Kameshwara Rao, Leader – Energy, Utilities & Mining, PwCIndia
The budget proposals for the power sector offer a very intriguing mix of initiatives, reflecting a fair appreciation of the challenges facing the industry, and some quick-fix attempts to resuscitate it, while falling short of the fundamental changes necessary to place it on the path to growth.
The finance minister rightly sought to address supply bottlenecks in coal and power, recognising public private partnerships as the key to capacity addition and that half of the overall 12th Plan investment will come from the private sector.
Fuel shortages and soaring costs of primary energy have bedevilled the sector, and these are refreshingly addressed in the Budget. The commitment for Coal India Ltd (CIL) to sign a Fuel Supply Agreement (FSA) with power plants to be commissioned by March 31, 2015 is welcome and will help in securing project financing.
The exemption from basic customs duty on thermal coal and a concessional countervailing duty (CVD) of 1% up to March 31, 2014 will help distribution companies on their regulated purchases, and merchant power plants and competitive tariff-bid projects, save about R70-90 crore per GW (giga watt) capacity on imported coal, subject to the bid provisions.
Likewise, full exemption from basic duty on natural gas and uranium will lower the cost of power supplied by gas and nuclear plants, albeit marginally, by about 3% and 0.3% respectively, to the extent based on imported fuel, thus benefiting the procurers and consumers. On the whole, these provisions help save a bit on costs for a 2-3 year period and so are welcome, but do nothing to revive the industry or improve supply position.
The constitution of the inter-ministerial group to ensure faster progress on coal mines allotted to various companies could, however, bring more coal production capacity on stream provided the state governments also step up their support. An associated welcome feature is the full exemption for coal mining project imports from basic customs duty, and reduction in basic custom duty for equipment used for surveying and prospecting. This will encourage Indian mining companies to upgrade to improve productivity and scale of their coal mining operations bringing more coal into production at a lower cost.
The reduction of withholding tax rate from 20% to 5% on interest payments on external commercial borrowings (ECB) for a period of three years will help reduce costs power and hydro projects financed in this manner. The extension of the sunset clause to March 31, 2013 for 100% deduction of profits for 10 years benefiting developers and buyers is welcome given the significant capacity scheduled for commissioning in the coming months.
Financing power projects remains a challenge with commercial banks close to exhausting their sector lending limits, and counter-party risk from loss-making state utilities remaining a threat. The provision to raise R10,000 crore from tax-free bonds and use of ECB to part-finance rupee debt of existing power projects is welcome but represents a small fraction of the financing need.
Solar thermal projects are capital intensive and will marginally gain from exemption from special CVD on imported equipment.
The reduction in excise duty on LED lamps to 6% will help improve their pay-back period in public service applications. The exemption from basic customs duty and special CVD and concessional excise duty on lithium ion batteries for electric vehicles is an encouraging step for this nascent initiative.
Other than these small steps, the Budget comes as a disappointment to the renewable and energy conservation sectors.
The overall theme of the Budget for the power sector appears to be an attempt at immediate cost reduction that provides some relief to eventual buyers for the medium term.
For the coal sector, however, some promising steps are laid out that can potentially help support growth provided the states also play ball. The most significant let-down is lack of any ideas on reforming the distribution sector to improve viability and on enhancing the flow of funds.