Imposing a duty would raise costs for the troubled power sector, but also allow India to grow its manufacturing base
Managing Director, Tata Power
“It is counterproductive to increase project costs through duty increases since the burden will eventually be borne by the consumer”
The recent discussions between the Prime Minister’s Office, the Planning Commission and different ministries including the power ministry on imposing import duty on power equipment could serve as a dampener for the sector, which is already plagued by varied issues starting from availability of fuel to poor health of the distribution sector.
At present, power equipment for projects with capacity of less than 1,000 Mw attracts a basic custom duty of five per cent. However, it is exempted for projects with capacity of more than 1,000 Mw. The government is likely to propose a basic customs duty of five per cent, a countervailing duty of 12 per cent and a special additional duty of four per cent, taking it to a total of 21 per cent import duty on power equipment.
According to ministry estimates, the total investment required in generation, transmission and distribution for the 12th Five-Year Plan is $230 billion. Since Indian banks are exposed to the extent of Rs 300,000 crore to the Indian power sector and will be unable to lend sufficiently to meet the entire needs of the sector, it becomes imperative for project developers to rely on external commercial borrowings (ECBs). These will be severely impacted if imports are curbed. ECBs also enable the industry to structure costs in a way that the final tariff of electricity is reduced for the benefit of customers.
Increasing import duties will reduce the competitiveness of the imported equipment, and accordingly the amount available through bilateral external commercial loans — the support of buying countries’ Exim banks, and so on, would not be forthcoming. Thus, the funding options for, and availability of competitive funding to, power companies would become a huge challenge. Problems with the import of equipment supported by export credit agencies and bilateral institutional funding would result in a cascading impact for non-competitive financing. This is of utmost importance since there has been a continuous downward trend in the financing of the sector for various reasons like non-performance in the sector and overexposure on the part of Indian financial agencies.
The domestic equipment manufacturing industry has been unable to fulfil orders within required timelines, causing delays in power generation capacity enhancement. This is one of the major reasons for India not meeting its generation capacity addition targets. On the other hand, the easy import of equipment for power projects has been a large contributor to the capacity addition in the 11th Plan, with almost 50 per cent of additional coal-based capacities depending on imported equipment. In addition, the power generation industry is keen to adopt new technology that is environmentally friendly and is more efficient. One example is supercritical technology boilers imported from Japan. Custom duties would curb the import of superior technology products that are already highly priced, thus, hindering the advancement of the sector.
Instead of protecting sales of domestic power equipment manufacturers by increasing custom duties, we strongly urge the government to resolve these issues since these would result in capacity addition and directly increase sales for all manufacturers.
The sharp depreciation of the rupee has already made imports costlier. Imposition of further import duties would significantly increase capital costs that would have to be passed on through increased tariffs to the already overburdened State Electricity Boards.
Mega projects are awarded by the government on a competitive bid basis with very low tariffs for the benefit of the consumer. It is counterproductive to increase project costs through duty increases since the burden will eventually be borne by the consumer. It is only a protectionist move to benefit a few domestic manufacturers at the cost of increased electricity prices and reduced power generation. The government needs to have a holistic view of the sector.
There is a strong need for removal of barriers to entry at all stages, and for an optimal pricing and tax strategy to be in place, so that the resource allocation takes place based on market forces operating under a credible regulatory regime.
President, L&T Power
“Should India be using any boom in its power sector to boost its manufacturing capability, or should it be gifting the opportunity away to China?”
Despite nearly three years of high-decibel discussion, the call for imposing safeguard duties on imported power equipment appears to have fallen on deaf ears, causing a deep sense of disappointment across the industry.
With their huge manufacturing muscle, Chinese manufacturers could meet all of India’s power equipment demand for the next 20 years in less than five years. But is that in our national interest? Should China, and not India, be the principal beneficiary of the growth in the country’s power sector?
The fortunes of the Indian economy are dependent on the performance of its power sector. Over the next 20 years, the industry must add 600,000 Mw of capacity, 65 per cent of it coal-based, if India has to stay on its growth path. A scale-up of this order would create a demand for equipment equal to 25,000 Mw. This, at the current market price, translates into Rs 150,000 crore or $30 billion of investment. In the next 20 years, that figure is expected to swell to a staggering $600 billion, making India the world’s second-largest market for coal-based thermal power plants.
Well aware of the massive opportunity, the Chinese are pulling out all stops to dominate our markets, unmindful of the short-term costs involved. This is particularly so because its own home market appears to be flattening out and needs to be replaced by another market of comparable size. Should India be using any boom in its power sector to boost its own manufacturing capability and consequently its economy, or should it be gifting the opportunity away to China?
Virtually all global majors, with the exception of Chinese companies, have entered India and set up joint ventures with leading local companies. This leaves Indian power plants of Chinese origin vulnerable, as seen in the case of plants in West Bengal and Haryana. Given the magnitude of material and service support required over the life cycle of a power plant, continued dependence on imports can be strategically risky and financially unaffordable, particularly when the rupee goes into a tailspin.
Indian private power players have often argued that China stands for cheaper costs and faster execution. Such a view ignores the life-cycle costs of a plant. It is widely recognised that Chinese plants offer inferior thermal efficiencies, consume excessive power internally and need frequent replacement of parts and intensive maintenance. The net availability and plant-load factor, too, are known to be lower.
Indian manufacturers may not have been ready to deliver some years ago. But, in recent times, manufacturing capacity equivalent to 30,000 Mw has been commissioned and is fully operational. Local suppliers have geared up their execution capability alongside, and are starting to match the Chinese on speed of execution as well.
If domestic Indian players do, in fact, possess best-in-class manufacturing and execution capabilities, then why don’t they stand up to Chinese competition instead of seeking protection? First, though Indian manufacturers have whittled costs down to impressive levels through a process of indigenisation and resource optimisation, it remains an unequal competition because Chinese manufactures enjoy substantial state subsidy.
A standard argument against imposing duties on Chinese equipment is that it would increase the capital cost and, thus, bump up tariffs. These concerns can be addressed by levying only customs and special additional duties, and retaining the countervailing duty or excise exemptions. Such a measure would offer protection to local manufacturers without increasing the net cost to project developers. It may also be noted that capital costs account for only 20 per cent of the tariff and even if this went up by 10 per cent, the net tariff would be just two per cent — more than neutralised by the overwhelming advantages of superior equipment performance and lower life-cycle costs.
India needs to act now and provide a level playing field to its power manufacturing industry by imposing the necessary safeguard duties on imported equipment. This measure would not only serve its own growth needs but would also help in building a globally-competitive domestic manufacturing industry.