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Budget attempts to boost T&D

Em News Bureau ,  Friday, March 15, 2013, 12:23 Hrs  [IST]

P. ChidambaramUnion finance minister P. Chidambaram definitely had the struggling power T&D sector in mind when he presented his Budget 2013 on February 28, 2013. Even if there was no open mention of measures in his budget speech to boost the power T&D sector, the detailed budget documents throw a pleasant surprise to the contrary.

The total plan outlay for the power sector for FY14 is estimated at Rs.10,073 crore that is a significant 27 per cent higher than the revised estimate of Rs.7,902 crore for FY13. The good news does not end here. While the proportion of plan expenditure (synonymous with capital expenditure) in the total outlay was 59 per cent in FY13, that for FY14 is a whopping 96 per cent. In other words, this implies that the business opportunity available to power equipment vendors and service providers will be roughly double the level in FY13.

The Budget is very serious about reforms in the power distribution sector, which is the inviolate precursor to techno commercial efficiency in the power value chain. In his budget speech, the finance minister exhorted state governments to financially restructure their beleaguered utilities in line with the restructuring scheme already approved by the government last year. "I would urge state governments to prepare the financial restructuring plans quickly, sign the MOU, and take advantage of the scheme," was what Chidambaram said in a strikingly serious tone. The budget has set aside Rs.1,500 crore as financial support for debt restructuring of distribution utilities in FY14. However, only a few state governments have so far opted for restructuring under the said scheme.

Budget PowerThe overall plan outlay for the power T&D sector for FY14 is Rs.9,049 crore that is more than twice the level of Rs.4,280 crore in FY13. Apart from Rs.1,500 crore apportioned for the discom debt restructuring, the budget has made a generous provision of Rs.4,041 crore for subsidizing rural electrification works under RGGYY in FY14, as against Rs.2,002 crore in FY13.

Public sector units under the power ministry are expected to maintain their capital expenditure levels in FY14. The total capex by power PSUs is estimated to be Rs.51,264 crore in FY14 as against Rs.50,841 crore in FY13. Central transmission utility Power Grid Corporation of India will incur Rs.20,000 crore of capex in FY14, same as that in FY13. For the XII Plan, PGCIL is expected to spend Rs.1 lakh crore as capital expenditure as against some Rs.55,000 crore in the XI Plan period. The budget formalized a very important power transmission project in Jammu & Kashmir. A 220kV Leh-Kargil transmission system has been proposed to improve power supply in the Leh-Kargil region and to connect Ladakh region to the northern grid. Costing Rs.1,840 crore, this transmission line will traverse an estimated 400 km. For FY14, the budget has made a provision of Rs.226 crore on the project that will be executed by Power Grid Corporation of India Ltd. The project, which has been in the planning stage for at least six years now, is expected to see traction in FY14. Industry experts believe that this transmission line, to be built at an altitude of over 10,000 ft and in hostile climate, will be the toughest project for PGCIL in India.

Budget CoalCOAL & POWER
The Budget clearly acknowledged the apprehension that India will face coal shortages in the coming years. While much is being done to promote renewable energy (non-fossil) power generation, the dependence on coal cannot be wished away. The Budget has proposed to adopt the PPP framework, with Coal India Ltd being one of the partners, to boost domestic production. The move is very significant as it comes at a time when CIL is consistently failing to meet its production targets, and dependence on imported coal is rising. As against the target of 464.10 million tonnes for 2012-13, actual output by Coal India Ltd is likely to be 451.50 million tonnes, which would imply a shortfall of 12.6 million tonnes. India's coal imports in the first three quarters of 2012-13 have already crossed 100 million tonnes and by 2016-17, they are estimated to grow to 185 million tonnes. Domestic coal shortages are not only affecting regular operations of existing thermal power plants but delays in receiving coal linkages are hindering the progress of upcoming generating stations.

The budget also ironed out the disparities in import duties between steam coal and bituminous coal. Both the variants will now have a uniform customs duty of 2 per cent and a countervailing duty of 2 per cent. While this has brought about uniformity as far as calculation of customs duty is concerned, companies relying on imported steam coal will now face higher landed costs. In conjunction with the hike freight charges as envisaged in the Railway Budget, the cost of power generation can potentially go up by around Rs.0.07 per unit.

The budget has also extended tax benefits available to power producers under Section 80-IA for one more year. This is expected to encourage more capacity addition in the power sector by March 2014. According to information available, power generation capacity of around 14,600 mw is scheduled for commissioning during 2013-14. These projects can now avail tax benefits for the first ten years of their operation.

The electrical equipment industry is generally disappointed due to the absence of direct positive-impact measures. Industry association IEEMA was expecting some measures to counter the downturn in the electrical equipment industry. In a statement, J.G. Kulkarni, President, IEEMA, noted that the association was hopeful of some favourable announcements in the budget for countering increasing imports of electrical equipment. It was also expected that service tax exemption would be granted to all projects covered in power generation, transmission and distribution in line with exemption provided to other infrastructure development projects.

It may be mentioned that the long-standing demand of a level-playing field between domestic and imported electrical equipment was somewhat addressed by the government earlier this year when it imposed a countervailing duty of 14 per cent on imported power equipment. All the same, imported power equipment still holds a duty-related advantage—albeit now reduced—over domestic production.

As widely anticipated, the Union Budget restored the generation based incentive (GBI) available to wind power projects and made an allocation of Rs.800 crore towards this cause. Wind energy has been the backbone of India's renewable energy pursuits. In less than three years—FY11, FY12 and FY13 (up to January 31, 2013)—India could add a record 12,436 mw of grid-connected renewable energy capacity, according to official figures released by the government, with wind energy contributing a healthy 67 per cent. All the same, the pace of wind energy capacity addition had dropped perceptibly when the GBI scheme was repealed. In 2011-12, while India saw over 3 GW of new wind power capacity coming online, the addition plummeted to around 1.5 GW in 2012-13. With the GBI scheme now restored, it is expected that projects worth 1 GW or so, which were facing uncertain prospects, might now come on stream in the next 1- 2 years.

The budget also envisaged a scheme encouraging municipalities and cities to convert municipal solid waste to energy. The scheme, to be implemented on PPP basis, will be neutral to different technologies. The budget promised support to project implementing agencies (municipalities, urban local bodies, etc) with different financial instruments like viability gap funding, repayable grant, access to low-cost capital, etc.

Currently, India does have a few MSW-based power generation projects in the private sector. However, they suffer from high generation costs and are not commercially viable without government support. India is urbanizing at an alarming rate. The 2011 Census put India's urbanization at 31.2 per cent and this is expected to touch around 40 per cent by 2030. MSW-based power projects are an excellent means to put growing amount of solid waste to gainful use.

The budget has also acknowledged that Indian consumers end up paying more for renewable energy-based generation, partly because of high cost of finance. With a view to providing low-cost finance, the government will provide lowinterest bearing funds from the National Clean Energy Fund (NCEF) to IREDA to on-lend to viable renewable energy projects. The scheme will have a life span of five years.

Despite the fact that there were no direct measures to boost the electrical equipment industry, the finance minister has attempted some "backward integration" where he has put out a sincere attempt to galvanize the micro & small medium enterprise (MSME) sector through some radical measures. Given that the MSME sector forms the backbone of the electrical equipment industry, these announcements do hold out promise.

P. Chidambaram made a very telling observation on the psychology of MSME sector companies. "Too many of them do not grow because of the fear of losing the benefits associated with staying small or medium," the minister said. To foster growth in the MSME sector, the budget proposed that benefits or preferences enjoyed by them will stay with them for up to three years after they grow out of the category in which they obtained the benefit.

The budget also proposed to enhance the refinancing capability of SIDBI from the current level of Rs.5,000 crore to Rs.10,000 crore per year so as to cater to a growing fraternity of MSME companies.

Tool Rooms & Technology Development Centres set up by the Ministry of Micro, Small and Medium Enterprises have done well in extending technology and design support to small businesses. The budget has proposed to provide, with World Bank assistance, a sum of Rs.2,200 crore during the XII Plan period to set up 15 additional centres.

This year's budget sought to revive the practice of "investment allowance" that existed in the late 1980s and the early 1990s. Budget 2013 proposed to introduce investment allowance for new high value investments. A company investing Rs.100 crore or more in plant and machinery during the period April 1, 2013 to March 31, 2015 will be entitled to deduct an investment allowance of 15 per cent of the investment. This will be in addition to the current rates of depreciation. "There will be enormous spill-over benefits to small and medium enterprises," noted the finance minister.

The budget has proposed to provide "appropriate incentives" to semiconductor wafer fab manufacturing facilities. These incentives include zero customs duty for plant and machinery. These incentives will become part of the National Electronics Policy 2012 that aims at promoting manufacture of electronics goods in India.

The electrical equipment sector has a last-mile connection with general infrastructure development. Hence, overall measures to boost infrastructure development will always have a positive bearing on the industry. The budget has consciously kept up the infrastructure momentum with a focus on removing policy bottlenecks and alleviating financing constraints.

In his presentation, Union finance minister P. Chidambaram was unambiguous of the need to not only sustain but also accelerate the pace of India's infrastructure development. "The key to restart the growth engine is to attract more investment, both from domestic investors and foreign investors," the finance minister noted and supplemented it by observing, "while every sector can absorb new investment, it is the infrastructure sector that needs large volumes of investment."

The XII Plan period (2012-13 to 2016-17) needs an estimated $1 trillion (Rs.55 trillion) of investment out of which the private sector's contribution would be an envisaged 47 per cent. The Budget underscored the need for effective means of financing and envisaged greater support to infrastructure debt funds. These funds, four of which have already been registered, will raise resources and, through takeout finance, credit enhancement and other innovative means, provide long-term and low-cost debt to infrastructure projects. The Budget also stated that India Infrastructure Finance Corporation Ltd (IIFCL), in partnership with Asian Development Bank, will offer credit enhancement to infrastructure companies that wish to access the bond market to tap long term funds.

Mobilisation from tax-free bonds by financial institutions is expected to be around Rs.25,000 crore in FY13 as against Rs.30,000 crore in FY12. The decline perhaps reflects the withdrawal of income tax incentives available to retail investors. Nevertheless, the Budget has provided for up to Rs.50,000 crore to be raised through infrastructure bonds albeit "strictly based on the need and capacity to raise money in the market."
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