The contentious issue of levying import duty on power equipments has been in a soup for long. On one hand, the indigenous equipment manufacturers are convincing the government to levy duty so as to eliminate the cost advantage Chinese enjoy. On the other hand, there is another lobby of power generation companies that is against this move. Their contention is simple. If import duty is levied on the equipments, cost of power is bound to rise. Thus, the ultimate decision on the levy has been postponed numerous times for the lack of consensus.
But finally Cabinet has decided to discuss over this matter. Let us remind you that the proposal is to levy a 21% import duty on power equipments. Lets us analyze the pros and cons of the levy now.
If the duty is levied, obviously the indigenous manufacturers would stand to gain. But it should be remembered that the levy will not completely eliminate the china advantage. Apart from lower equipment cost, Chinese have faster delivery schedules. They also have the currency benefit due to artificial peg. Further, Chinese banks also provide cheaper access to loans when Indian companies import equipments from China. Thus, the levy is not a fool proof solution to the current competitive pressures.
However, it may be noted that if the duty is levied it would discourage imports. And this can upset the power capacity addition targets of India. The reason being majority of the capacity in India is import based. Also, imposing duty would increase the cost of power as the levy is more likely to be passed on to the consumers.
Now, let us see what can be the scenario if the duty is not levied. In that case, the current competitive pressures would prevail. Capacity would lie idle at local workshops. Margins of the equipment manufacturers would also come under threat. However, with Cabinet finally granting its approval for the levy it should bode well for the domestic manufacturers.