The new budget for 2014-15 will be the first of the recently elected government in India. The expectations are high, but the finance minister has to walk a tightrope to ensure fiscal prudence in an economy that has been handed over to him in a bad shape.

• BRIDGE TO INDIA expects the government to increase the allocations to the MNRE
• The government should think of ways to strategically support the growth of solar manufacturing
• The possible reinstatement of accelerated depreciation for wind projects is expected to have a significant impact on the solar sector

The interim budget for 2014-15 presented by the outgoing government announced allocation of funds for setting up ultra-mega solar power projects but lowered the budgetary allocations to the Ministry of New and Renewable Energy (MNRE) and did not extend the 10 year income tax holiday for new solar projects.

In terms of taking corrective measures, we expect the government to increase the allocations to the MNRE. This should help revive the subsidy scheme for rooftop solar projects (refer). Given that Minimum Alternate Tax (MAT) of 19% is payable even if there is an income tax exemption (maximum rate is 33%), removing the tax holiday does not make much difference to either the cost of solar power or the government’s tax revenues. The government may or may not extend the tax holiday. If it does, it would be advisable to also waive off the MAT component so as to make it truly effective.

To show that the government is serious about promoting manufacturing in India, especially in the wake of anti-dumping duties being potentially imposed, it should think of ways to strategically support the growth of solar manufacturing. That means, manufacturers in India should be able to become competitive in the medium term without further government support. It would be a huge policy blunder if anti-dumping duties are enforced, but domestic manufacturing still does not take off. In such a scenario, the government would not  be able to keep the market afloat, let alone achieve ambitious new goals.

Apart from this, we expect this budget to signal a reform of the the power sector at large and provide more energy access. This will set the tone for a regulatory overhaul of the existing transmission and distribution mechanisms and make the rural electrification authorities look at all possible alternatives to achieve their targets. This, in turn, will be good news for the solar sector.

Another aspect of the budget that is expected to have a significant impact on the solar sector is the possible reinstatement of accelerated depreciation for wind projects. If this happens, a lot of tax-driven investment that had moved from wind to solar will move back to the wind sector. This will have both negative and positive implications on the expansion of the solar sector in India. Negative, because the availability of funds will reduce. Positive, because it will help steer the market towards more long-term and project-related investments.

Overall, we expect this budget to take steps in the right direction but it is still much too early to see the whole picture on where the government intends to take solar in India.

Jasmeet Khurana is a consultant at BRIDGE TO INDIA.