The Finance Minister of India presented the union budget for the financial year 2016-17 (April 16 – Mar 17) earlier today. As predicted by us earlier this month, there is no substantial change in central government outlay for the sector (refer). The most significant announcement is about an investment of INR 91 billion, an increase of INR 37 billion over the previous year (refer) in the Indian Renewable Energy Development Agency (IREDA), the government owned renewables dedicated lender.

• Focus on improving availability of debt finance is a step in the right direction
• A cess levied on domestic coal production has been increased from INR 200/tonne to INR 400/tonne making coal fired power more expensive and improving price competitiveness of solar power
• But overall, the solar sector has got lost amongst various priorities of the government – changes in depreciation, corporate tax and service tax will have marginal impact on the sector

A larger balance sheet will allow IREDA to provide more lending to the private sector. According to BRIDGE TO INDIA estimates, the country is expected to add 5 GW of solar projects in 2016 and 9 GW in 2017, up from just 2 GW in 2015. Enhancing IREDA’s ability to provide greater debt is a step in the right direction as other traditional lenders are likely to struggle to ramp up.

Other relevant announcements from the budget include:

1. Doubling of cess levied on coal production from INR 200/tonne to INR 400/tonne on coal – this cess, estimated at INR 280 billion for FY 2017, was originally dedicated to funding clean energy initiatives but its scope is now widened to cover all environmental projects. The main impact for the sector is that it will help in making solar power commercially more attractive in comparison to coal-fired power by about INR 0.12-0.15/kWh.
2. Reduction in accelerated depreciation rate to 40% from the existing 80% from April 2017 – the impact of this change will be felt in the short-term mainly in rooftop market, where bulk of end customers make use of this benefit. As a result, rooftop sector is likely to see a big boost in FY16-17 before this benefit is halved. Longer-term, this move will provide a more level playing field to professional capital and should help in bringing more investments in the sector.
3. Increase in effective service tax rate through an additional 0.5% cess – this announcement is likely to have a marginal negative impact on EPC and O&M services.

Overall, the budget is lacklustre for the sector. In particular, lack of any initiatives to support domestic solar manufacturing is disappointing especially in the light of the recent WTO action and ‘Make in India’ campaign. The government is walking a tight fiscal and political path. The sector has got lost amongst a myriad conflicting priorities.  The industry’s wish list of tax waivers and other sops has been unsurprisingly ignored.