Plan to levy duty on power equipment imports stalled

Plan to levy duty on power equipment imports stalled

The government’s plan to raise import duty on foreign power generation equipment has been stalled because of opposition by the power ministry to the move that’s supported by the heavy industries ministry, which backs the levy as it will protect local manufacturers.

Also See Call of Duty

The issue has gone to the cabinet secretary with a final decision expected to be taken by Prime Minister Manmohan Singh, said government officials.

Planning Commission member Arun Maira had recommended a 14% import levy, as reported by Mint on 10 February, to settle the debate between the requirement of overseas equipment to boost capacity and the need to protect local manufacturers.

Currently, no duty is levied on the import of foreign equipment for so-called mega power projects (defined as 1,000MW and above for thermal projects), while a 5% duty is levied on equipment for smaller projects. A mega project is entitled to fiscal incentives, including a 10-year tax holiday.

The power ministry says additional domestic equipment manufacturing capacity will only come on stream in the 12th Plan (2012-17), leaving a shortfall that can’t be bridged without overseas supplies, particularly from China.

“Our argument is simple. Why can’t companies in India compete with overseas players?" power secretary H.S. Brahma asked. “The cabinet will take a decision on the issue."

Increased import duty will make equipment from Chinese firms such as Shanghai Electric Group Co. Ltd, Dongfang Electric Corp. and Harbin Power Equipment Co. Ltd dearer, apart from raising the cost of power.

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 of which are looking to start manufacturing power equipment in the country.

India has a power generation capacity of 153,000MW and expects to add an additional 62,000MW by 2012.

Of this, orders for 42,431.58MW of capacity have been placed with Bhel, the country’s largest power equipment maker, which has a current annual capacity of 10,000MW. The country plans to set up an additional capacity of 100,000MW during the 12th Plan.

The ministry of heavy industries, in a communication to finance minister Pranab Mukherjee, has argued for the implementation of the Maira recommendations and has presented the cost disadvantage for Indian manufacturers vis-à-vis Chinese suppliers. Bhel and L&T have been lobbying with the government to limit Chinese competition.

“We are happy that the Planning Commission took this view. We are still hopeful that something will come out of this," said B.P. Rao, Bhel chairman and managing director.

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 today) of goods to India in 2008-09.

“The power ministry wants some more time. We have written to the finance ministry. It is now for the cabinet to decide," heavy industries secretary Satyanarayana Dash said.

Indian utilities have ordered equipment to generate 26,000MW with Chinese firms, largely because of the inability of local manufacturers to meet demand. Chinese equipment is relatively inexpensive, besides being readily available.

“We can’t restrict any nation from selling equipment here. Tomorrow, somebody else can do the same to us," said Anish De, chief executive of Mercados EMI Asia, an energy consulting firm.

The freezing of the proposal may also affect the decision of a ministerial group on so-called ultra mega power projects (which 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. The ministerial group was waiting for the report for implementation of its decision.

Photo by Bloomberg