At a meeting of the finance sectretaries of state governments held by the Reserve Bank on November 8, 1997, state governments were offered a facility to raise 5 per cent to 35 per cent of their market borrowing allocation in a flexible manner as regards timing, maturity and rate of interest. But there was a hitch as the Centre did not allow state governments to borrowon their own. Now the realisation has dawned upon the Centre that there has been a steady deterioration in state finances and this emanates from lower growth of 14.6 per cent in revenue receipts in 1998-99 than that of 16.8 per cent in the previous year.

This is in addition to the fact that there is a sharp rise of 16.2 per cent in revenue expenditure on top of an increase of 17.4 per cent 1997-98. Consequently, there will be a marked rise in revenue deficit to 1.5 per cent of GDP in 1998-99 from 1.3 per cent of GDP in the previous year. This will take the combined gross fiscal deficit of the Centre and states to beyond 8 per cent in 1998-99. The fact that states can now borrow on their own, will establish their credit-worthiness based on their respective fiscal positions which is a welcome sign.

Crompton Greaves
Crompton Greaves' third-quarter results illustrate how sensitive heavy-engineering stocks are to volumes, during a slowdown. Compared to the second quarter, sales have declined by just1.4 per cent and OPM is lower by a meagre 0.9 percentage point. However, net profit, compared with the second quarter, is lower by 30 per cent. The reason is that the lower sales have not been accompanied by a lowering of costs.

On a year-on-year basis, there will only be single-digit growth in the bottomline. Cumulative profit up to the third quarter is just 56 per cent of PAT for 1997-98. Yet this cannot be taken as an indicator of annual performance as the fourth quarter is generally the best because of government spending. Exports account for 12 per cent of sales in the third quarter, but for the year they are expected to be higher at 14 per cent of sales. However, performance will depend heavily on the Rs 20-crore orders for power systems each from the Andhra Pradesh Electricity Board (World Bank funded) and the Tamil Nadu Electricity Board. The order book is in the range of Rs 660 crore (Rs 693.3 crore at the beginning of the year), but again the year-end figure will be much better. However, alsoincluded in the order book are requirements of the Korba power project in MP, which is yet to get off the ground.

Power
In two sharply contrasting events, the World Bank has refused to fund infrastructure projects in Maharastra while at the same time, it has extended a $1-billion loan to Andhra Pradesh (AP) for the power sector. This is the third instance, after Orissa and Gujarat where reforms and rationalisation in the power sector have been rewarded. The ADB has approved a $600-million loan to Gujarat.

While Maharashtra is still struggling with the issue of providing free electricity to farmers, AP and Gujarat are taking steps to reform their electricity boards. In AP, separate companies for generation, transmission and distribution will be formed and each will be a wholly-owned subsidiary of a corporatised board. In Gujarat, the electricity board will be reduced to a distributor and a regulatory commission will be formed for tariff restructuring.

SEB reforms have been stonewalledfrequently sighting privatisation or private-sector participation as a hindrance. The Indian Electricity Act provides for a Central Transmission Utility for inter-state transmission and a State Transmission Utility for intra-state transmision, both being government owned. Thus, private-sector players are restricted to building, opertaing and maintaining transmission systems. Also, SEBs cannot be broken down without a separate state legislation. If SEBs were to be split into seperate entities, problems of compliance with the requirements of the Electricity (Supply) Act will emerge.

To surmount these problems, all that a state has to do is to enact a legislation which has to be approved by the President. This is a simple route to restructuring and corporatisation taken by AP, Orissa and Haryana. If the reforms go through, the state will merely remain an advisory body, with regulatory functions remaining with the State Electricity Regulatory Commission. Furthermore, by ensuring that the terms of employment arefavourable to existing employees, issues relating to possible industrial unrest can be effectively tackled.

States opting for this route will have an efficient power sector and this in turn, will result in industrial and commercial concentration. The others that will be left with costly and unreliable power, will see a flight of commercial activity to regions where cheap and efficient power is available.

With contributions from Anirban Nag & Urmik Chhaya