Budget 2018: For any country, infrastructure plays a very important role in development. A lot of foreign investment is also dependent on the quality of infrastructure that a country provides. In fact, the infrastructure sector itself has a great potential to attract money if the asset quality looks good to the potential investor. The sector, by definition, means that it provides essential services and public goods. For any potential investor who is interested in investing in a particular infrastructure asset, the two critical drivers are conducive economic ecosystem along with a stable and forward-looking policy environment.
With the Narendra Modi government strengthening the country’s foundations in the first few years of its administration, Budget 2018-19 is expected to focus on consolidating the policy framework—by dispelling any uncertainties associated with the policy environment. But fiscal incentives also do play a big role in enhancing the return on these assets, thus attracting more capital. Better capital inflows can bring down the cost of the infrastructure asset to a great extent and reduce the cost of the essential service or public goods the infrastructure asset provides.
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In light of the above, the Budget should focus on certain key areas.
Renewable power generation with a healthy distribution ecosystem
Despite repeated interventions, the distribution segment unfortunately remains plagued with lack of financial and operational discipline. Many industrial and commercial consumers may prefer renewable energy. Since these consumers are the most profitable and revenue generating, and that is where discoms hide their inefficiencies and losses, open access approvals are hard to come by. Further, discoms levy ad hoc charges like cross-subsidy, which are too burdensome and negate the cost advantage in favour of open access.
There is an imperative need to remove the legal and regulatory hurdles and address related infrastructural issues, to facilitate open access.
Reserves against renewables
The renewable energy target of 175 GW also necessitates spinning reserves. Unfortunately, due to various issues, some within and some not within the control of the developers, many hydroelectric projects have faced time and cost overruns and are yet to see the light of day. There is a need for intervention from the government, in the form of a stimulus, not only to help complete these projects but also reduce the cost of electricity generation, at least in the initial few years. The new hydro policy under consideration would be a step in the right direction.
Time to experiment DBT for power subsidy
An inefficient tariff structure where certain segments of consumers are heavily subsidised creates an imbalance in revenue-cost matrix. The time has come to rationalise the pattern of cross-subsidisation particularly for domestic and agricultural consumers segment. Equally, there is a strong case for extending the direct benefits transfer scheme.
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Decentralisation of energy system
There is also a need to promote adoption of decentralised energy systems like solar roof-tops, etc, which does away with the line losses and provides access to electricity to deprived households.
This could be promoted through schemes such as the UJALA, where the capex is undertaken by either discoms or by a government entity like EESL (Energy Efficiency Services Limited) or a private entity, and recovered by discoms through electricity bills. The capex may require some subsidy from the government.
Include power sector in GST regime
Supply of electricity has been kept out of the purview of the GST regime. However, at the same time, the capital goods and services consumed by the sector fall within the purview of the GST Act. Accordingly, power generating companies are not able to claim input tax credit for the GST paid. This increases the procurement cost for discoms, thus unintentionally increasing the tariff for consumers. Hence, either the power sector should be brought within the purview of GST to remove the anomaly of multiple incidence of taxes or, alternatively, the GST rate on sale of goods and services to power projects should be zero.
(Managing director & CEO, PFS (PTC India Financial Services)