News reports indicate that SAIL is planning to sell its 1.8 million integrated steel plant at Durgapur, a major producer of sleepers, wheels & axles, structurals, bars, rods and skelp (narrow hot rolled coils). Although the porposal is perfectly logical from the financial point of view, it misses the ground realities.

While the Bhilai and Bokaro plants continue to make operating profits, the losses from the Duragapur and Rourkela plants have been mounting. SAIL tried to correct this by undertaking a modernisation exercise at both these plants. While it has completed the exercise at Durgapur, spending close to Rs 4,000 crore, the modernisation of the Rourkela plant is yet to be concluded. Close to Rs 2,000 crore have already been spent on this plant.

After the mordernisation of the Durgapur plant, the blast furnance productivity improved from 0.59 tonnes per cubic metre per day to 0.86 tonnes per cubic metre per day. The coke consumption also went down from 857 kg per tonne to 749 kg pertonne of liquid steel produced. However, what has gone wrong with this plant is that the Railways, one of SAIL's major customers has set up its own wheel and axle plant. The end result has been that the capacity utilisation of the plant for most products is less than 30 per cent. In addition, labour productivity (according to the Iron and Steel Industry Manual) is less than 48 tonnes per man year, which is less than half of SAIL's average labour productivity of 94 tonnes per man year.

Hiving off this plant would mean that a liability of approximately Rs 2,500 - Rs 3,000 crore, incurred mainly for its modernisation, would leave SAIL's balance sheet. This would reduce the burgeoning debt : equity ratio from 2.4 to less than 2. Moreover, the yearly cash drain of Rs 1,500 crore per year would go towards raising the profitability of the firm. In simple terms the bottomline should rise by 52 per cent with the sale of Duragapur plant.

Analysts believe that there would be takers for this plant as Duragpur isclose to the port. There are Eurpoean manufacturers who could use the plant as a base for exporting products to China.

Nevertheless, the ground reality is that trade unions and other powerful lobbies could stall the whole process. Consider for instance, IISCO which drains Rs 100 crore of cash every year from the company. SAIL was forced to pick up stake in IISCO just to please the trade unions. It would, therefore, have been prudent for SAIL to hive off the Rourkela plant instead, where trade union pressures would have been less. The gain to bottomline would be less as the Rourkela plant's operating loss is only marginal compared to Durgapur. But the success at Rourkela could give the mangement sufficient grounds to prepare for the eventual divestment of the Durgapur division.

Economic Projections

After the Centre for Monitoring Indian Economy (CMIE) pared the GDP growth projection for 1998-99 to 4.5 per cent, ICICI Securities (I-Sec) has trimmed its estimates to 4.4 per cent. It has also revisedits fiscal deficit target for 1998-99 to 6.3 per cent of GDP. The government and the Reserve Bank, however, are confident that the economy will grow at 5.1 per cent and the fiscal deficit will be contained at 5.6 per cent of GDP. Their confidence appears to be grossly misplaced.

The finance minister, Yashwant Sinha had said that a good monsoon will see a healthy agricultural growth and this will ensure a 5.1 per cent GDP growth. But this seems unlikely given the floods in North India and the prolonged bouts of non seasonal rains across the country. I-Sec says that the agricultural growth is estimated at 2 per cent mainly because of the cash crops and the fact that agricultural production had posted negative growth rates in the previous year. Adding to the economy's woes is the fact that industrial growth has further decelerated this quarter with the April to August IIP (Index of Industrial Production) growth averaging 3.5 per cent on a YoY basis.

With the pace of investments slowing down and the increasedimport threat in a number of commodities following the Asian crisis, the outlook for the next quarter is equally bad and industrial growth has been pegged at 4.5-5 per cent in 1998-99. The growth in the services sector, which has tasted heady sucess earlier, will slow down. This is because the road freight rates have stayed low, indicating a lack of demand. Data on load carried by the railways also shows a decline. The major constituent of the services sector -- financial services has also been going through a pretty bad phase. I-Sec has forecast the serivce sector growth to be about 6.5 per cent this fiscal.

The tardy growth in the economy has hit the fiscal performace of the government. The union budget has targeted a 17 per cent growth in customs and 21 per cent growth in excise duties. So far the growth in the first half has been 2 per cent and 7 per cent respectively. The overshooting of the fiscal deficit is estimated to be to the tune of Rs 10,500 crore mainly due to the shortfalls in excise &customs duties and corporate & income taxes.

While the shortfall in excise & customs duties has been to the tune of Rs 7,000 crore, corporate & income tax have fallen short of the target by about Rs 2000 crore. This will be coupled with the increase in the subsidies and grants to the tune of Rs 1,500 crore. This, in turn, might lead to a rise in interest rates -- something that the economy can ill afford at this juncture.

(With contributions from Manish Saxena & Anirban Nag)