Weekly Update: Expectations of the Indian solar industry from union budget 2013
The finance minister of India will be presenting the union budget in front of the parliament on 28th February 2013. The budget is will highlight the public fund allocations for the next financial year (April 2013-March 2014). Multiple commerce and industry associations have provided suggestions to boost the solar sector in India.
- FICCI has released suggestions for methods to reduce the high interest rates in India in the next budget
- Expensive access to debt puts Indian manufacturers and developers at a disadvantage as compared to their international peers, with the domestic rate of interest as much as 10% higher
- FICCI has also proposed further measures to make solar power more competitive, meant to be in addition to existing direct subsidies. However, given the fiscal deficit in India, these measures could replace the direct subsidies
In a pre-budget memorandum, the Federation of Indian Chambers of Commerce and
Industry (FICCI), has submitted suggestions (refer) for reducing the high interest rates in
India by i) creating a low cost fund for financing solar projects; ii) providing an interest
subsidy through the National Clean Energy Fund (NCEF); iii) creating a hedging mechanism
for external commercial borrowing (ECB) and iv) creating a separate lending category for
renewable energy projects to avoid these being crowded put by conventional power
Expensive access to debt has indeed put Indian project developers and manufacturers at a disadvantage as against their international peers and has hampered the growth of the industry (refer to BRIDGE TO INDIA’s upcoming report on ‘Bankability and Debt Financing of Solar Projects in India’, to be released on 1st March 2013). The domestic rate of interest is as much as 10% higher than in established solar markets.
In addition to financing, the following steps have been proposed by FICCI to make solar power more competitive: i) extend the cutoff date for accelerated depreciation from the end of each fiscal year (March) until 2017 (the end of the next Five Year Plan); ii) exemption from payment of Minimum Alternate Tax (MAT, 19.2% of EBITDA, payable, if now income tax is paid) under section 115JB of the income tax act in addition to the exemption from the income tax (32-33% for 10 years); iii) availability of 80% accelerated depreciation in the first year to manufacturing companies and 100% accelerated depreciation benefit for companies installing large MW scale projects; iv) exemption from all indirect taxes, including CST, VAT and service tax, on equipment used solar plants and v) provision of personal income tax incentives for individuals who are buying solar PV or thermal systems for domestic use (comparable to US tax credits).
These measure are proposed in addition to existing direct subsides (such as FiTs, viability gap funding or capital subsidies). Given the fiscal deficit facing India, however, it is much more realistic that such measures could actually replace the direct subsidies. We already see that the release of some funds to the Ministry of New and Renewable Energy (MNRE) has either been delayed or cancelled (refer). This has caused a significant delay in allocations under phase two of the NSM, which was originally supposed to being in January 2013 but has now been postponed to June 2013. Also, there is uncertainty over the availability of funds for the 30% capital subsidies for solar projects below 100kW in the next financial year.
The exemption of MAT alone would reduce the cost of solar for a 1 MW plant by around INR 1/kWh to ca. INR 7/kWh. The effects of VAT, CST and service tax could add another INR 0.5/kWh. Personal income tax incentives for the <100kW category would also be significant. This can make solar power extremely competitive with grid supplied power and can perhaps even free the market from the need for capital subsidies. Overall, we think that FICCI’s suggestions are good. However, it is unlikely that the government will approve all of them. In BRIDGE TO INDIA’s upcoming INDIA SOLAR COMPASS April 2013 edition, we will analyse in detail, if solar power is already competitive without government support.
Jasmeet Khurana works on project performance benchmarking, success factors for module sales, financing and bankability of projects in India.
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