RESEARCH IT  >>  INDIAN ECONOMY  >>  BUDGET 2002

Power and Engineering Industry

  

Budget Measures

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    Disappointing from the sector point of view.

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    10 year tax holiday for investments in infrastructure continues. For investments made prior to March 2003, the tax holiday is applicable from retrospective effect.

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    The new electricity bill will be introduced soon. There was also a mention of increasing user charges for services provided by the government. If electricity charges for farmers and other subsidised class of users are rationalized then it will be positive for the sector. But there is no clarity on that yet.

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    Dividend tax reduction to 10%.

      

    Budget Impact

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    Nothing concrete. The FM and the Prime Minister had built up a lot of expectations to give a push to infrastructure and in particular investments in the power sector. Nothing on that front.

      

    Dividend Tax Impact

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    Tata Power will benefit a little more than BSES from the reduction in the dividend tax.

    Gains through reduction in dividend tax
    Company No. of
    shares (m)    		 Dividend
    per share     		Tax savings
    (Rs m)    		 % addition to
    net profit
    BSES 137.9 3.5 134 1.9%
    Tata Power 203.3 4.0 199 2.2%

      

    Industry wish list

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    Priority status to infrastructure development for a 7-8% GDP growth. A thrust on infrastructure will be a big boost to both power and engineering sectors.

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    The government of India should withdraw the 16% cap on the rate of return for power projects in the upcoming budget and instead state that power companies will compete on the efficiency of their plants and tariffs. This will encourage companies to become operationally efficient and would be beneficial for consumers in the long run.

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    Industry chambers have asked the government to exempt captive power generation projects from the 4% non-modvatable Special Additional Customs Duty (SAD). Associated Chambers of Commerce and Industry (Assocham), in its pre-budget memorandum, has also said that captive/cogeneration projects should be categorised as power generation projects and exempted from the SAD.

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    More clarity in funding of IPPs. This will encourage more investments and result in faster execution of power projects. This means more demand for T&D equipment.

     
       Key Positives
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    India has a long history of power shortages. The existing gap in supply coupled with the expected rise in demand from a growing economy will ensure that power will remain a precious commodity for some time to come.

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    There have been many positive reforms in the IPP (Independent Power Projects) policy. Some of them being: the period of licenses for generation and distribution can be upto 30 years and renewals for 20 years, five year income tax holiday and upto 100% foreign holding permitted in power projects.

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    Many of the engineering companies are now looking at becoming one-stop service providers. Value added services are thus becoming the new area, where companies are competing.

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    With the government looking keen to speed up its divestment program and an increasing number of states looking to revamp their state electricity boards it is likely that investments in infrastructure will go up, fuelling demand growth in the engineering sector.

    		  
       Key Negatives
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    Overall power reforms have been slow. Independent power projects (IPPs) supply power to the State Electricity Boards (SEBs). However the poor financial condition of the SEBs is a major concern for the viability of these IPPs. As a result financial institutions are reluctant to fund these IPPs.

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    Import restrictions will be relaxed post April 2001. This could bring the domestic transmission & distribution (T&D) equipment manufacturing companies under pressure.

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    Low levels of modernization hamper the industry resulting in below par productivity levels. The unorganized sector dominates in segments where technology is not crucial.

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    A slowdown in the economy affects the engineering sector much before it filters down to other sectors as clients postpone investment decisions. However in an economic upturn this industry picks up last as various sectors like steel, petrochemicals, automobiles needs to perform well before they invest in capital and engineering goods for capacity expansions.

  • How was this sector impacted by Budget 2001?