Our Views on Impact Of The Union Budget On The Power Sector

The Hon’ble Finance Minister, Ms. Nirmala Sitharaman, presented the Union Budget for the year 2021-22 on February 01, 2021. The budget was presented in unprecedented circumstances, with the pandemic driving the economy to a major contraction. The Atmanirbhar Bharat packages, introduced in May 2020, were a key marker of the vision of a self-sufficient India.  Given this background, it was important that the government present a forward-looking budget which continued the focus on self-reliance. While the government has mostly delivered on this demand, it is pertinent to ask the question – what does the Union Budget hold for the power sector?

We have previously noted the relationship between per capita energy consumption and GDP: 1% increase in per capita energy consumption is said to increase per capita GDP by 0.23%. Given this centrality, the power sector has been a continual focus area for successive governments over the last few decades. Keeping with this tradition, the Union Budget for FY 2021-22 contains various proposals for the power sector, aimed towards bringing in investment, improving infrastructure, reducing monopolies and promoting competition.

Marked Increase in Capital Expenditure and Focus on Infrastructure

A key point of discussion following the budget is the marked increase in planned capital expenditure: an increase of 26% at Rs. 5.54 Lakh Crore. The Finance Minister has also set out the government’s intent to work out mechanisms to nudge State Governments to spend more of their budget on infrastructure creation. Enhancing the share of capital expenditure in the budgets of central and state governments would markedly improve the quality of government expenditure, as increased capital expenditure would improve demand and create positive ripple effects in the economy.

The Government is also planning for finance infrastructure projects by monetizing transmission assets. In this regard, transmission assets worth Rs. 7000 Crore is proposed to be transferred to an Infrastructure Investment Trust sponsored by POWERGRID, the central transmission utility. Such creative financing options would use existing assets to finance planned infrastructure.

Additionally, the budget also proposes to launch phased manufacturing plan for solar cells and solar panels. This plan would increase indigenisation of the renewable energy sector, thereby reducing imports. This is important given the ambitious plans of the government to increase the share of renewable energy in India.

Measures to Reduce Monopolies and Promote Competition

The distribution sector has long been an area of great concern for policy makers. We have already seen how distribution utilities are loss-making entities. Since the promulgation of the Electricity Act in 2003, repeated efforts to reduce monopolies and promote competition have hit multiple roadblocks. Today, the viability of distribution utilities is a matter of grave concern. With this in mind, the Finance Minister proposed a revamped, reforms-linked scheme with an outlay of Rs. 3 Lakh Crore. The scheme will provide assistance to DISCOMs for Pre-paid smart metering, feeder separation and up-gradation of infrastructure. Given that the details of the scheme have not yet been announced, it remains to be seen if this scheme will succeed in reducing monopolies and promoting competition.

National Hydrogen Mission

Over the last few years, India has succeeded in rapidly increasing the share of renewable energy in the country. The ongoing clean energy transition – where electricity grid powered by fossil fuels are giving way to a future where renewable energy resources are a key facet of the green economy, is proposed to be further empowered by a National Hydrogen Mission. This mission, to be launched in 2021-22 would create a framework for generating hydrogen from green power sources.

Taxes and Duties

Keeping with the theme of Atmanirbhar Bharat, the government has proposed an increase in duty on solar inverters from 5% to 20% and on solar lanterns from 5% to 15%. Combined with the proposed phased manufacturing plan for solar cells and panels, this measure is expected to reduce imports.

Startups are often seen as businesses which invigorate the industry with new ideas and technologies. The government has taken an appreciable step towards incentivizing startups by extending the tax holiday for startups till March 31, 2022. The government has also eased investment in startups by extending the eligibility period for capital gains exemption till March 31, 2022.

Conclusion

The Union Budget for FY 2021-22 showcased the government’s intention to focus on infrastructure creation with benefits accruing to the power sector. The proposed reforms-linked scheme for distribution utilities, if successful, would ameliorate a major pain point for the sector. Taken together with the Electricity (Amendment) Bill, 2020, the government has set out its intention to reform the power sector in a major way. At SCOPE, we hope this legislative intent is followed up with strong implementation, so often the bugbear of reform initiatives in the power sector.

Do you agree with our views on the Union Budget? Let us know what you think by writing to us at marketing@scopetnm.com