Costlier equipment imports isnt the best way to ensure quality and reforms in the power sector
The government seems to be veering around a view that power equipment imports for 1,000 MW-plus projects must face a 19 per cent duty. Clearly,this is targeted at cheap imports from China that helped private developers with not just equipment but also credit to quickly erect power plants at a time when domestic equipment manufacturers such as state-owned BHEL and L&T were still augmenting capacity. The levy,for which domestic equipment manufacturers are lobbying hard,with active support from the heavy industries ministry,is aimed at levelling a 14 per cent duty disadvantage faced by Indian companies that pay excise and sales tax. Chinese power gear firms do not pay local levies. To this extent,its not a level playing field for Indian manufacturers. Concerns with regard to quality of Chinese equipment also weigh heavy. A decision on levying duties has been pending for over two years. As the Centre dragged its feet on the issue,equipment contracts for an estimated 37,626 MW of upcoming power capacity have already been placed with Chinese vendors. A decision is,however,on the anvil with the PMO stepping in to clear the larger mess the power sector finds itself in today.
Theres no doubt that domestic manufacturers having formed joint ventures with foreign firms have ramped up capacity to meet power developers requirements. A duty on Chinese imports will help them remain competitive but will not necessarily keep Chinese companies out. A recent CII-sponsored study reveals Chinese competitiveness does not stem exclusively from state subsidies as is widely perceived,but also derives from economies of scale and significantly lower transaction costs.
So,higher duties on Chinese imports of power gear will only result in increasing the per unit cost of power produced. The cost-benefit analysis,therefore,should consider if the power sector in particular,and Indian manufacturing in general,stand to gain from imposing tariff barriers that smack of protectionism. At a time when higher fuel costs threaten to short-circuit the entire viability of the generation sector,do domestic players need such crutches to fend off competition? It,however,goes without saying that quality concerns need to be addressed
on a priority basis. But these could be done by tweaking the technical specifications at the time of bidding.