At first glance, the budget seems to have a lot of sops for the beleaguered power sector. Four measures stand out. One is the proposal to allow external commercial borrowings (ECB) to part-finance the rupee debt of existing power projects. Second, the customs duty on thermal coal and natural gas has been removed. Third, the withholding tax on interest payments on the ECBs has been reduced to 5% from 20%. Fourth, the finance minister has agreed to compute additional depreciation for the new assets purchased by power companies and extended the sunset clause for the power sector by one more year.
Of the four, the proposal to allow ECBs to part-finance rupee debt is expected to accrue significant financial benefits for power companies. With the interest costs in the overseas markets far lower than in India, companies can save significantly if they manage to raise money. Bhargav Buddhadev, analyst at Ambit Capital said, “Adjusting for currency volatility and hedging costs, the ECB route will help the power companies save at least 200 basis points on interest costs.” But the caveat remains: who will be willing to finance firms that are struggling to stay viable?
The removal in customs duty on thermal coal will provide relief given that the power sector is starved of coal. The Central Electricity Authority pegs the coal shortage this financial year at 54 million tonnes. With imported coal at least 50% costlier than what Coal India Ltd provides, companies dependent on imported coal can look forward to lower generating costs. But the gains could be limited to companies that import coal and sell power in merchant power markets. According to analysts, most power purchase agreements have a pass-through clause, which requires the producers to pass on the duty benefits to the utilities, namely state electricity boards.
While the extension of the accelerated depreciation benefit is a positive sign, no attempt has been made to address the structural problems facing the sector, namely fuel scarcity and distribution sector reforms. The finance minister was silent on the issues surrounding the supply of coal. No concrete measures were announced on resolving issues such as environment and mining clearances. That’s perhaps why the power index on the Bombay Stock Exchange lost more than the benchmark Sensex on Friday, and stocks such as GVK Power Ltd and NTPC Ltd lost far more.