provided as follows:

(Figures in MW except percentages)

Sector Capacity Addition Percentage State 27,952 35.6 Central 39,865 50.7 Private 10,760 13.7 Total 78,577 100.00

Source: Base Paper, International Conclave on Key Inputs for Accelerated Development of Indian Power Sector for Eleventh Plan and Beyond, 4-5 July 2007, MoP and CEA

Public sector. In India, control over the development of the power industry is shared between the central and the state governments. Central sector utilities were created in 1975 under administrative control of the MoP. State governments have set up state utilities that are responsible for ensuring the supply, transmission and distribution of electricity in the most economical and efficient manner.

One of the key changes introduced by the Electricity Act is the elimination of the legal basis for the continuation of SEBs. It is intended that SEBs will be completely restructured and their assets unbundled into separate generation, transmission, and distribution companies. The SEBs of Orissa, Haryana, Andhra Pradesh, Karnataka, Uttar Pradesh, Uttaranchal Rajasthan, Delhi, Maharashtra, Gujarat, Assam and Madhya Pradesh have been unbundled as on December 10, 2007.

Private sector. In 1991, the GoI began to encourage private sector participation in the power industry.

The Electricity Act allows for increased private involvement in power sector development. In particular, it has introduced significant changes in the industry, notably by moving the sector from a single-buyer market to a multi-buyer and multi- seller system. The aim is to give the private sector access to the state electricity board transmission grids thereby allowing private power producers to sell directly to large industrial consumers

The significant private power sector participants include Tata Power Limited and Reliance Energy Limited.

Captive power generation. The electricity supply industry in India is also characterized by a large amount of captive generation, which has been established by energy intensive industries such as steel and aluminium. Under the Electricity Act, captive generators are able to sell excess power to consumers. For Fiscal 2007, the total installed capacity of captive power plants with capacity of 1 MW and above was 19,485 MW. Out of this, about 14,866 MW of captive generating capacity is connected to the grid and balance 4,619 MW is operating in isolation meeting their own captive power requirements.

Investments in generation. According to the Report of the Working Group on Power for Eleventh Plan, the total fund requirement for generation projects, during the Eleventh Plan period is estimated at Rs. 4,108,960 million, with Rs. 2,020,670 million being required for the central sector, Rs. 1,237,920 million being required for the state sector and Rs. 850,370 million being required for the private sector. The total fund requirement includes the fund requirement estimated at Rs. 1,891,950 million for start-up generation projects benefiting in the Twelfth Plan.

Transmission

In order to accomplish the GoI's stated mission of "Power for all by 2012,” there must be significant expansion of the regional transmission network and inter-regional capacity to transmit power.

The transmission of electricity is typically defined as the bulk transfer of power over a long distance at a relative high voltage. A reliable transmission and distribution system is important for the proper and efficient transfer of power from generation facilities to sub-stations or between substations. A transmission and distribution system is typically comprised of transmission lines, sub-stations, switching stations, transformers and distribution lines.

Demand for electric power transmission and distribution services is largely dependent on levels of electric power demand, and on the ability of the electric power generation and distribution sectors to service that demand. In order to ensure reliable supply of power, efficient utilization of generating capacity and effective exploitation of unevenly distributed generating resources in the country so as to optimize their potential, a strong interconnected transmission grid is required, which interconnects various generating stations and load centres.

In India, the transmission and distribution system is a 3-tier structure comprising distribution networks, state grids, and regional grids. These distribution networks and state grids are principally owned and operated by SEBs or other state utilities, or state governments (through state electricity departments). At present there are five regional grids operating in India, in the Northern, Eastern, Western, Southern and North eastern regions. Regional or interstate grids facilitate the transfer of power from a region with a surplus to one with a deficit. Most of the inter-state transmission links are owned and operated by PGCIL. These regional grids also facilitate the scheduling of maintenance outages and coordination between power plants.

In Fiscal 2007, the GoI launched a scheme under the Electricity Act to invite private sector investments in major transmission projects pursuant to which private developers are proposed to become transmission service providers on a "build, own and operate" basis. The GoI has identified 14 transmission-related projects to be implemented on a build, own and operate basis.

National grid. In order to optimize the utilization of generation capacity through the exchange of power between surplus and deficit regions and to exploit the uneven distribution of hydroelectric potential across various regions, the GoI in 1981 approved a plan to establish a national grid. The plan envisaged high-voltage transmission links across various regions in order to enable the transfer of power from surplus to deficit regions. The process of establishing the national grid was initiated with the formation of central sector power generating and transmission companies.

According to data from the MoP, GoI's transmission perspective plans focus on the creation of a national grid in a phased manner by adding over 60,000 ckm of transmission network by 2012. It is intended that integrated grid will evacuate an additional 100,000 MW by the year 2012 and carry 60% of the power generated in the country. The existing inter- regional power transfer capacity of 9,000 MW is to be further enhanced to 30,000 MW by Fiscal 2012 through creation of "Transmission Super Highways".

In order to enable the exchange of power and to encourage competition in power market, there is need for accelerated implementation of national power grid programme.

Investments in transmission. According to the Report of the Working Group on Power for Eleventh Plan, the total fund requirement for transmission system development and related schemes during the Eleventh Plan period is estimated at Rs. 1,400,000 million, with Rs. 750,000 million being required for the central sector and Rs. 650,000 million being required for the state sector.

In 1998, the GoI enacted the Electricity Laws (Amendment) Act, which recognized transmission as an independent activity, distinct from generation and distribution, and allowed private investment in the transmission sector.

In January 2000, the MoP issued guidelines whereby the state transmission utilities (STUs, SEBs or their successor entities) and the central transmission utility (Power Grid) could identify transmission projects for the intrastate and the inter-state/inter-regional transmission of power, respectively. The STUs and the CTU could invite private companies to implement these projects through an independent power transmission corporation, which would facilitate private investors including investors coming through FDI to invest 100% by themselves or on a joint venture basis with the CTU.

The role of the independent power transmission corporation would be limited to the construction, ownership and maintenance of transmission systems. The CTU and STUs would be involved in the development phase for obtaining project approvals and various regulatory and statutory clearances (such as environment and forest clearances and the securing of rights of way), and would transfer the same to the private companies selected.

Distribution

Power distribution is a critical link between generation, transmission and end users of power. As a result of high transmission, distribution and commercial losses and the poor financial health of bulk power purchasers (SEBs and SPUs), investments in the distribution sector have been relatively low and the growth and maintenance of distribution systems in India has been poor. The poor financial health of SEB's and SPU's historically affects their ability to invest in new generation capacity, to update their transmission and distribution network and to undertake any system improvement. With distribution being the weakest link in the chain of power supply, distribution reforms have been identified as a key area of focus in the power sector reform process.

As regards the structure, in India, the distribution network and the state grids are mostly owned and operated by SEBs or state governments through SEBs. Delhi and Orissa are two states where private companies oversee power distribution. Additionally, Tata Power Limited, CESC Limited, Reliance Energy Limited, AEC Torrent Power Limited, SEC Torrent Power Limited and Noida Power Company Limited own and operate distribution networks in their respective license areas.

Rural Electrification

Village electrification. According to data available from the CEA, as on September 30, 2007, out of estimated 593,732 inhabited villages in India, as per 2001 Census, approximately 106,679 are yet to be electrified. As on September 30, 2007, 82% of the estimated total inhabited villages in India have been electrified.

The table below shows the status of rural electrification of villages in selected states in the country, as on September 30, 2007:

State Villages to be electrified Percentage

Uttar Pradesh 12,346 12.6% Bihar 18,395 47.1% West Bengal 1,523 4.0% Uttaranchal 680 4.3% Jharkhand 20,235 68.9% Orissa 20,994 44.2% Assam 5,383 21.4% Meghalaya 2,354 40.7%

Source: Central Electricity Authority

Rural households’ electrification. As per 2001 Census, overall, 60.18 million, or 43.5%, of the country's rural households have been electrified, and 78.09 million or 56.5% are yet to be electrified.

The table below shows the status of rural electrification of households in the country, as on March 31, 2007:

Overall electrification in the country Number of Households Percentage

Households electrified 60.18 million 43.5% Households yet to be electrified 78.09 million 56.5% Total no. of Households 138.27 million 100%

Source: Ministry of Power website

States with more than 75% of households electrified. As per 2001 Census, the states of Himachal Pradesh, Goa, Punjab, Haryana, Sikkim, and Jammu and Kashmir, constituting about 6% of country's total rural households, had achieved electrification in respect of over 75% of their rural households.

The table below shows the status of rural electrification of households in the above-mentioned states, as on March 31, 2007:

State Percentage Number of Households Electrified

Himachal Pradesh 94.5% 1,036,969 Goa 92.4% 130,105 Punjab 89.5% 2,482,925 Haryana 78.5% 1,926,814 Jammu & Kashmir 74.8% 868,341 Sikkim 75.0% 68,808

Source: Central Electricity Authority

States with 80% or more households yet to be electrified. As per 2001 Census, the states of Bihar, Jharkhand, Assam, Orissa, Uttar Pradesh and West Bengal, constituting 43% of country's total rural households, had 80% or more rural households yet to be electrified.

The table below shows the status of rural electrification of households in the above-mentioned states, as on March 31, 2007:

State Percentage Number of Households yet to be electrified

Bihar 94.9% 12,010,504 Jharkhand 90% 3,422,425 Assam 83.5% 3,522,331 Orissa 80.6% 5,470,135 Uttar Pradesh 80.2% 16,505,786 West Bengal 79.7% 8,899,353 Total 49,830,534

Source: Central Electricity Authority

Investments in distribution. According to the Report of the Working Group on Power for Eleventh Plan, the total fund requirement for sub transmission and distribution system development for urban and rural areas, during the Eleventh Plan period is estimated at Rs. 2,870,000 million. This is inclusive of the fund requirement for implementation of the GoI's RGGVY estimated at Rs. 400,000 million and the fund requirement for implementation of other initiatives, including APDRP, estimated at Rs. 500,000 million. The entire fund requirement is estimated to be required for the state sector.

Development of the power sector requires large investment that cannot be met solely by public finance. The pace of reforms in the distribution sector would need to be accelerated in order to attract private investments. Therefore, the GoI is seeking a public private partnership model for resource mobilization and efficiency gains. An example of public private partnerships is already emerging in the form of franchisees in rural areas where electrification of villages has been achieved under the RGGVY.

PROVIDERS OF FINANCE TO THE POWER SECTOR IN INDIA

The primary providers of power sector financing in India are power sector specific government companies, financing institutions, public sector banks and other public sector institutions, multilateral development institutions and private banks.

Power-Sector Specific Government Companies

Besides our Company, the other sector - specific companies owned by GoI and engaged in financing power sector are as follows:

Power Finance Corporation Limited. In order to provide funds for the power projects in India and to act as developmental financial institution for the power sector in India, PFC was incorporated on July 16, 1986. PFC is a Public Sector Undertaking and its main objective is to raise resources from international and domestic sources at competitive rates and terms and conditions and on-ward lend these funds on optimum basis to the power projects in India. PFC has been actively persuading State Governments to initiate reform and restructuring of their power sector in order to make them commercially viable and in this regard, is providing financial assistance to reform-minded States under relaxed lending criteria/exposure limit norms. It is also providing funds based services like Term Loans, Equipment Leasing, Bill Discounting, Buyers Line of Credit and also non funds based services like Guarantee Services and Consultancy Services.

Indian Renewable Energy Development Agency. The Indian Renewable Energy Development Agency ("IREDA") was established in 1987 as a public sector NBFC under the Ministry of Non-Conventional Energy Sources with the objective of promoting, developing and extending financial assistance for renewable energy and energy efficiency, and energy conservation projects. IREDA is playing a key role in the development of renewable energy in India.

Financial Institutions

Financial institutions were established to provide medium-term and long-term financial assistance to various industries for setting up new projects and for the expansion and modernization of existing facilities. These institutions provide fund based and non-fund based assistance to industry in the form of loans, underwriting, direct subscription to shares, debentures and guarantees. The primary long-term lending institutions include IDFC Limited, IIFC Limited, IFCI Limited, Industrial Investment Bank of India Limited and Small Industries Development Bank of India.

State Level Financial Institutions

State financial corporations operate at the state level and form an integral part of the institutional financing system. State financial corporations were set up to finance and promote small and medium-sized enterprises. At the state level, there are also state industrial development corporations, which provide finance primarily to medium-sized and large-sized enterprises.

Public Sector Banks and other Public Sector Institutions

Public sector banks make up the largest category of banks in the Indian banking system. The primary public sector banks operating in the power sector financing include the Industrial Development Bank of India, State Bank of India, Punjab National Bank and the Bank of Baroda. Other public sector entities such as the Life Insurance Corporation of India also provide financing to the power sector.

Private Sector Banks

After the first phase of bank nationalization was completed in 1969 the majority of Indian banks were public sector banks. Some of the existing private sector banks, which showed signs of an eventual default, were merged with state owned banks. In July 1993, as part of the banking reform process and as a measure to induce competition in the banking sector, the RBI permitted entry by the private sector into the banking system. This resulted in the introduction of nine private sector banks. These banks are collectively known as the 'new' private sector banks. These institutions also provide fund based and non-fund based assistance to industry in the form of loans, underwriting, direct subscription to shares, debentures and guarantees and will compete in this sector.

International Development Financial Institutions

International development financial institutions are supportive of power sector reform and of more general economic reforms aimed at mobilizing investment and increasing energy efficiency. The primary international development financial institutions involved in power sector lending in India include several international banking institutions such as Japan Bank for International Cooperation, Kreditanstalt fur Wiederaufbau, the World Bank, the Asian Development Bank and the International Finance Corporation.

In the early 1990s, the World Bank decided to finance mainly projects in states that "demonstrate a commitment to implement a comprehensive reform of their power sector, privatise distribution, and facilitate private participation in generation and environment reforms". Recent loans from the World Bank have gone to support the restructuring of SEBs. In general, the loans are for rehabilitation and capacity increase of the transmission and distribution systems, and for improvements in metering the power systems in states that have agreed to reform their power sector.

The overall strategy of the Asian Development Bank for the power sector is to support restructuring, especially the promotion of competition and private sector participation. Like the World Bank, the ADB also provides loans for restructuring the power sector in the states and improving transmission and distribution.

Other Provisions for Power Sector Finance

There also exist several short term and long term financing measures by the GoI to facilitate the financial viability of the power sector, such as the implementation of the Electricity Act. As a long term financing measure, the process has been initiated for institutionalising mechanism for facilitating and accelerating private and foreign direct investment into the power sector.

Source - Rural Electrification Corporation Ltd

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