India will impose a 10 per cent import tax on power equipment for big projects within weeks to help level the playing field between domestic and foreign firms jostling in what may soon be the world's biggest market.
The tax would reverse a policy of zero import duty on equipment for mega projects introduced to meet India's urgent capacity shortages, said Arun Maira, a member of the government's Planning Commission who led a committee on equipment imports.
Without enough local suppliers, India turned to China to help bridge a peak power shortage of 12 per cent seen as an obstacle to matching its Asian neighbour's double digit economic growth.
The zero duty on imports for equipment to build so-called Ultra Mega Power Projects (UMPPs), which are larger and use more fuel efficient technologies, created a "perverse situation" that helped foreign firms at the expense of Indian ones, Maira told Reuters in an interview late on Wednesday.
"It will happen very shortly, in the next few weeks," he said, when asked when the duty would be imposed, adding he had received confirmation of the decision on Wednesday.
"It should be normalised as quickly as possible because we want a level playing field. The playing field got distorted ... We had done a disfavour to our domestic producers."
Chinese power companies such as Dongfang Electric and Shanghai Electric could account for 50 per cent of India's capacity addition between 2012-17, said Shubhranshu Patnaik, executive director, PricewaterhouseCoopers.
The sector's scope for growth is huge. India will soon become the world's largest buyer of power equipment, Maira said. It will spend around $140 billion on power infrastructure in the five years to 2012, close to half from the private sector, according to the latest Planning Commission estimates.
Where India gets its power equipment from reflects a significant policy challenge for the government as it overhauls the economically vital sector. It needs to balance the need to import cheap Chinese equipment with fostering domestic manufacturers key to long-term growth.
The government wants to diversify its IT- and services-driven economic boom to help absorb tens of millions expected to join the workforce in coming years.
The issue reflects a debate in India on how to let foreign players enter a market of 1.2 billion customers and 8.5 per cent economic growth. New Delhi has dragged its feet on opening India's defence sector more to foreign investors, weighing the need to upgrade with promoting local firms and know-how.
"India's shortage of power generation capacity is so large, and China has made it up," Maira said.
"The larger good is to have power available, and cheap power available. The lesser good perhaps is to produce the equipment here and generate jobs in this country," he added.
India is looking how to spur the growth of domestic manufacturers such as Bharat Heavy Electricals Ltd and Larsen & Toubro Ltd , and how to make life easier for foreign players setting up shop on Indian soil, he said.
India plans to spend $1.5 trillion on infrastructure from 2007-17 to overhaul the roads, railways and power plants in Asia's third-largest economy. It plans to add 100,000 MW in the next five year plan from 2012-17, though the government has often missed construction targets in the past.
China won projects worth 36,800 MW in the last two years alone, equivalent to more than half the added capacity India is likely to achieve by 2012, worrying the Planning Commission.
"Import of huge quantity of Chinese equipment without developing local component vendors would mean continuing import of components and spare parts from China," the Commission said in a recent review of the government's infrastructure targets.
"This will not only be a costly affair but also weakens the opportunity for developing domestic manufacturing capability."