Fresh Spotlight On Import Duty On Power Equipments

The issue of import duty levied on foreign power equipments has once again created a buzz in the markets. According to a report in the business newspaper ‘Mint’, the prime minister has called for a meeting to discuss the various aspects of this duty. The primary objective of levying this import duty is to create a level playing field for the domestic power companies. Currently, the Indian power equipment manufacturers are facing intense competition from their Chinese and Korean counterparts who make these equipments at lower costs. This is evident from the latest order book positions of the domestic power companies.

The state-owned heavy electrical company BHEL saw its order inflow declining by 63 per cent to Rs 22,096 crore in FY12 from Rs 60,507 crore in FY11. The overall order book of BHEL is also down by 18 per cent to Rs 1,34,681 crore in FY12. Even worse are the power sector orders which are down by 70 per cent to Rs 13,937 crore. The same is the case with the engineering giant L&T which has seen 27 per cent erosion in its power sector order book and a 23 per cent decline in the power sector order inflow.

All figures in Rs Crore

The growth of the power equipment sector is mainly dependent upon how many projects get finalised in the country. Due to the uncertain environment prevailing as of now (issues related to fuel, environment, land, finance, etc), it cannot be predicted how many projects will get finalised, thereby putting a strain on the order books of the companies.

While the overall investments in the infrastructure sector have slowed down, the power sector has witnessed the worst due to issues like order cancellations, rupee depreciation, etc. Recently the Rajasthan government cancelled orders worth Rs 12,000 crore placed with BHEL and BGR Energy. This has led to a shrinking of the order books, impacting the margins of the companies. At the same time the foreign power equipment companies are able to bid at lower prices, thus increasing competitiveness.

The issue of levying import duty has been there for quite some time. In this year’s budget this issue was a very hot topic and it was expected that the government would go ahead with imposing duty of between 14-20 per cent on imported equipments. The budget, however, proved to be a damp squib in this respect. Now the issue has reared its head again with different authorities asking for levying the import duty on power equipments. The clear beneficiaries from this would be BHEL, L&T, Alstom Projects, Bharat Forge, BGR Energy and Thermax, among others.

The power generating companies like Reliance Power, Adani Power, Lanco Infra, etc would be at risk as they are the ones who will have to bear the extra costs. Currently there is no import duty on foreign power equipments ordered for mega projects. For small projects, developers pay 5 per cent import duty. It would be interesting to track the issue and await the outcome. Levying of this duty would be negative for the power sector but positive for companies providing capital goods.