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Import duty on power equipments: Pros & Cons - Views on News from Equitymaster
 
 
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  • Mar 10, 2012

    Import duty on power equipments: Pros & Cons

    For long, the Indian power equipment manufacturers have been vouching for a levy of import duty on cheap equipments imported from China. Subsequently, in order to create a level playing field and protect the domestic industry government has decided to levy a duty of 19% on imported power equipments. Final decision is likely to be taken up in the upcoming budget. Right now, equipments with less than 1,000 MW of capacity attract a duty of 5% while those above it are completely exempted.

    In this article, we try to understand the pros and cons of the proposed levy and how it will impact the business dynamics of equipment manufacturers and power producers in general.

    On the face of it the levy is likely to benefit domestic equipment manufacturers as imports would become expensive. Here we first try and understand why utilities import equipments and then whether the levy would really help overcome the China factor.

    Basically, there four reasons why independent power producers like Tata Power, Reliance Infrastructure etc import their equipments from China.

    • First, the equipments come cheap since China is a manufacturing hub.

    • Secondly, the lead time taken to manufacture the equipment is low when compared to the domestic producers.

    • Thirdly, Chinese banks provide cheap loans to the power producers on the total worth of the equipment imported. This reduces the funding cost of the equipment.

    • Lastly, artificial currency peg makes Chinese exports competitive (Indian imports inexpensive)
    Now we need to understand whether the levy, if articulated, will erode any of the above benefits thereby creating a level playing field. While import duty may partially impact the cheap cost and peg benefit the other two components will remain relatively insulated. Hence, the levy even if implemented will not create a strong disadvantage quotient for imports.

    As far as equipment contracts from state utilities like National Thermal Power Corporation (NTPC) are concerned there is already an implicit protection from import through various clauses. For instance, EPC contracts by state utilities layout a requirement of having a JV or a subsidiary in India. That means direct imports are not allowed. Further, public sector undertaking (PSU) equipment manufacturers like Bharat Heavy Electricals (BHEL) are also given preferential treatment in bulk tender bids. Recent NTPC bulk tender was a prime example to that where BHEL just had to match the L1 (lowest bidder) price to get a part of the order. Thus, overseas competition for project awards from state utilities is fended through such virtual embargoes and preferential treatment.

    Further, it needs to be understood that the import component is high not only due to cheap cost factor but also due to faster delivery schedules of the Chinese. In the eleventh five year plan approximately half of the generated capacity came from the imported components. So, if imports are discouraged through levy it can seriously upset the future production targets of the country in the next plan which is equally reliant on the import component. Imposing levy will also increase the cost of power and the ultimate burden will have to be borne by the consumers.

    Thus, while the levy may discourage imports to a certain extent it can also turn out to be a double edged sword. As a result, the government needs to be careful before taking any decision in this regard in the upcoming budget.

      Jinesh Joshi (Research Analyst) holds a masters degree in Finance and has over 8 years of experience in tracking equities. He has a keen affinity for number-crunching and is often sought after for his valuable insights on financial modeling and valuations. He has a keen eye for spotting emerging growth opportunities across sectors and market caps. Jinesh contributes to our Megatrend investing service The India Letter.

     

     

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