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Policy | May 2012

2012-13: Review of Union Budget

Dr Hiranmoy Roy and Professor Anil Kumar take a look at what the power sector expected from the Budget and what it has received.

It is imperative that the power sector scales up its generation capacity and reforms. From 2011 to 2016, the generation capacity is projected to increase by an annual average rate of 6.76 per cent. The net power consumption, during this period, is expected to reach 1,021 TWh by 2016 from 729 TWh as registered in 2011. Renewable energy will play a key role and as per industry estimates the solar power generation potential is close to 5,000 TWh per annum. However, the initial cost of set-up acts as a major detriment and therefore the generation and utilisation of solar power is far below its potential. The same stands true for wind energy as well.

Challenges

India in order to sustain its plus 8 per cent growth rate until 2030 requires its power supply to be ramped up by more than four times the current levels. While on one hand it is a challenge to ratchet up generation, on the other hand the sector continues to suffer transmission and distribution (T&D) losses that are as high as 25-30 per cent.

Opportunities

India is a global leader in terms of hydro-electric power generation. It represents 17 per cent of the total installed generating capacity – placing the country as the sixth-largest producer of hydro-electric power. Along with solar and wind power, it has set ambitious targets to use nuclear energy sources as well. Earlier in 2009, the government announced plans to generate 470 GW of nuclear energy by 2050, throwing open huge opportunities in the sector.

Budget Expectations

The Section 80IA tax holiday, which is to be extended to power projects, expired on 31 March 2012. Considering the pressurised margins, the sector had been expecting some avenues to access low cost funds. Facing challenges of high capital investment and interest cost, the sector expected indirect tax benefits along with concessions and exemptions for plant and equipment that are required to set-up solar and wind power projects.

Budget Proposals

The industry also expected relaxation in import duty to bring down the input cost involved in buying equipment, which are mainly available in the Western countries. The Budget proposed extension of sunset date by one year for power undertakings so that they can be set up on or before 31 March 2013 to claim 100 per cent deduction of profits for 10 years. Additional depreciation of 20 per cent in the initial year is proposed to be extended to new assets acquired by generation companies.

External commercial borrowings (ECB) is permitted to be used for part re-financing the existing Rupee debt of power projects. Tax will be charged at 5 per cent on any income of non-resident (not being a company) or foreign company as interest on foreign current borrowings from sources outside India between 1 July 2012 and 1 July 2015 by companies engaged in generation, distribution or transmission of power. This amendment will take effect from 1 July 2012.

The rate of service tax is proposed to be increased from 10 to 12 per cent which may result in an incremental cost of generation. Under the negative list the following services are proposed to be exempt from service tax: Transmission or Distribution by T&D utility.

The basic rate of duty has been increased from 10 to 12 per cent and merit rate has been increased from 5 to 6 per cent, which may result in a higher CENVAT credit build-up.

In the interest of energy conservation, excise on LED lamps has been reduced from 10 to 6 per cent.

The removal of customs duty on imported coal, natural gas, LNG, and incentives for the mining sector will marginally improve coal supply.

Exemption from BCD

While customs duty exemption continues for equipment imported for mega power projects and UMPPs, the project import rate of customs has been increased from 21 to 23 per cent on equipment imported for non-mega power projects.

In view of exemption from additional customs duty on import of equipment to set up a solar thermal project, BCD exemption has been provided on – (i) steam coal (used in thermal power plants) for two years up to 31 March 2014 (ii) Uranium concentrate and sintered uranium dioxide pellets for generation of nuclear power (iii) Specified coating chemical used in compact fluorescent lamps.

The basic customs duty has been reduced to 5 per cent on – (a) solar lanterns or solar lamps and the (b) raw materials required for manufacturing parts of rotor blades for wind energy generators.

BCD has been reduced to 7.5 per cent on pipes/tubes for boilers subject to conditions prescribed. The Budget, however, could not fulfill expectations like settling the issue of bankrupt discoms that have Rs 150,000 crores of accumulated losses, an emergency red paper on fuels to unlock nearly 60,000 MW of stuck projects needed, the emergency of coal stocks and gas and improving the fate of domestic equipment manufacturing (private and public) as well as the lack of a level-playing field.

Impact of Budget proposals

• Some important expectations like investible funds (through ECBs), provision of low cost funds, exemption of customs duty to control the price of coal as an important input, exemption of natural gas and LNG from basic duty, and additional depreciation of 20 per cent are supposed to bring good fortune to the sector this year.
• The Budget has been a disappointment for wind energy when the sector is generating a sizeable share of 5 per cent of electricity. The minister announced customs duty exemption on imported coal and natural gas but there is nothing supportive for the wind and solar sectors in particular.
• The industry had also raised concerns about the cheap import of equipment from China, which was not addressed. Indigenous solar cell module manufacturers are suffering due to cheap imports and by not addressing this issue, the Budget has left the domestic industry to suffer.
• Further, there are concerns like a hike in service tax and excise duty rates, which may impact the top-line and bottom-line of equipment manufacturers. Reinforcement of intention to introduce DTC and GST in future will create a positive investment climate.
• Manufacturers are already facing a financial crunch and working at broadly 65 per cent of their production capacities, but the increase in excise duty and service tax by two per cent may impact the margins of the industry across the board.

The authors are Assistant Prof. (SS), Dept of Economics and IB, and Prof and HoD, Department of Power and Infra, CoMES, University Of Petroleum and Energy Studies, Dehradun. Views are personal.
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