Improve power sector funding, provide more sops

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: Has India Inc done enough to improve investment in power sector? Are investors satisfied with the incentives available to investment in power sector? Let us take a sneak preview of the present situation of the power sector and the expectations that the power sector has from the Budget 2009.

According to the report from the Central Electricity Authority (CEA), at present, the country has an installed power generation capacity of around 1,47,000 mw—a current deficit of almost 20,000 mw. Equally important are the transmission and distribution activities for power. Recent estimates indicate that to sustain a level of GDP growth rate of 8% until 2012, India would need to increase its installed capacity to 2,27,000 mw. Even in a low growth scenario of 4%, India would still require an installed capacity of 1,83,000 mw by 2012. Clearly, the country’s economic growth runs the risk of being derailed if urgent steps are not initiated to overcome the substantial power deficit.

This indicates a requirement for significant investment in the power industry. Although a proportion of this investment will be made by the public sector to achieve capacity additions of the magnitude required, substantial private investment is a must.

One of the most difficult challenges faced for infrastructure projects is to achieve financial closures for the project—this is more so the story for power projects. Obviously, to attract private investment, the government needs to give appropriate carrots to investors by providing incentives to investors—one important form of incentive for investors is tax breaks and exemptions and a consistent tax policy.

In contrast, the government took two steps backwards in 2007, when the Budget rolled out complete overhaul of the tax provisions relating to income of venture capital funds investing in the power sector.

Under the erstwhile provisions, income of venture capital funds from investments made in any sector was not subject to tax in the hands of the fund, but was taxable in the hands of the investors thereby according a pass through status to the fund and taxing the investors directly.