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Vol. IX Issue. 37
The Camouflaged Union Budget 2013-14: Coal & Power

Ashish Gupta,
26 February 2013

The expectant anxiety for individuals and industries is over as Union budget 2013-14 was announced on the last day of February by the Finance Minister. The Budget left some sweet and some bitter taste among the citizens and stakeholders. Though the Budget had nothing to offer for the individuals as the tax slab remains flat - apart from pinching the super rich - it certainly provided relief for the power sector by announcing the plan outlay for Ministry of Power of ' 54, 696 Crore but remained aloof over the very important associated sector, coal.

Highlights of the Budget 2013-14: Coal & Power

Sector CPO 11-12 (' Crore) CPO 12-13 (' Crore) % Increase Announcements
Coal 6, 810 9, 519 28.46 Equalization of duties on steam and bituminous coal in the form of 2% customs duty and 2% countervailing duty.

In the light of increased imports, policy of blending and pooled pricing advocated.

PPP model was advocated for increasing coal production having CIL as one of the partner
Mines 1, 347 1, 654 18.56
Power 46, 084 54, 696 15.75 Tax holiday has been extended for another year though power producers want it for two years.

Scheme of Financial Restructuring of State Dicoms.

Urged lenders to extend fresh loans to infuse liquidity.

Government will provide low interest bearing fund to IREDA to on lend to viable renewable energy projects.

' 800 Crore will be provided to MNRE for reintroducing "generation based incentive" for wind projects

CPO - Central plan Outlay

Coal and Mining Sector:

Apart from increase in Central Plan Outlay for the Ministry of Coal/Mines and equalization of duties on steam and bituminous coal in the form of 2% customs duty and 2% countervailing duty, there is nothing much to unveil. The impact of the duty is yet to materialise but it will certainly increase the cost of power generation. Finance Ministry's move in this regard will pinch in the short term but surely it is a step in the right direction as it will help in curbing imports. It is also noteworthy that Finance Ministry is very concerned about the coal imports as it is likely to increase the current account deficit if we continue importing coal in line with oil imports. The concern is quite evident from the Finance Minister's speech:

"Despite abundant coal reserves, we continue to import large volumes of coal. Coal imports during the period April-December, 2012 have crossed 100 million tonnes. It is estimated that imports will rise to 185 million tonnes in 2016-17. If the coal requirements of the existing power plants and the power plants that will come into operation by 31.3.2015 are taken into account, there is no alternative except to import coal and adopt a policy of blending and pooled pricing. In the medium to long term, we must reduce our dependence on imported coal. One of the ways forward is to devise a PPP policy framework, with Coal India Limited as one of the partners, in order to increase the production of coal for supply to power producers and other consumers. These matters are under active consideration and the Minister of Coal will announce Government's policies in this behalf in due course".

The concern is highly appreciated and is in the national interest of the country but advocating PPP policy framework for increasing coal production has no merit. PPP model in India is seen primarily as a means to finance infrastructure projects without adding to public debt. This is very untrue as money is borrowed from the same institutions as PPPs do not have access to some special new source of finance and over the life of the project it is very likely that PPPs will involve higher public spending.

•   PPPs are often advocated for infusing efficiency by introducing private sector but again this is far from reality as it is mostly seen in current PPP projects; companies try to procure projects by projecting lower cost for setting up the services. Whereas cost overruns during the project and renegotiations are a norm in these projects which always favour private companies. Many of the Ultra Mega Power Projects were secured with low cost estimates are now up for the renegotiation.

•   Can Coal India Ltd. which is always criticized for being inefficient by all the stakeholders really become a reliable partner in PPPs for coal extraction?

•   Rather than stressing on PPP model, CIL subsidiaries must be made independent with autonomy in taking their decisions so that they do not cross-subsidise each other.

•   Coal mining must be seen as separate activity distinct from power generation and coal blocks must be allocated to mining companies only.

•   On the pattern of CEA under Power Ministry, CMPDIL must be made independent to act as the technical arm of Ministry of Coal.

•   Price pooling mechanism is not very rational as it will favour imported coal projects at the cost of others and is also against the government ideology to do away with subsidies. It is better to introduce the International Coal Power Purchase Obligation on the line of Renewable Purchase Obligation and this must take off only when indigenous coal production increases.

•   Putting Cabinet Committee on Investment (CCI) for expediting investment proposals is a good move but raising coal extraction process or making more coal blocks to come online through CCI is doubtful unless it institutionalizes the framework for resolving micro issues like Forest & Environment Clearance, Land acquisition and R & R process.

•   Coal Regulatory Bill is in the parliament and the industry was looking for some kind of expedition in this regard but it has not found any place in the Budget speech.

•   There is nothing on Land Acquisition Bill as well in the Budget.

•   Apart from the solutions listed above, there is an urgent need to extend the infrastructure status to coal mining activity which help serious companies to get access to cheap loans, various concessions and will help getting more investment in the sector.

Power sector: Certainly the Union Budget has provided relief for the power sector not only by extending the tax holiday by one year but the major bonanza comes from the scheme "Financial Restructuring of State Discoms" announced by the Government of India last year.

•   According to the scheme, 50% of the Short Term Liabilities (STL) of Discoms is to taken over by the State Government corresponding to the accumulated loss of the Discoms as on March, 31, 2012.

•   Balance 50% of STL shall be rescheduled and serviced by the Discoms with a moratorium of 3 years and will be backed by State Government guarantee. Exact terms and condition for restructuring will be decided by lenders in consultation with respective State Governments and Discoms keeping in view the specific circumstances of the state utilities.

For availing the scheme the respective State Governments have to prepare the financial restructuring plan quickly, which I hope they will do.

•   But whether these schemes will act as a catalyst for bringing more investment in the sector is not clear as most of the lending organizations are also in financial crunch. In the light of these circumstances asking the lender organizations to renegotiate loans terms with power project developers will only add to their financial volatility. Apart from that it will be very difficult for the lending organization to extend fresh loans for power projects. As per the economic survey 2012-13, 55.08% of loans by the Indian infrastructure Finance Company Ltd (IIFC) up to quarter 3 (2012-13) was locked in power projects. Therefore to infuse liquidity in the sector PSU banks will have to share the burden. But the question here is: are these PSU banks in a position to extend fresh loans?

•   Going by the estimates of the Last Budget 2012-13, the Finance Ministry was allocated ' 15,888 Crore for recapitalization of PSU banks and NABARD but the government is yet to release ' 12,517 Crore to PSU banks. Though the Finance Minister had assured infusion of the same amount into 13 PSU banks by March, 2013. Therefore, further announcement by Finance Minister that ' 14,000 Crore will be added this fiscal year towards capital infusion in PSU banks has no credibility. Perhaps PSU banks will be further squeezed in the name of national obligation?

•   Finally infusion of money will remove any incentive for reform

Views are those of the author

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