DELHI

THE HINDU

MONDAY, JUNE 13, 2011

15

Maxx Mobile to invest Rs.320 crore to set up manufacturing plant

Maxx Mobile has decided to set up a mobile handset manufacturing plant at Haridwar. At this plant, it will also have a unit to make lithium ion batteries. The company has earmarked an investment of Rs.320 crore on these new projects, Maxx Mobile Communications Managing Director Ajjay Agarwal told PTI in New Delhi.

BUSINESS REVIEW

Vital need for power capacity addition

The CEA has projected that the country will have an energy shortage of 10.3 % and a peak demand shortage of 12.9 %

he saga of energy shortage will continue for one more year. This is the broad picture that the Central Electricity Authority (CEA)s annual report on the countrys power supply position gives. In the nancial year that just went by, all regions suffered shortage, both in terms of energy and peak demand. The western and northern regions were the worst hit, as they recorded energy shortages of 13.3 per cent and 8 per cent respectively. For the current year, the CEA has projected that the country will have an energy shortage of 10.3 per cent and a peak demand shortage of 12.9 per cent. While the highest energy shortage of 11 per cent

will be in the western region, the maximum peak demand decit, 14.5 per cent, will be felt by the southern region. According to the CEA, the hydel-rich States having run of river schemes on the Himalayan rivers Himachal Pradesh, Jammu and Kashmir, and Uttarakhand will be surplus in energy during south west monsoon (JuneSeptember) but they will face severe shortages during the winter low-inow months when the generation from hydro schemes will dwindle to the minimum. Delhi, Dadra & Nagar Haveli and Sikkim would have both peaking and energy surplus on an annual basis. Though Himachal Pradesh will witness peak demand decit from November 2011 to March 2012, the

States overall position in meeting the peak demand for the year is expected to be surplus with 7.1 per cent. In the south, Karnataka and Puducherry will be energy surplus with 4.7 per cent and 4.8 per cent respectively. Other energy-surplus States will be Chhattisgarh, Mizoram and Tripura whereas Orissa will be in a comfortable position in peak demand. All other States and Union Territories will have electricity shortages of varying degrees both in terms of energy and peak demand. Twentyve of them will have energy decit, of which four Jammu and Kashmir, Uttar Pradesh, Uttarakhand and Daman and Diu will fall under the category of energy decit of over 20 per cent;

nine under the category of 1020 per cent and six each in the groups of 5-10 per cent and less than 5 per cent.

Deviations highlighted
One may ponder over the accuracy of the CEAs projections. To be fair to the Authority, the annual report clearly indicates the areas of deviation with regard to the projections for the previous year. Although the Authoritys forecast for the entire country saw only a minor deviation, its projections for some States, particularly those in the South, were well off the mark. Compared to the anticipated gures, the actual energy availability and peak demand met in the South were higher by 8.9 per cent and 9.4 per cent respectively whereas the actual energy requirement and peak demand were lower by 1.3 per cent and 2.8 per cent. Similarly, the actual energy shortage in the region was 5.2 per cent against the forecast of 14.1 per cent. The actual energy shortage in Andhra Pradesh was 3.2 per cent (anticipated shortage: 11.6 per cent); Karnataka 7.6 per cent (13.3 per cent); Kerala 1.4 per cent (10.1 per cent); Tamil Nadu 6.5 per cent (18.4 per cent) and Puducherry 4 per cent (5.7 per cent). The actual peak demand and energy shortage was less than the anticipated due to higher load factor, demandside management, lower requirement and higher availability of energy.

CHRONIC SHORTAGE: Cooling towers of a super thermal power plant. FILE PHOTO
One more reason was that most of the southern Stateswent on in an aggressive way to purchase power on a temporary and daily basis. As a result, what was sold at Rs. 8 or Rs. 9 per unit in the early part of 2010-11 got almost doubled in the later part of the year. At one stage, the Tamil Nadu Generation and Distribution Corporation bought power daily at an overall cost of Rs. 50 crore. Still, the authorities had resorted to load shedding of 1,500 MW daily. What policy makers and administrators have to realise is that fundamental and chronic problems cannot be overcome through shortterm measures. Additional capacity has to be created in a sustained and rapid manner. There is no short-cut to this option. During 2010-11, about 12,161 MW only could be added against the target of around 21,440 MW. This year, it has been planned to add nearly 17,200 MW. It appears that the country will not even meet the revised target of about 62,300 MW. When the XII Plan ends, the achievement could be around 50,000 MW. All these only reinforce the need for focussed attention on capacity addition.
T. RAMAKRISHNAN

Close watch on RBI move over recent economic data

M
arkets are keenly watching how the Reserve Bank of India (RBI) will react to the key economic data that will be released during this week, when it will review the rst mid-quarter of this nancial year on June 16. The key data are: Wholesale Price Index (WPI) ination for May to be released on Tuesday, advance tax numbers on Wednesday and monetary policy review meeting on Thursday. The equity markets ended in the red for the third straight trading session on Friday last, with the NSE Nifty closing below the crucial 5500-mark. The Index of Industrial Production (IIP) growth for April was 6.3 per cent compared to 13.1 per cent in April 2010 as per the new series. Manufacturing growth (year-on-year) stood at 6.9 per cent (14.4 per cent) and mining growth at 2.2 per cent (9.2 per cent). The base year of IIP has been revised from 1993-94 to 2004-05 by the Ministry of Statistics and Programme Implementation. The two series have different item baskets and different weightages. Food articles rose to 9.01 per cent from 8.06 per cent. Meanwhile, Finance Minister Pranab Mukherjee termed the industrial production gures as disturbing, while adding that one should wait for longer term IIP growth to see the underlying trend. The markets believe that a further interest rate hike (even by a 25 basis points) is imminent, which will have a negative impact on the market sentiment as they will consider the hike as a signal to slowdown in growth. The current macro condition of Indian economy is not the most desirable from a growth point of view. The growth is slowing down even as ination remains well entrenched. This could lead to stagation, said Sanjeev Zarbade, Vice-President (Private Client Group Research), Kotak Securities. Crude oil rose further last week, thus aiding inationary pressures and at the same time squeezing government nances. We believe Indian equities would continue to remain range-bound and may even weaken further given the ongoing euro-debt crisis, fresh worries on U.S. economic growth and domestic economic risks, he added. the 91-day T-Bill auction was marginally higher (8.23 per cent) than the yield (8.19 per cent) in previous week auction (June 1). T he cut-off yield in the 182day T-Bill auction also was 8.23 per cent, marginally lower than 8.27 per cent in the auction held on May 25. It is expected that the RBI will keep the rate hike cycle on and hike the repo rate (and consequently the reverse repo rate as well) by 25 basis points. Liquidity system However, there is a view The liquidity system tight- emerging in some quarters of ened over the week: average the market that the RBI may RBI infusion through the re- pause this time, in view of po window was Rs.75,000 some degree of softening in crore last week (June 6 to 10), the global growth rate and the higher than Rs.43,000 crore fact that the rate hike was 50 in the previous week (May 30 basis points (instead of 25 bato June 3). sis points) on May 3, accordIn the T-Bill auction held ing to BNP Paribas Wealth on June 8, the cut-off yield in Management. The mild softening in money market yields last week, in spite of tight banking system liquidity, is partially due to this view. The softening of one-year overnight indexed swap (OIS) reects the moderation in market expectation on rate hikes going forward. Taking into account the limited progress on the policy front, Citi India Economist Rohini Malkani said the IIP numbers were likely to remain lacklustre till August. We maintain our view that 2011-12 will likely be a year of two halves: with rst half GDP in the 7.57-8 per cent (year-on-year) range; and an up-tick in the second half GDP likely to be dependent on a recovery in investments which saw growth decelerating to 0.4 per cent in the fourth quarter of 2010-11. The soft fourth quarter GDP data for 2010-11 and other sectoral trends have once again brought debate on a possible pause by the RBI. Probably, the central bank is in its last quartile of tightening and a further 50-75-basis point hike in policy rates is expected with a likely 25-basis point hike in its policy review meeting on June 16, according to Rohini Malkani. Given the trend in the overall IIP growth numbers as per the new series and the prevailing inationary pressures, we expect the RBI to continue with its rate tightening regime, that is, increasing the repo rate by another 25 basis points in the upcoming monetary policy review, said Arun Singh, Senior Economist, D&B India. Going forward, said Mr. Singh, this would lead to a subdued growth in the consumption and investment demand in the near-term. A slowdown in growth and a rise in food ination will inuence the RBIs plans for a rate hike.

Food ination
Food ination is showing signs of inching up adding to the core ination pressures. Further, another hike in fuel prices is also imminent. However, the silver lining is that the current expectation on monsoon is closer to 98 per cent normal. Though the policy tightening since March 2010 would show its impact in the next few quarters, the RBIs focus will remain on controlling ination while keeping a close watch on growth numbers.
OOMMEN A. NINAN

Ination major concern

Ination is the major concern for the RBI and in the recent policy announcement, the central bank made clear that even at the cost of a growth rate it had to control ination and inationary pressures. The primary articles group in WPI witnessed a higher inationary level at 11.52 per cent for the week ended May 28 against 10.87 per cent in the previous week.

TAX FORUM: QUESTIONS & ANSWERS

Whether straightline method of depreciation is available for all

UESTION: Straightline method of depreciation was permitted by amendments to Sec. 32(1) by Rule 5(1A) for electricity companies. It is misunderstood by some ofcers that this is applicable for all assessees engaged in generation of power including those who have set up windmills. At best, it is an option, which has to be specically discarded, if they want to avail normal depreciation of 80 per cent. Is such a view correct? ANSWER: Sec. 32(1)(i) and Rule 5(1A) read with Appendix 1A which provide for straightline method of depreciation are applicable only to an assessee engaged solely in the business of generation and distribution of power and are obliged in law to prepare accounts under the provisions of the Electricity Act, 1948. For others, Appendix 1 alone will have application. Statement of Objects and Reasons for the amendment in Income-tax (Amendment) Bill, 1998 reads: With a view to enabling power generating

Hunt for actuary in the IRDA

T
he word insurance always brings in ones mind two professions the agent and the actuary. The agent is virtually omnipresent, while the actuary is rarely visible. At present, this rather invisible profession is posing some peculiar problems to the Ministry of Finance. The Insurance Regulatory and Development Authority (IRDA) comprises a chairperson and not more than nine permanent and temporary members. One of the permanent members is designated as member (actuary). This position is vacant now and is yet to be lled. To ll this vacancy, the government had recently invited applications for the post from among Indian citizens who are fellow members of the Institute of Actuaries of India (FIAI) or the British institute (FIA), having a minimum 15 years experience in actuarial functions in a life insurance company or at least three years experience as appointed actuary in a life insurance company. The consolidated remuneration offered was Rs.2.50 lakh a month. The tenure of appointment was for ve years or up to the age of 62, whichever is earlier. A member, after retirement, cannot accept a job in any insurance company for two years. The advertisement may look quite attractive, but it did not elicit any response from any actuary. The reasons are quite simple. An actuary with 15 years experience or, an appointed Actuary, is at present getting about three times the remuneration offered by the government. Since a person cannot be a member (actuary) for more than ve years and, after that, he cannot accept a job in any insurance company for two years, no one aged below 55 will be interested in this post. Are the requirements prescribed in the advertisement really essential? As per the IRDA Act, the Central Government can appoint whole-time members to the regulatory authority from among people with ability, integrity and having experience in life or general insurance, actuarial science, nance, law, economics and others. That is, the only requirements are integrity, ability and experience and not any paper qualication. Can a person, who is not a full-edged actuary, be able to function as member (actuary)? Certainly, the answer is yes. He will function at the decision making level and not at the departmental level where all actuarial calculations required are made. To understand the nature of decisions he will be called upon to understand the nature of products being marketed by life insurance companies. Life insurance products are no longer based on simple algebraical formulas. The availability of computers has enabled product designers to

units to depreciate their capital assets in a straightline method at the same rate at which it is reimbursed by the State Electricity Board under the Electricity (Supply) Act, 1948, it is proposed to make amendment in Sec. 32 of the Income-tax Act. With this amendment, there will be lower tax reimbursed by the State Electricity Board, consequently, a lower power tariff rate. What is applicable only to such assessees could have no application for others like those who produce power by windmills or solar energy. There is, therefore, no question of any option. The Tribunal in Dy. CIT v SAMKRG Pistons & Rings Ltd. (2009) 34 SOT 401 (Hyd) has held that block concept continues to apply to all others not governed by Indian Electricity Act. In K.K.S.K. Leather Processors (P) Ltd. v ITO (2010) 126 ITD 215 (Chennai), it was decided on assumption of requirement of option for straightline depreciation that an assessee by claiming depreciation under Appendix I at 80 per cent should be treated to have exercised

option for such depreciation. In K. Ravi v Asst.CIT (2010) 2 ITR (Trib) 752 (Chennai), on the erroneous view that assessee running a windmill was entitled to straightline method of depreciation, the option should be exercised in a return led in time and that a delayed return will forfeit right to normal depreciation not only in the year of late return but also for later years. Since the law in the Statement of Objects and Reasons, the clarication, the statutory provision and the Rule would make available straightline depreciation only for electricity companies and not to others, the question of exercise of option by ling a return would not arise. The Board is better advised to correct the wrong inference drawn even by the Tribunal and some of the assessing ofcers so as to avoid litigation in the light of the objective of enhanced rate of depreciation meant as an incentive for power generation.
S. RAJARATNAM

............................. AN ACTUARY WITH 15 YEARS EXPERIENCE OR, AN APPOINTED ACTUARY, IS AT PRESENT GETTING ABOUT THREE TIMES THE REMUNERATION OFFERED BY THE GOVERNMENT. ..............................

introduce complex products similar to mutual fund products but with one important difference. While mutual fund products do not give any guarantee, life insurance products provide long-term guarantees. How to quantify the liabilities arising from such guarantees? Is the insurance company properly equipped to meet these guarantees? Is the underlying rate of return

guaranteed to the policyholder commensurate with the investment environment and the expected long-term movements in interest rates? Is there any mismatch between the assets held and the liabilities underwritten? Are the assumptions made regarding operational expenses realistic or will they result in expense over-run and need for unsustainable levels of capital infusion? These are the aspects to be periodically looked into by the IRDA to ensure security for the policyholders money. So, in the last two decades, the actuarial science has progressed from simple algebraical and statistical techniques to broader and highly complicated issues of nance and investment. Deriving actuarial formulas to represent various situations mentioned above is not difcult and can be done by the Actuarial Department of the IRDA. These formulas, however, involve many parameters and assigning appropriate values to these parameters is a really tough task. At this point the decision maker steps in and, for making the right decisions, he should have good knowledge and experience in nance and investment as well as principles and practices of life insurance. Knowledge of actuarial techniques can be of

additional help, but not absolutely essential. The qualications required for a member (actuary) are: good knowledge of nance and investment; at least 20 years of all-round experience (underwriting, policy servicing, accounts and marketing) in life insurance; actuarial knowledge and software skills can be important additional qualication; good academic record with aptitude for mathematics and statistics; and holding a fairly senior position in a life insurance organisation. For the remuneration being offered, there would be good response from persons satisfying the above criteria and the insurance industry will be the ultimate beneciary. At present, the member (actuary) looks after life and general insurance. The requirements of the two elds of insurance are vastly different and it is almost impossible to nd a person with good experience in both elds. It is, therefore, advisable to have a separate member (actuary) for general insurance. Prociency in statistics and all-round experience in the general insurance industry should be the basis for selection.
R. RAMAKRISHNAN

(Actuary)

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