Union Budget 2021: Incentives, more allocation to power sector may propel economic growthJanuary 31, 2021
Indian Union Budget 2021-22: Budget 2021 will be of considerable importance to the power sector even if it is viewed only from the perspective of the setback received by this sector due to the outbreak of COVID-19. During this pandemic period, the Government called for the country and its citizens to be ‘independent and self-reliant in all senses’ while introducing the Atmanirbhar Bharat Abhiyaan. One of the five pillars of the Atmanirbhar Bharat Abhiyaan is Infrastructure and needless to state that power sector is an integral and key part of it. The stimulus packages announced by the Government during the pandemic has attempted to give strength to the power sector, however, are largely considered as being unable to achieve the desired results.
Therefore, Budget 2021 should give concrete measures / relief to the power sector as the targeted government spending will give a booster shot to the sector. The key areas of concern are distribution and renewable energy generation projects.
Distribution of electricity is the most crippled segment in the power sector. It is well known that most of the distribution companies (Discoms) are financially unviable and the pandemic has only worsened their situation. As per the PRAAPTI (Payment Ratification And Analysis in Power procurement for bringing Transparency in Invoicing of generators) website, at the end of November, 2020, the outstanding amount payable by the Discoms to generating companies stood at INR 1,30,690 Crores which and appears to have increased by about 30%-35% from August 2019. The delays in payment have an impact not only on the Discoms themselves, but also the generating companies, railways, coal suppliers, the consumers of the Discoms and public at large. The non-payment by Discoms, amongst other effects, creates working capital shortfall for generating companies leading to several issued including inability to service debt which has cascading effects like lowering of credit ratings, and charging of higher rates of interest and penal interest.
A related issue here is that the Government is also considering the privatization of the Discoms and has commenced the process for the same in certain Union Territories. With such enormous financial liabilities, weakening distribution infrastructure and waning financial health of the Discoms, this aim of privatization will be severely impaired as these liabilities cannot be passed on to the private players. Accordingly, the Budget must allocate an amount for absorbing, or scheme to address, such liabilities before the process of privatization is commenced for the distribution companies. Even if the privatization process is not considered, these incentives are required to revive the health of the Discoms. While the Government is undertaking policy measures and also proposed amendments to the Electricity Act, 2003 to address issues affecting the Discoms, the Budget 2021 must provide relief required while keeping long term interests in mind.
The renewable energy sector also needs attention in the Budget 2021. The replacement of the safeguard duty on the import of solar cells is being considered to be replaced with the imposition of the basic customs duty on the import of solar cell. While the Government may consider the requirement of these tariff barriers to promote the manufacturing of modules in the country as a part of the Atmanirbhar Bharat Abhiyaan, it must also provide some offerings for the development of the module manufacturing capacity. In December, 2019, Solar Energy Corporation of India concluded the solar projects bid linked with module manufacturing capacity. Through this bid, 3 GW of module manufacturing capacity was to be developed. However, projects have not yet taken off due to the higher tariff discovered in such bids and lack of proper support from the Government. To be self reliant, the Government cannot ignore the risks involved in module manufacturing along with low prices of imported modules and should consider subsidizing tariffs or such similar direct support if it wants to seriously develop the module manufacturing capacity.
Further, as the data suggests that there is a pipeline of about 35 GW of renewable power generation projects requiring about INR 1.75 lakh crore of investment, the Government can consider providing innovative green finance products along with concessional rates of financing for this capacity.
With the vaccination drive in progress in the country which will definitely lead the commercial and industrial activity towards normalcy, hopefully the Budget 2021 will provide the right incentives and make appropriate allocations for spending in the power sector to propel the economy once again to a healthy growth rate.
(Shashwat Kumar is Partner, Shardul Amarchand Mangaldas & Co. Views expressed are the author’s own.)