New Delhi: The government may increase import duties on foreign power generation equipment sourced in the country as recommended by the Planning Commission in a report submitted on Monday.
The commission was asked to look at ways to increase domestic production of power equipment and address concerns about imported equipment, particularly from China as reported by Mint on 4 January.
The changes expected to be made in the coming Union Budget could make equipment sourced from Chinese firms such as Shanghai Electric Group Co. Ltd, Dongfang Electric Corp. and Harbin Power Equipment Co. Ltd dearer. At the same time such a decision will favour state-owned Bharat Heavy Electricals Ltd (Bhel), engineering firm Larsen and Toubro Ltd (L&T), and joint ventures between Toshiba Corp. of Japan and JSW Group, Ansaldo Caldaie SpA of Italy and GB Engineering Enterprises Pvt. Ltd, and Alstom SA of France and Bharat Forge Ltd. All these firms are looking to start manufacturing power equipment in the country.
It could also increase the cost of power.
Currently, no duty is levied on import of foreign equipment for so-called mega power projects (1,000MW and above for thermal); a 5% duty is levied on imports for smaller projects.
The recommendations of the report submitted by Arun Maira, member, Planning Commission, if approved could see a 14% import duty on equipment across the board.
“The key finding of the report is that there is no level playing field for domestic manufacturers. Interestingly, Ficci (Federation of Indian Chambers of Commerce and Industry, an Indian industry lobby) had done a separate survey where they found 13-14% disadvantage to domestic manufacture on account of low import duty. It has been recommended that the duty be adjusted to make it on par,” said a top government official aware of the recommendations of the report, but who did not want to be identified.
The industry lobby in a January study on the import of capital goods in India had said, “cost disadvantage for Indian manufacturers vis-à-vis Chinese suppliers comes to around 8-9%. To offset these disadvantages, government should consider compensating the domestic manufacturers at least to the tune of 13-14%.”
“Higher duties will discourage the Indian companies from placing their orders with the Chinese firms. This will involve some changes in the mega power policy. We expect this announcement to be made in the Budget,” said a second government official aware of the development but who too did not want to be identified.
A mega project is entitled to fiscal incentives, including a waiver of customs duty on equipment imports and a 10-year tax holiday.
Indian power generating firms have placed orders for equipment to generate 26,000MW with Chinese firms, largely because of the inability of local manufacturers to meet growing demand. Chinese equipment is also relatively inexpensive and readily available.
Bhel and L&T have been lobbying with the government to limit Chinese competition. Interestingly, L&T’s chairman and managing director A.M. Naik has been asking for a 25% anti-dumping duty on Chinese products.
Equipment makers, much like other exporters from China, benefit from low interest rates and an undervalued currency to boost exports. China exported $31.33 billion (Rs1.5 trillion) of goods to India in 2008-09.
A ministerial group on so-called ultra mega power projects (UMPPs; they are to generate 4,000MW of power), which had approved, in principle, a rule requiring all such projects that will be awarded in the future to use local power generation equipment, was also waiting for the report for implementation of its decision.
“It was found that the playing field was tilted in favour of foreign equipment because when the UMPP norms were announced there were no Indian makers of such equipment. A duty structure had to be given to make import attractive for Indian utilities. Now that there is a domestic capacity, we have to ensure a level playing field,” said the first government official.
Union power secretary H.S. Brahma, said that he was yet to see the report. “We have to see how we can go forward with this,” he added.
Questions emailed to Shanghai Electric, Dongfang Electric, Harbin Power and L&T remained unanswered at the time of filing this story. B.P. Rao, chairman and managing director, Bhel, said: “This is a welcome move. We have been asking for a level playing field with reference to imports. The high financing cost in India combined with infrastructure costs and plethora of taxes result in a 12-24% price disadvantage.”
Questions emailed to the Indian representatives of Shanghai Electric and Dongfang also remained unanswered.
“These are economic skirmishes. The rationale is very strong. The Chinese will not be able to produce at the same cost points if they manufacture outside China. However, the lower power tariffs quoted by the utilities will get impacted,” said Gokul Chaudhri, partner at audit and consulting firm BMR Advisors.