For the power industry, Monday’s budget was a let down.
The focus was more on ongoing government schemes and accordingly increased allocations for rural electrification, improvement of state level transmission and distribution schemes.
Finance Minister Pranab Mukherjee has made no announcements to push investments by the private sector. Instead, there were a few negatives provided in the budget for private sector power projects.
With Aam Admi as the focus and to fulfil its political agenda of electrifying all villages by 2012, a Rs 7,000-crore allocation for Rajiv Gandhi Gramin Vidyutikaran Yojana for 2009-10 has been announced. This is an increase of 27% over the previous year.
Under this scheme, the government provides 90 per cent grant and Rural Electrification Corporation (REC) gives the balance 10 per cent to the state governments as loan.
The government has so far electrified 47,826 villages, released free connections to 22.93 lakh BPL households and completed construction of 130 new substations. The scheme was launched in 2005.
In addition, under the Accelerated Power Development and Reform Programme — which is an important scheme for reducing transmission and distribution losses — the finance minister has increased allocation for this scheme to Rs 2,080 crore, an increase of 160% above the allocation in the previous fiscal.
“Such expenditure will improve the efficiency of the state electricity boards and will also benefit construction contractors and power equipment suppliers. However, it was disappointing to note that private sector projects which in fact are the key focus of the government did not receive any significant push,” said Kuljit Singh, Partner, Ernst and Young (E&Y).
Another negative for the power industry is the increase in MAT rate from 10% to 15% (even though the credit period for allowing carry forward of MAT has been increased from 7 years to 10 years).
Experts said this move would impact nearly all power projects as these are typically set up as special purpose vehicles and will reduce their profitability.
“The budget mentions about the power reform programme but is unclear about the incentives available for private sector to join public private partnership for investment in power generation and expansion of the distribution system in rural areas,” Kalyan Bhattacharya, President & CEO, Birla Power Solutions, said.
Also, service tax has been imposed on transport of goods through rail. According to E&Y, this will increase tariffs as the cost of coal will increase for power projects.
While the finance minister announced extending the income tax holiday under Section 80 IA by a year to 31 March, 2011. But since a power project takes at least 3 to 4 years to commission, this section should have been extended to at least 2013.
At the same time, the benefits of Section 80 IA to reconstruction / revival of old power plants has now been extended from retrospective effect.
Also, neither there is a mention of relaxation of sector exposure limits for banks lending to power sector nor of any enhanced allocation for any of the specialised lending institutions such as the Power Finance Corporation and rural electrification sector.