Originally Published 2004-07-15 05:28:20 Published on Jul 15, 2004
Budget 2004, despite the change of regime in New Delhi, maintains the much required continuity for critical power sector reforms to achieve the country¿'s "Power for All" objective by 2012 and double installed capacity to over 200,000 MW .The salient features in the budget vis-a-vis the power sector are:
Budget 2004: The Power Sector Review
Budget 2004, despite the change of regime in New Delhi, maintains the much required continuity for critical power sector reforms to achieve the country's 'Power for All' objective by 2012 and double installed capacity to over 200,000 MW .The salient features in the budget vis-a-vis the power sector are:

The Government of India's (GoI's) commitment to ensure access to basic amenities like power to all citizens of the country 
GoI to set up an Inter Institutional Group, IIG, comprising 6 Indian FI's with an initial outlay of Rs 400 billion to support infrastructure projects including the power sector

Extension of tax benefits under section 80 1A to all projects undertaken between April1, 2004 and March 31, 2006.

GoI to provide central PSUs, including power sector PSUs, equity support of Rs 142 billion and loans worth Rs 21 billion 

Duty changes signalling a clear preference for natural gas with duty exemptions to 12 select naphtha power plants to be withdrawn during FY 05-06 

The forward looking proposals are crucial indicators to the power sector objectives of the new Congress led government which had initially declared its intent to review the Electricity Act 2003 and deferred the June 10, 2004-deadline for states to unbundle the existing SEB's.

Budget Impact

Budget 2004 has positively underlined the government's intent to not only push ahead with reforms in the power sector but at a faster pace. The EA03 had laid an ambitious framework to restructure the power sector in the country and the budget reaffirms that the act is here to stay. 

The industry wish list before the budget had included downward revision of mega power status from the existing 1000 MW to 500 MW, continuation of APDRP funding, continuation of tax incentives for mega power projects and lowering of custom duties on power equipment to 8%. Budget 2004, however, remains silent on revising the mega power guidelines but extends the tax benefits from generation to transmission and distribution business reflecting the arrival of the next stage of reforms. While custom dusty on equipment import remains unchanged the finance minister has withdrawn the duty exemptions for naphtha from the next fiscal even as CVD exemption for LNG continues. This signals a clear government preference for natural gas as a generating fuel, more so when seen with the January 2004 guidelines for urea manufactures to shift to natural gas. The APDRP funding is also set to continue and the Power Finance Corporation will see further increase in its outlay for interest subsides for R&M projects at the state level.

On the generation front, India is planning to add another 150,000 MW during the next decade i.e. 15,000 MW/year for the next 10 years. With demand not a constraint the likely issue of availability of necessary finds has sought to been addressed through the setting up of a Rs 400 billion support fund to be administered by the Inter Institutional Group, IIG. In addition the extension of tax benefits under section 801A allowing 100% deduction of profits for 10 consecutive years provided the investment is made between April 2004 and March 2006 is likely to spur up the rate of investment in the power sector. A dedicated provision of Rs 142 billion for equity infusion in central PSUs is likely to help public sector giants like NTCP and NHPC to further maintain their leading edge and aggressively take up expansion projects. The Power Grid Corporation has been provided with Rs 343.8 million and is likely to take up large scale transmission projects in the absence of any significant private sector investment in the sector.

The T&D business has been the bane of electricity reforms so far undertaken in the country. The cumulative losses of the SEB's were estimated to be around Rs 3.3 billion in 2001-02 or 1.5% of the GDP. The poor T&D infrastructure remains a cause of concern which results in poor realisation of per unit power produced by generating companies. A 1% reduction in such Aggregate Technical and Commercial losses (AT&C) would lead to a saving of Rs 700-800 crores, or around 1000-1200 MW in power terms. The extension of the 10 year tax break to T&D business, hitherto reserved for the generation business only, is expected to help state unbundle their SEB's. The time frame of April 2004 to March 2006 for claiming the tax incentive is likely to spur private interest in acquiring and investing in these businesses countrywide as also stimulate an inter-state competition to attract the private players through speedy restructuring of their respective SEB's.


On the whole, Budget 2004 maintains a positive outlook for the power sector. The duty adjustments on naphtha indicate the arrival of a framework for a competitive electricity generation business in the country .Electricity generating business in the near future will be required to stand on its merit void of government guarantees or tax shields; more so with power trading set to take off shortly. For investors, the extension of tax breaks to T&D business means that the electricity industry is likely to witness increased interest in acquiring distribution business as also rapid consolidation with players establishing their presence in the generation, transmission, trading and distribution business. For the small consumer the increased investments in the T&D business are likely to translate into quality and reliable supply of power. With T&D losses expected to fall and the investors already assured of a 16% post tax return, the new tax breaks could actually lead to a lower per unit cost of power for the retail consumer in the near future.

* Views expressed in this article are those of the author and do not necessarily reflect those of Observer Research Foundation.
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