The finance ministry has rightly rejected the power ministry’s proposal to extend tax incentives and fiscal concessions to merchant and captive power projects under the garb of easing the unsuccessful mega power policy to make it more attractive.
The genesis of this policy more than a decade back lay in linking fiscal concessions with power sector reforms in the states and encouraging large capacity additions at the same time. Neither happened.
And now, instead of focusing on curing the ills of the sector which keep investments at bay, the ministry is labouring on measures for private sector to utilise the sops, even if means delinking it from the reforms agenda. Not surprisingly, the finance ministry is unwilling to loosen the purse strings. The sops concerned are considerable, too—waiver of import duty on capital equipment and a 10-year tax holiday for 1,000MW thermal and 500MW hydel projects.
The power ministry has an argument, albeit a weak one. It says the mega power policy has not found takers since the terms are too stiff. Here’s how: The policy was envisaged as a tool to push through reforms in the state power sector—reduce the staggering losses in the distribution business—which in the long term would attract private investments in the generation business. One of the pre-conditions was the need to sell power to more than one state. This was aimed at lowering the risk of payment default. Importantly, the purchasing states had to commit to privatizing electricity distribution in large cities.
This has been seen as a serious stumbling block for private producers availing the sops. Only one project with private participation—the Lanco group’s Nagarjuna project in Mangalore—has managed to secure the “stipulated assurance” for privatization of distribution. That too, very weakly worded ones, from Punjab and Karnataka.
There is now growing “understanding” that the political environment in the states doesn’t favour privatized distribution. And the condition of selling power to more than one state is not as relevant as it was a decade ago—the argument is that with a fast growing economy, demand for electricity is only rising and one state can easily absorb the 1,000MW supply that is the base level for availing the mega power policy benefits.
Evidently, the power ministry’s proposal seeks to delink the tax sops from the reform agenda. Lagging way behind its generation targets, it might see this as the route to some redemption.
Nevertheless, this proposal is fine as far as removing the norm of inter-state sale of power goes. On the other hand, given the tardy pace of distribution reform, any let up on the reforms is certainly not justified. After all, for every rupee of power sold, only 65 paise is recovered, with the rest is lost to technical losses and theft.
Worst of all is the proposal to hand fiscal benefits to captive and merchant power producers. The first is when industry produces its own electricity. There’s no rationale for giving sops here. Any arguments that industry would thus be encouraged to set up larger captive capacity don’t hold since that should happen anyway under compulsions of economies of scale in its market-led business plans. There’s only one inference here—lobbying from industry and rent-seeking tendencies in the ministry.
The second is that of merchant power, or the spot market supplier who gets active in times of power shortages. Sops here translate into encouraging state electricity boards to rely on temporary solutions and buying power that will still be costlier than long-term contracted supply from producers.
At best, extending these sops to captive and merchant power producers spell an economic distortion and at worst, cronyism. The finance ministry must stick to its guns.
Should captive power get fiscal incentives? Write to us at firstname.lastname@example.org