Bunching up of Govt orders hits capital goods firms

Anil Sasi Vishwanath Kulkarni New Delhi | Updated on December 01, 2011

Pressure mounts to rush thru deliveries in last year of Plan period

The Government's ponderous decision-making process could be a major reason for the sluggish performance of the capital goods sector, which has been a drag on the overall industrial output in recent months.

While the impact of the interest rate hikes, high input costs and the general slowdown in the economy are evident, the Government's contribution is significant since it is the largest customer for infrastructure.

Equipment firms such as BHEL face a peculiar problem in terms of the bunching up of orders towards the terminal years of a particular five-year Plan period, which translates into delays in execution and project commissioning.

Customers, especially Government utilities such as the State Electricity Boards (SEBs) and central power utilities that form a bulk of BHEL's clients, generally tend to drag their feet on order placement in the initial years of the Plan period. Most orders tend to come in only by the second or third year of the Plan and as a result, the equipment manufacturing firm is full up and focussed entirely on execution of the orders by the terminal year of a Plan period, as is the case in fiscal 2011-12, the terminal year of the 11th Plan period.

So by the fifth and the last year, as SEBs and other Government utilities come under increasing pressure to meet targets set at the beginning of that Plan period, pressure keeps mounting on equipment firms to rush through deliveries.

“Bunching up of orders in the second-half (of the Plan) was a serious problem last time around (Tenth Plan period) and continues to be an issue this time around too. Slack ordering by utilities is something that has still not been addressed and we are forced to stretch ourselves in the end,” a senior BHEL official told Business Line.

Due to the rush, equipment firms tend to go slow on new order intake during the second-half of the Plan period as they have their hands full.

Delayed order placement also tends to result in a spill-over of deliveries from the terminal years of each of the Plan periods into the first and second year of the next Plan; something that has manifested itself in a cyclical manner over the last couple of decades. The capital goods sector is generally seen as a proxy for future investments. Power and steel sector firms are seeing such a trend, even though the petroleum sector could be an exception.

Corroborating this, SAIL's Chairman and Managing Director, Mr C.S. Verma, said 2011-12 being the terminal year of the Eleventh Plan, there is a rush to complete targets on various projects. “Typically, the first year is a lean period and the last year of a five-year Plan is a brisk period,” he said.

In keeping with the trend, CMIE has already scaled down growth projections for the industrial sector because of the slow pace of commissioning of projects. CMIE's CapEx database reveals that while projects valued at an impressive Rs 8.3 lakh crore were scheduled to be commissioned in 2011-12, a mere 305 projects entailing an investment of Rs 63,274 crore had been commissioned in the first quarter of the fiscal as most projects have been delayed. The slow creation of new capacities, it said, could hurt growth in power generation, steel and petroleum refining in 2011-12.


Published on December 01, 2011

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