Concessions on duty and tax proposed for the power sector will not only help attract investment but will also keep a check on rising electricity generation costs. That should help the government’s mission to boost competitiveness in the manufacturing sector, though in a limited way.
The finance minister has tried to rein in power generation costs by exempting both coal and natural gas from import duty even as he reduced withholding tax rate on interest payment for ECB loans from 20% to 5%. “The finance minister has tried to reduce costs of fuels besides lowering borrowing costs for the power sector,” power secretary P Uma Shankar said.
Experts agree that the manufacturing sector will get a boost as financially bankrupt power distribution companies pose a major hurdle to turning around the sector.
“These incremental measures will help the sector, but may not be enough unless the problems in the distribution sector are fixed,” said DK Joshi, chief economist at Crisil.
The government has envisaged adding 1 lakh MW capacity during the coming 12th Five Year Plan (April 2012-March 2017). That would call for matching investments into the transmission and distribution business. The total fund requirement for the sector during the coming plan is estimated at R12 lakh crore.
Meanwhile, most domestic banks and financial institutions are close to hitting their exposure ceilings for the sector. This problem is more acute for players like Reliance Power, Adani and Lanco, who are implementing large-sized projects.
Power companies are expected to increasingly tap overseas capital market for meeting their project financing requirements. The reduction in withholding tax rate will lead to a significant gain for ECB borrowers.
A back-of-the envelope calculation suggests that interest burden for an ECB borrower will come down by $12 million on a five-year loan worth $1 billion taken at an interest rate of 6%.
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