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Lack of a central theme

29 February, 2016

The Union budget announced by finance minister (FM) Arun Jaitley lacked a central theme or a roadmap.

As was widely expected, the FM has adhered to the path of fiscal consolidation and has retained the targets for fiscal deficit. A few announcements for rationalising taxation have also been made.

For the infrastructure sector, the big funding push of Rs97,000 crore announced for roads and highways is an extremely positive step. This comes on top of efforts made in the current year to resolve disputes in around 70 road projects. Together with railways, the likely expenditure of more than Rs2 trillion is encouraging.

The public-private-partnership (PPP) mode of project development is likely to pick up in the coming years. The announcement to have a mechanism for dispute resolution and to renegotiate the terms of PPP agreements is definitely welcome.

My expectations from the budget for the power sector specifically were subdued for mainly two reasons: the limited fiscal space the FM had for manoeuvrability and the actions already taken in FY16 to resolve some of the power sector issues. The two important issues that the sector faced were coal shortage and the financial health of power distribution companies. Partly owing to actions taken in FY16 and partly owing to lower demand, coal shortage scenario changed and coal became surplus. The Ujwal Discom Assurance Yojana (UDAY) was launched to turn around the finances of distribution companies. Though this will take a couple of years to show its impact, the budget can assist the financial turnaround for increasing operational efficiencies of distribution companies by providing sufficient funds for Integrated Power Development Scheme and Deendayal Upadhayaya Gram Jyoti Yojna to reduce aggregate technical and commercial losses, and feeder segregation, respectively. The allocation of Rs5,800 crore for both schemes is far below my expectations.

Smart metering up to the consumer’s level is one of the critical components of UDAY, which will greatly help in reducing theft and increasing energy accounting and auditing. The budget was expected to help reduce domestic manufacturing cost of meters by duty reduction on electronic components that go into meters, which did not happen.

Demand for power has remained muted because of lower industrial activity, which accounts for 40% of electricity consumption. This was another area where the budget could assist in reviving domestic industrial production. The indigenous steel and cement sectors, for instance which consume substantial quantities of electricity, have suffered due to imports as a result of inverted duty structure wherein duties on inputs were far higher than that on finished products making imports cheaper. The expectation that reduction in duties on inputs and coke would make domestic production more competitive and help increase production has not been met.

The financial year 2015-16 also saw a lot of activity in solar projects on the back of government’s ambitious target to generate 100 gigawatt (GW) of solar power by 2022. However, to meet this stiff target, the domestic manufacturing capacity for solar cells is limited to 2GW (some estimate it even lower at 400 megawatt) whereas the annual demand will be 15GW. Some incentive was expected to help boost domestic cell manufacturing capacity, which again did not happen.

Another requirement of developers was availability of inexpensive debt. The expectation was that the budget will provide for substantial allocations of tax-free bonds to lenders such as Power Finance Corp. Ltd and Rural Electrification Corp. Ltd to reduce cost of debt. The announcement of Rs31,000 crore for bonds should help raise inexpensive debt.

The FM announced that a long-term plan for nuclear generation will soon be formulated. While that is welcome, it was disappointing to see that there was no mention of steps to exploit the huge hydro potential of the country, particularly at a time when renewable energy is being given a huge push and hydro power would have been a useful balancing source.

The announcement to electrify all villages by 1 May 2018 misses an important issue—electrification of the large number of un-electrified households. Whether the latter is the focus of the government or is being provided the required allocation remains a moot question.

P. Umashankar is a former power secretary, government of India.


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Lack of a central theme

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