Bridge India

Lacklustre budget

The Union Budget of India for financial year 2017-18 was presented last week. The Indian budget making exercise is somewhat unique as it is seen as setting the tone for major government policy and reform agenda rather than merely a record of financial book-keeping. From that perspective, the budget was a disappointment as it didn’t break any new ground for the renewable sector. It included a mix of some tinkering manoeuvres and reiteration of previously announced measures.

Key highlights for the sector:

  • Provision of INR 7.45 billion (USD 110 million) for promoting electronics manufacturing under Modified Special Incentive Package (MSIP) and Electronic Development Fund (EDF) schemes;
  • Reduction of corporate taxes from 30% to 25% for businesses with annual income of less than Rs. 500 million (USD 7.3 million) and extension of MAT credit from 10 years to 15 years;
  • Increase in the Ministry of New and Renewable Energy (MNRE) total annual budgeted expenditure by 9%

Additional money granted under MSIP and EDF schemes (15 times the amount provisioned for the current year) would help domestic manufacturers of solar cells and modules. But this amount is very small as it would cover gross investment of only INR 35 billion (USD 514 million) for the entire electronics sector. Allocation for solar is expected to be relatively inconsequential for the sector.

Reduction of corporate tax rates and MAT credit extension will help all small-medium size players in the sector. But the benefit will be eroded by phasing out of the ten-year corporate tax holiday. Net final impact on most IPPs will be marginal.

The budget also included a few other minor announcements including a reiteration of the plan to expand the solar park scheme by another 20,000 MW (capital outlay of approximately INR Rs. 40 billion, USD 588 million), plan to install rooftop solar systems on 7,000 railway stations (expected to be installed under BOOT model ie, no capital support from exchequer) and rationalization of indirect taxes on some components used in solar module manufacturing.

One area where the budget is very unequivocal is the government’s intent to gradually remove all financial subsidies for renewables as both wind and solar energy have gained generation cost parity. Apart from phasing out the ten-year corporate tax holiday, the Generation Based Incentive (GBI) for wind sector will also lapse from April 2017 onwards. Similarly, accelerated depreciation benefit will stand reduced from 80% to 40% from next year.

Overall, there is no big bang or material announcement in the budget. We are disappointed that there is no increment funding for investment in transmission schemes or development of smart grid or storage initiatives. Integration of growing renewable capacity will pose a formidable challenge for the sector in the coming years. Nor are there any skilling or customer education initiatives, which are a crying need for the sector in our view.

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