Power Sector: Budget Expectations

The thirst for power in India is well at its peak now. Power is the key input to all the industries and is also a basic necessity for us in the current era of modernisation. However, while the demand has been increasing steadily, capacity addition has been happening at a slower pace. The peak demand deficit ratio still stands above the level of 10 per cent. The mountain of losses made by the state electricity boards (SEBs) to the tune of Rs 75,000 crore on one hand is making them financially stressed while on the other hand the increasing coal prices, inability to pass on the prices and the persistent fuel (coal and gas) shortages is eroding their profits.

Overall, these issues have resulted in the investors’ array of disbelief in the sector in the last year. Lately, though, the prime minister’s indication to Coal India to supply coal to the power utilities has improved the sentiment. Yet, things certainly are far from rosy.

Currently, power equipments over the capacity of 1,000 MW do not attract any import duty but projects below the capacity of 1,000 MW attract a duty of 5 per cent. There is also 5 per cent import duty on imported coal and LNG. Under Section 80IA, the tax holiday is applicable to the power projects only if they had begun to generate power by March 31, 2011.

In the renewable energy space, solar PV cells and modules are exempt from import duty at the moment. However, the raw material components for the same attract import duty of about 10-15 per cent. In last year’s budget there was not much for the power sector. The tax holiday under Section 80IA was extended by another year. The FIIs were allowed to invest up to USD 40 billion in infrastructure bonds which helped to increase liquidity to a certain extent.

The basic customs duty and countervailing duty on specified goods used in high-voltage power transmission projects was reduced by 5 per cent, subject to fulfillment of specified conditions. The surcharge of 7.5 per cent on domestic companies was reduced to 5 per cent. The MAT rate (minimum alternative tax) was increased from 18 per cent to 18.5 per cent.

Under the impression that the above-stated announcements would benefit the sector, the BSE Power Index was up by over 2 per cent on the next day of the budget. However, after knowing that these announcements would not materially be highly beneficial, the index gave up all the gains. To date the index stands lower by 14 per cent. Individual stocks have also not fared well on the bourses except for equipment manufacturer ABB and power generator Reliance Power. Meanwhile, Power Grid has kept good good momentum as the company is expecting to increase its capacity and has remained insulated from the fuel shocks.

# Adjusted for split

Lately, after the PM’s meddling in the sector, the stocks have gained in value but we believe that this is a temporary impact and the overall sentiment will remain negative until very firm decisions are made by the concerned authorities.  On the back of the investors’ bearishness on the sector, it is important to see what are the demands put up by the industry this time.

Key Demands

• The tax holiday under Section 80IA should be extended for another six years to augment large capacity additions in the coming years.
• Minimum alternate tax (MAT) on the SEZ units should be removed.
• Issues related to the huge losses of the SEBs should be firmly resolved. The industry has also requested to the government the divestment of the PSU companies in power generation, distribution and transmission sector.
• The industry has also asked for the exemption of basic customs duty and countervailing duty implemented on thermal or steam coal.
• Besides, there is an import duty of 5 per cent on imported coal which should be removed as there is coal shortage in the country and many thermal projects are now based on imported coal.
• Renewable energy should be treated as a separate sector rather than one in the power sector. This will help in increasing advances to the players in the renewable energy sector, thus easing the liquidity scenario.
• Import exemption on the finished solar PV cells and modules should be removed to bring the Indian manufacturers at par with the global players.
• The tax holiday should be extended to the solar industry. The grid-connected solar projects should also be exempt from all taxes for the next five years in order to bring down all the costs and for the growth of the entire value chain of the solar industry.

Our Opinion

In our view, the demand related to the divestment of the SEBs is very difficult to execute and will not be approved as PSUs such as Power Grid, NTPC, NHPC, etc are responsible for most of the power generation / transmission in the country. Also, SEBs come under the control of state governments and hence there will be difference of opinion between the state and central governments.

As power belongs to the priority sector and has the attention of the government at all times, we expect a reduction of import duty on imported coal. The domestic coal sector is unable to fulfill the demand for coal and hence it is logical to reduce the import duty. The tax holiday and removal of MAT would also be rejected as the government’s main objective is to reduce the fiscal deficit.

Moreover, the government may increase the import duty on power equipments to create a level playing field for the domestic equipment makers. This will also result in revenue generation for the government. We also expect import duty on finished solar PV cells and modules to create a level playing field for the domestic solar energy sector.

Granting a separate industry status to the renewable energy sector is not likely to get the government’s approval as the final customers of the equipment are the power generating companies. Besides, renewable energy currently represents a very small proportion of the total capacity in the country.

This budget may see some good announcements related to supply of coal as in the last two months there have been a couple of meetings between the government officials and the private power companies on this issue. Also, with the five year plan coming to an end, we expect the government to review the sector in the last five years and come up with a clear and realistic road map that will address all such issues as fuel shortage, lower tariffs, SEB losses, etc.