[Compiled by Yeahindia Research Team in association with White Arrow Information Services Private Limited. All rights reserved.]

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Early Indian Economy

Indian economy in the early period was a self sufficient economy comprising of several villages. Indian villages produced and met their requirement according to division of labour and their economic activity was restricted to village economy. Barter system prevailed as an exchange mechanism. Basically, the primary activity was agriculture. Other services like carpentry, weaving, hair dressing, etc. were offered by labourers who extended their services based on hereditary. They received their wages as food products. In short, Indian villages functioned as an independent republics and the only interference was from the King for whom they paid taxes in kind. Thus, India had happy villages.

Prior to the British rule, religion, system of the society and king’s law influenced the economy to a great extent. There prevailed caste system which decided the division of labour for the benefit of the society’s economy. Further, the prevalence of joint-family system helped them to pool their resources for their individual family benefit and also for the benefit of the society. Another advantage of the joint-family system was that the cultivable lands were not fragmented, yielding to beter economic gains.

Another influencer of early Indian economy was the Hindu religion. The religious centres also functioned as Indian trade centres. For example, major pilgrimage spots like Nasik, Allahabad, Varanasi, etc. also functioned as centres of commerce and trade. Many trade and commerce activities were linked to the religious festivals and functions. In short, the Hindu religion acted as an indirect catalyst for the Indian economy.

One of the major industries in early India was textile. Handicrafts was also part of the Indian industrial activity. Indian textile products like shawls, dhotis, dopattas, woolen products, cotton goods, etc. and handicraft products were exported to overseas markets, such as Egypt, South East Asia, Greece, etc. It is worth noting that when Europe (birth place of modern industrialism) was inhabited by uncivilised people, India was very popular for its craftsmanship and rich economy.

Indian Economy During Colonialism

Indian land had been invaded and ruled by many outsiders, amongst which the British regime was considered very important. British East India Company entered India in 1757 through the Battle of Plassey and the Crown took the complete administration during 1858. Politically, India was under the British rule for around two centuries and the Indian economy was significantly influenced during their rule. Indian culture and administration too underwent a major transition during British rule.

Other invaders, prior to British, created a feeling of differentiation between Indian citizens and themselves as a separate class. However, British identified themselves as citizens of India. Thanks to this attidude, British followed an administative set up in India to develop their motherland at the expense of India.

Further, the spread of coloniasim of the British in South East Asia also led to another problem. They transported Indians to other neighbouring countries like Sri Lanka as labourers to work in their plantations. However, when they left this sub-continent, they left several of these issues unsolved. Still today, these Indian labourers in Sri Lanka face an identity crisis. In Sri Lanka they are considered as Indians; and in India these labourers are considered as Sri Lankans.

Economic activities of their colonies including India were tuned to the interests of Great Britain. During British rule, Indian handicrafts contribution declined and the economy was ruralized. British also introduced new land mechanism to enable them to gain more land revenue in order to suit their imperialistic needs. They adopted an industrial process transition through colonial capitalism.

The colonial imperialistic attitude of the British rule has yielded India an unique economic problem, that is, modernisation with under-development. Though British provided peace in this country, they failed to extend properity. The only remarkable economic fruit British rulers left for India was in the field of Indian transport system, especially that of railways and roadways. However, this benefit was only incedental. The untimate motive of all the enterprise during British rule was to serve the benefit of the Great Britain and not that of India. Thus, when British left India in 1947, Indian economy depicted a paradoxical dual picture of modernisation and under-development; along with several unsolved political issues, such as the fate of Indian labourers in Sri Lanka.

Indian Economy After Independence

It is paradoxical that India is a rich country (in terms of enormous natural and man power resources) with poor people. India adopts a mixed economic model which is tending towards economic liberalization in order to attain self-reliance.

Indian economy is characterized by lower per capita income, mass unemployment and under employment, over-dependence of agriculture, over population, poor standard of living, low level of capital formation, low levels of health and education facilities, etc. Indian population, instead of being an asset, has most often proved to be a liability and economic distress. This calls for more attention by the Government in the upliftment of the population. Thus, any economic policy treatment in India will be viewed with a social mind frame.

During 1901, urban population which was at 10.8 per cent of total population has increased to 25.7 per cent during 1991. Further, almost the entire rural population of 1901 (213 million) lives in urban India during 1991 (218 million). This indicates the extent of migration.

Savings and capital formation are very important for a country’sonomic development. The gross domestic savings which was at Rs 2544 crore in 1960-61 rose to Rs 157186 crore in 1992-93. The contribution of household sector to savings is the largest in India, followed by public sector and private corporate sector. The rate of svaing s in India to GDP is not satisfactory due to several reasons, such as, low per capitan income, poor performance of public sector enterprises, poor contribution of private sector players and untapped rural savings potential.

It is worth noting that the gross savings of corporate sector, for the period 1960-61 to 1992-93, indicates an annual average growth rate of 14.23 per cent. However, when the savings and capital formation in the private corporate sector are compared with the gross domestic savings and capital formation, it has remained at more or less the same proportion around one-eighth of the total domestic savings. This is an indication of the corporate sector’s dependence on household sector savings for its long term capital requirements, which has led to a broad based structure of share ownership pattern.

Indian economy has come a long way, especially after independence. Since independence, the structure of the Indian economy has gone through several changes, out of which sectoral contribution to the economy is the most vital one. The agricultural contribution to GDP is declining gradually as seen in the Table below. While the contribution of industrial sector has not improved to a great extend, the service sector’s contribution to GDP has notably increased. One of the main reason for this change can be attributed to the economic policies of India.

Sectoral Share in National Income

It has to be noted that though the contribution of agriculture to GDP has declined, still majority of the population (around 67 per cent as per 1991 census) is depend on primary sector. This is the reason for the failure of many multinationals in India. They fail to notice this fact and over estimated the demand potential of their products.

Therefore, India is not just another country. It has to its credit its own socio-economic features.

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Agriculture is the back bone of Indian economy for several centuries. The importance of agriculture in Indian economy is prominently evident. Nearly 70 per cent of the population depend on agriculture either directly or indirectly for their living.

According to 1991 Census Report, over 67 per cent of the work force is still engaged in primary sector. However, employment in this sector is not wide spread. In other words, only 0.78 per cent of rural population (or 1.97 per cent of the rural work force) is employed in allied activities, such as, livestock, forestry, etc. Considering India’s wide natural resource potential (sea base, animal stock, etc.) this is a very negligible figure. Thus, there can be found great untapped employment opportunities for rural work force in the allied sector.

Indian agriculture is characterized by lack of technology, low productivity, under employment, multiplicity of crops, unequal distribution of land, predominance of small farmers, etc.

Indian agricultural crops can be broadly classified into food and cash or commercial crops. In India, selection of crops for farming depends on the nature of soil, climatic conditions prices of crops, size of farms, availability of inputs (seeds, fertilizers and pesticides), availability of irrigation facilities and policies of the Government. The major food crops in India are rice, wheat, bajra, maize, jowar and other pulses and cereals. Important commercial crops of India are sugarcane, groundnut, oil seeds, tea and coffee. India also farms non-food commercial crops like cotton, jute and mesta.

Wheat Production in India

Rice Production in India

Year	Production in Million Tonnes
1991-92	74.7
1992-93	72.9
1993-94	79
1994-95	81
1995-96	79.6
1996-97	80.5
1997-98	83.5

Fertilizer consumption per hectare is very low in India, even when compared to other low-income countries like Indonesia and Bangladesh. Thus, higher consumption of fertilizer has to be induced in the Indian environment to achieve higher value addition in agriculture.

Another major hurdle for the agricultural sector in India is lack of water or proper irrigation policies by the rulers. To improve agricultural production, in a country like India, where net irrigated area (as percentage to net sown area) is only 35.1 per cent, superior water management becomes vital. However, due to political reasons Indian rulers are not able to unify water resources.

India, if need to develop economically, can not ignore agricultural sector. Agricultural productivity for higher food supply has to be improved, which in turn will reduce the cost of food, leading to better standard of living. Giving thrust to agriculture has the following advantages :

• Higher production

• Improved productivity

• Greater employment

• No foreign technology required. Thus, no outflow of capital.

• Will check migration. Thus, lesser urbanization problems.

• Agriculture produces no pollution. Thus, lesser expenses on pollution control.

Further, a thrust to allied rural activities like animal husbandry, fishery, forestry, alternate energy, industries based on rural resources will yield the following benefits :

• Additional income generation

• Generate jobs for the landless labourers

• Better nutrition to the masses

• Low gestation, high income vocation

• No pollution

• Added energy supply

• Reduce migration

• No overseas technology required

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Industrialization is vital for a country’s economic development. Indian industrial sector is characterized by under-utilization of resources, low capital formation, low level of technology, lack of skilled man power and social attitudes of the population. Indian industrial development is also highly influenced by the political climate of India, the political philosophy of the ruling party, the attitude and culture of the the political administrators and Indian Industrial Policies. Indian industry also depends highly on the attitudes and aspirations of the Indian man power and Indian society.

The economic structure of India follows a mixed economy. Thus, the functioning of duel sectors - public and private - exist in India. Public sector includes both public utility undertakings and public enterprises. Due to several factors, such as, low returns, long time lag, defence requirements, public utilities, large resource requirement, development of backward regions, development of infrastructure, etc. the Government had to invest in certain capital-intensive segments to share the burden of industrialization and to generate employment opportunities. However, most of the public sector undertakings do not perform well from the angle of profitability and/or efficiency for many reasons, like initial heavy costs, capital-intensive industries, large capacities, heavy social costs, low priced products, labour problems and high expense ratio, unprofessional manpower planning, etc.

The role of private sector in Indian industrial development can not be under stated. Private sector is also sharing Government’s burden in certain heavy investment ventures today, like infrastructure. This is due to the improved government policy towards private sector. The Indian Government has been form time to time changing its industrial policies to suit the economic and global environment in favour of industrial sector. Further, there can be found a trend towards taking advantage of the liberalised industrial policy frame work. This is vindicated by the various indicators of investment intentions. However, the private sector in India faces several obstacles : undue delay by the government authorities, restrains on capacity, over-dependence of public sector, price restrictions, small scale reservations, finance, etc.

Though private sector is facing many problems, its contribution to Indian economy is remarkable. For instance, India achieved a GDP growth rate of 7 per cent in 1995-96 for the first time since 1950, despite a low agricultural growth rate of 2.4 per cent. The major factor which contributed for this growth rate was achievement by the industrial sector which registered a growth rate of 12.1 per cent in 1995-96.

Further, besides the output aspect, there is an equally important aspect relating to the pattern of industrial development. There can be found substantial changes in the pattern of Indian industrial development which can be viewed from two dimensions : one, there is a fast growth of basic and capital goods industries; and two, there is a large diversification of industries.

During independence, industrial production was confined to select industry categories. Progress of industrial sector in India has been a striking feature of Indian economy. Industrial production has gone up by about seven times, registering a compound rate of growth of 6 per cent per annum during Plan period. This is certainly impressive compared to 2.0 per cent rate of industrial growth per annum during pre-independence period - 1900-91 to 1945-46. The contribution of industry to GDP has substantially increased from 14.9 per cent in 1950-51 to 28 per cent in 1995-96. Apart from the rise in the quantity of production, the industrial structure has been widely diversified, covering the entire spectrum of consumer, intermediate and capital goods.

There has been an acceleration of the production of basic and capital goods industries, particularly since Second Five Year Plan which had a heavy-industry strategy. this has resulted in a larger contribution of these industries to the economy. As a result of the swifter growth of investment goods industries, there has been a big shift in their status in the economy. Prior to Planning in India, industries manufacturing machines, tools etc. were almost non-existent. Currently, these industries account for around 50 per cent of total value added by the industries. (Their importance is also vindicated by the large weightage assigned to them in the index of industrial production.)

No less important is the change that has taken place in the composition of industries. The number of industries producing a large variety of goods has increased. And there can be found a change in the relative significance of traditional and new industries. During independence, India inherited an industrial structure which was restricted to a few industries, such as sugar, steel and textiles. However, the structure underwent a major transformation during mid 1950’s when industrialization drive was launched; and self reliance became one of the vital objectives of Planning. Thanks to the Second Plan, in particular, India has a large variety of industries today producing goods of varied nature.

This change in Indian industrial structure has yielded many fruits to Indian economy. It has strengthened the base of the economy which helps the economy to move towards self reliance.

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For any developing nation development of service and infrastructure segment is very important to reach its economic goals. India is successful in improving its service and infrastructure areas. It is very evident that the role of service sector in Indian economic development has increased by several notches from the fact that this sector which was contributing only around 20 per cent during independence is contributing over 43 per cent currently to India’s GDP.

Service and infrastructure sector is comprised of the following segments : Banking, Insurance, Transport, Telecom and Power.

Banking

Performance of the banking sector is considered as a proxy for the economy as a whole, due to banks' wide spectrum of exposure across industries. Unfortunately for India, the banking sector has historically remained under the impact of non-competitiveness, poor technology integration, high NPAs and grossly under productive manpower.

Banking sector in India has a wide mix, comprising of joint sector (scheduled and non-scheduled banks), nationalised sector (Reserve Bank of India, State Bank of India and all other nationalized commercial banks and post office savings bank), specialized corporate financial institutions (specific industrial finance corporations and state finance corporations), co-operative sector (co-operative banks and land development banks) and foreign sector (foreign commercial banks and exchange banks).

Keeping in mind the socio-economic goals of the country, banks were under strict control of the regulatory bank - Reserve Bank of India. For instance, during mid-1969, 14 major Indian commercial banks were nationalised. One of the major criticism against nationalisation of commercial banks was with respect to efficiency. And the critics were right. Since nationalisation, the operational efficiency of the commercial banks have come down, thanks to the ‘public-sector working’ attitude of the bank work force. Since, their pay is not linked to performance, there is no inducement for the banking staff to perform well. This has been further, deteriorated by the poor quality to man power planning which is linked to selection of inefficient staff on the basis of social reservations.

Earlier profitability gained only secondary importance, since banks lived in the comfort of a controlled environment. However, today banks cannot survive only with government support. They have to set goals of profitability along with service and set targets and evolve strategies to reach them.

There is certainly a paradigm shift in banking in India in the recent past. At present profitability, capital restructuring and transparency are considered important and significant for banks. Also, banks in India have started realising the need to be `customer focused' that in turn leads to `customer appreciation' which is imperative for survival and growth.

The first change along this line was brought in by the foreign banks with their emphasis on high quality and efficient service combined with the technological advantages like satellite banking and tele-banking manned by skeletal staff and lesser number of branches.

Further, development of special manpower, innovative products, technology exploitation and personalized services play a crucial role in the banking industry today, since the customer has more options in choosing a bank. Thus leading to consumerism in the banking sector. Also, since customers are becoming more sophisticated and educated, their expectations from the neighbourhood bank are increasing .

The private banks wisely chose to use this opportunity to prepare for the future rather than scramble for current business. Many of them refocused their activities, seeking clearly defined identities in terms of services and customer segments.

To sum, the new private sector banks are poised to redefine banking in India. Though they do not pose a threat to the existing private banks they will certainly force them to gear up their strategies to remain in the field. This will lead to intense competition among the new banks, that would also serve as a challenge to the foreign banks.

The last five years saw a sea-change in banking strategies, with more focus on quality.

The adoption of a specialised customer-oriented focus is fast getting wider acceptability. In a market that keeps growing in depth and diversity, niche banking is the new mantra adopted by all. Thus, instead of targeting an entire market segment, banks have adopted a specific business focus to clearly reach their target audience.

The best banks' strategies:

(1) Increase volumes to compensate for declining interest rate spreads;

(2) Trim expenditure on provisions and contingencies, thus narrowing the gap between operating profits and net profits;

(3) Pare down operating expenses through organisational restructuring; and

(4) Adopt a clearly focused communication plan.

Thus, today focus is more important than size in achieving success in the banking industry. The latest in technology, innovative retail products and personalized services are vital to carve out a niche in banking sector.

Over the last few years, the communication style too has changed with respect to the banking industry.

Communication has shifted from branding the bank to branding banking products, highlighting service commitment, convenience, etc. Further, branding of banking products, such as home loans, consumer durable loans, tele banking, ATM's, net banking, etc. have started taking place, especially after the entry of foreign banks and private sector banks which had the advantage of the latest technology.

Insurance

Insurance sector in India has been enjoying a state-monopoly status in India for decades. Under Indian conditions there is only two broad classification of insurance companies : life and non-life insurance. The life insurance activities are solely managed by Life Insurance Corporation of India and the rest is handled by General Insurance Corporation of India.

Life insurance business was started in India during British rule. Prior to independence, there were several insurance companies : Oriental Life Insurance Company, Bombay Life Assurance, The Madras Equitable Life Insurance Society, Oriental Government Security Life Assurance Company, etc. Most of the insurance companies were charging a very high extra premium of 15 to 20 per cent, since they considered Indian lives as sub-standard.

These insurance companies prevailed during the time of independence failed to sustain on a long term basis. As many as 25 companies were liquidated and another 25 companies had to merge with other companies at a lost to the policy holders. This has forced the Government of India in 1956 to nationalise all the 245 life insurance companies (154 Indian and 16 foreign), and form the Life Insurance Corporation of India.

Financial Performance of Life Insurance Corporation of India, 1997
(figures in Rs crore)

Till December 1972, the Indian general insurance market was overcrowded with as many as 107 companies. However, as in the case of commercial banks, all these insurance companies were nationalised under an act in 1972 which has yielded the state-monopoly General Insurance Corporation of India. General Insurance Corporation of India operates through four of its subsidiary companies which are spread geographically. They are : National Insurance Company (Calcutta-based), New India Assurance Company (Mumbai-based), Oriental Insurance Company (New Delhi-based) and United India Insurance Company (Chennai-based). The paid up capital of General Insurance Company is fully subscribed by the Indian Government.

Financial Performance of General Insurance Corporation of India, 1996-97(figures in Rs crore)

However, the Government is planning to open this sector for private and overseas players. Towards this end, the Government is planning for a formation of an Insurance Regulatory Authority.

Transport

A well developed transport system will support an economy in several ways : supports the industry by increasing the efficiency of production, rises the demand through movement of products, facilitates the location of an industry, helps the development of urbanization, movement of man power, better standard of living, better education, etc. Contribution of transport to Indian economy is very significant.

Indian transport sector comprises of all forms of transports : railways, roadways, water and air transport.

Indian Railways, largest Indian public sector undertaking and largest railway system in Asia run 12000 trains a day, with over 63000 route kms of track. Indian Railways has around 7000 railway stations. The total distance covered by the 12000 trains every day equals three and half times the distance to moon. It takes a gigantic task of carrying nearly 11 million passengers and 1.2 million tonnes of cargo per day. Indian Railways function as a major employment generator in India. Of the 27 million people employed in the organised sector, Indian Railways accounts for 6 per cent directly and an additional 2.5 per cent indirectly. Totally about 1.6 million people are employed by Indian Railways.

The importance of road transport to Indian economy can not be neglected. Road transport is vital for the movement of of agricultural products and also for industrial development. Thus, roads quicken the rate of growth. Further, road transport functions as a supportive system to railways. Railways can reach only certain locations, and the rest of the link is taken care by road transport. At the time of independence India had only 388000 kms of roads. Today, India has 2178008 km of road length, thanks to Planning efforts.

The cheapest mode of transport is water transport, since water-ways provide ready made routes and thus no infrastructure costs involved in developing journey routes, compared to railway or road transport. India has both inland water and marine or shipping transport facilities. India possesses about 14150 kms. of navigable inland water-ways. Notable Indian water-ways are : Ganga, Brahmaputra, Godavari, Krishna, Delta Canals, Mandovi, Zuari, Buckingham Canal and back-waters and the west coast canals of Kerala. Considering the geographical sea-base benefits of India, there is much scope to improve this mode of transport in the country, especially the coast line transport.

The costliest mode of transport is by air, since airline industry is highly capital-intensive. In India, most passengers are infrequent air travelers due to the cost aspect of this mode of transport. They are broadly classified into business and leisure travelers. Air transport was nationalised in India in the year 1953. Since then, for a long time, air transport was monopolized by the government players - Air India operates international flights and Indian Airlines operates domestic flights. However, in the recent past India has allowed private players also to participate in the domestic aviation segment, with adequate restrictions imposed upon them. One of the major hurdles in the aviation industry is the lack of adequate airport infrastructure. Inspite of the low airport infrastructure, there are over 25 international airlines operating from India. International services to India are guided by bilateral air services agreement with around 80 countries.

Aviation industry in India is fragmented with relatively less interdependence with other similar agencies within the country and outside. Thus they face global competition from mega airline operators. About 50 to 60 per cent of India’s air space is controlled by defence and the balance by civil. The lack of co-ordination and in the grab of security, civil aircraft have at times follow very circuitous routes, to avoid defence installations, thus causing immense loss of time and fuel, which can be to the tune of several hundred crores in a year.

India needs a comprehensive aviation policy which will facilitate improvement of airport infrastructure and assure smooth flying in India and overseas for the betterment of Indian economy.

Telecom

In an economic policy frame work where the role of markets and incentives based on the price system is emphasized, infrastructural goods and services, such as telecommunications are generally characterized by high fixed investments, long gestation lags and relatively low profits, especially during the initial phases of operation. For a long period, almost all the infrastructural projects in India were Government’s responsibility.

However, as India moved along the path of economic development, the process of liberalization began and private sector’s supportive role was recognized. Telecom sector was opened up for private sector participation into basic services and value added services with the policy announcement in May 1994. In order to meet the rising demand in the telecom sector, Indian Government decided to invite private players to supplant the government supported agencies in rendering basic as well as value added telecom services. Though opened up, barring a few areas like pagers and mobile phones, Indian telecommunication sector is dominated by Department of Telecom (DOT) and two government companies - VSNL and MTNL.

Telecommunication sector in India is characterized by a fundamental failure on the following accounts:

• The number of per capita telephone connections in India is around one-sixth of that found in countries with a comparable per capita GDP. The ratio is even more adverse, in the area of data communication. (In India there are only 13 connections per 1000 persons; India has 10 million telephones with a density of one per 100, where the global standard is 10 per 100.)

• In India, the current players are not able to meet the demand. The registered demand during 1996-97 was 17430 thousand connections out of which the unmet demand (waiting list) was around 2887 thousand lines.

• Telecom facilities in India are noisy and unreliable as compared with what is easily attainable using contemporary technology.

• In India, telecom facilities are often hundreds of per cent costlier than the fair price of these services.

The usage of modern telecom technology is a vital factor for the rapid growth of Indian economy, since :

• The application of modern telecom coupled with computer technology has the potential of yielding order of magnitude gains in productivity in a large variety of industries.

• Modern telecom and computer networks allows India gain access to ideas from all over the world.

• Telecom is special, because, as an alternative, it is substantially cheaper as compared with roads or railways.

• Improving the telecom infrastructure will help to boost trading activities of India.

• Superior telecom facilities are a must for India today, because many Indian states are focusing on information technology for export earnings. Only a proper telecom facility can assure the industry players a swift data transfer mechanism which will help them to compete with the global players in the information technology field.

Telecom sector in India lacks a clear Government policy directive. There are several issues, such as incoming call fee in the case of cellular, which are not solved. The Government has to announce a proper stable and long-term telecom policy for the benefit of the economy, since the development of this sector is a crutial indirect input for the development of the nation.

Power

Power  is  a vital input for the growth  of  industrial development  of any nation - higher the power,  higher  the industrial growth and higher the employment.  Since independence most of the projects in this  sector  has  been  financed  and managed by  government  agencies  - Center or State (nearly 90 per cent or more  investment required  for  the power sector came  from  the  public sector through Five Year/Annual Plans). However,  since liberalisation,  the role of private sector,  inclusive of  foreign  players  were  recognized in  the   power projects.

Power  projects involve huge investments  and  overseas support in terms of financing as well as managing power  projects become inevitable for a developing nation like India, since electricity can not be easily imported  or stored  and  hence,  creation  of  generation capacity domestically  is  critical for  meeting  the  country's demand  for  power. If the capacity additions  are  not done  in  time, power shortages result  in  the  system which leads to inefficient operations and  management, decelerate  investment in other sectors of the  economy and  hamper  the  growth  process  of  the  country  in general. In India, the endemic power shortages and cuts lead  to inadequate capacity utilization,  unproductive expenditure  such  as in back-up  generators  and  much waste,  all  of  which impose  a  major  constraint  on economic growth.

Shortage of Power : Demand and Supply

In  India  there is a significant  short-fall   in  the availability  of  power.  With  the  present installed  capacity of about 84000MW, there is a peak shortage  of about 15 per cent and an energy shortage of about 5 per cent.

The per capita electricity consumption in the  country,  in  spite  of a rise to a level of 314KWH in  the  last  four  decades,  is one of the lowest in the  world.  In fact,  this  is  in sharp  contrast  with  the  average consumption  in the developed countries which  is  over 5000KWH per annum.

Over  the years, sectoral consumption of  electricity  in  India  has changed considerably. The  shares  of   the agricultural and domestic sectors have increased,  while the share of the industrial sector has declined. This  can be attributed to the setting up of  captive  power plants by  the  industry, due to the increasing tariffs and unreliable supply from SEBs.

The  15th Electric Power Survey has forecast an  energy demand of 570 billion kwh and a peak demand of 957,000 MW  in  2001-02.  This  forecast  is  less  than   that forecasted in the 14th EPS for the same year. This  is probably due to the enlarging base and the increase in the share of the services sector in the GDP.

In order to optimise the  utilization  of  the existing  capacity,  the Government  is planning  to initiate  steps for the conservation of energy  and  to reduce  the  difference in the peak  and  base  loads, through  measures  such  as energy  audits  and  tariff incentives.

Power : Demand and Supply : All India
(figures in billion KWH)

(Source: Central Electricity Authority)

The  future  projections made by CEA, the  15th  Annual Power  Survey  and  similar  other  institutions   have estimated  a growth requirement of about 6-7  per  cent per  annum. According to the Fifteenth  Electric  Power Survey  of  July 1995, energy demand  in 1999-2000  is projected  at 502254 million KWH. And the Power  Survey is  reported to have recorded a peak power  requirement of  95000MW  at  the end of the Ninth  Five  Year Plan (2001-2002)  and 130900MW at the end of the Tenth  Plan (2006-2007), which corresponds to an installed capacity of 160000MW and 280000MW respectively. In other words, requirement of additional installed capacity during the ninth Plan is 57000MW and 67000MW in the Tenth Plan. To  meet  the power needs of India  by  2005-2006,  the  country needs Rs.67900 crores of investment.

Power Line has projected the loss to the economy due to power shortages in the country as follows :

• The loss in GDP growth is at least 2 per cent  per annum and perhaps as much as 2.5 per cent

• GDP loss over the last five years amounted  to  at least  Rs.65000 crore (assuming a 2 per cent  loss per annum)

• GDP loss in the year - 1996-97 - is  close  to Rs.18000 crore. Assumes 6 per cent growth with shortages and 8 per cent growth without shortages.

• The  total projected GDP loss over  the  next  ten  years will be at least Rs.1800000 crore. Assumes 6  per  cent  growth with shortages and  8  per  cent growth without shortages.

• Every 1000MW project delayed is costing the economy over  Rs.1300 crore per year. This is based on  the following assumptions : 20 per cent more peak power needed;  16 per cent more capacity needed;  13500MW needed this year; and 18000 crore lost attributable to the above shortfall.

Thus,  to attain considerable industrial growth,  India needs swift power.

Power Finance

During post-independence era, power - one of the  major core sector -  has been funded by the  government/government     agencies,    when     private participation  was almost nil in power sector,  thanks to  government policies. However, with  liberalisation,  this  core sector  was opened to  private  sector  and consequently to the foreign players.

Further,   due  to  constraints  of  funds   with   the Government  of  India, the public sector would  suffer  from  inadequacy  of  funds.  With  present  levels   of  finances,  only 20000MW in each plan period  could  be built in the public sector. Thus, the rest (84000MW) is expected  to be financed through private  sector,  both  Indian and foreign.

Since  the  cost  outlay in power  projects  are  huge,  financing the projects through internal accruals  alone  becomes inevitable; and further, the government is also  slowly  changing withdrawing itself from the  role  of  producer and trying to stick-on only as a regulator  in the long run. Thus, power producers has to look in  for alternate source of financing such as, term loans  from  financial institutions (internally and internationally)  like  World Bank, ADB, ICICI, etc. and debt  market  in India and abroad.

Some  70 per cent of the finance required by the  power sector over the next decade - total estimated at  about  Rs.5000  billion  (US $143 billion) - has to  be  found  through  debt. While the sector could  expect  special consideration   in  the  allocation  of  foreign   debt entitlement, the bulk of the debt finance will have  to be raised in rupees. Identified level of rupee debt  at present is about 75 billion per annum. This would  need stepping up significantly.

The center has decided to allocate about Rs.14000 crore for  nuclear  energy to generate an additional  1000MW during  the Ninth Plan period. This is a Rs.1000  crore increase  over the Eight Plan period  allocation  which was   Rs.13000   crore.  Further,  according   to the estimation of Finance Minister, around 22.5 per cent of the proposed voluntary disclosure scheme for harnessing black money, would be used for financing infrastructure projects and basic minimum services program.

The  power  sector so far in 1996-97  has  accessed  $2 billion in ECB sanctions. Compared to the previous year ECB sanctions of $0.61 billion, this is a  considerable increase. Allocations in power sector have largely been made  to  non  fast-track projects  and  captive  power projects.

Financial  institutions  have told the  Power  Ministry that  they  will  not  be able  to provide  funds  for additional  power generation beyond 5000MW  during  the Ninth  plan. This falls woefully short  of  the  power ministry's target of adding 57000MW during the Plan.

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