|Arun Maira versus rupee|
|Thursday, 15 December 2011 00:00|
Rupee fall compensates for suggested duty hike
Though the Arun Maira committee must have examined all sides of the story before making its recommendation of a 14% import duty on power equipment (including the special additional duty), it’s useful to keep in mind that the 16% rupee depreciation since then (the report was submitted in February 2010) has effectively raised the protection afforded to local industry by more than this amount. So when the government takes a decision on the matter—after being shelved last year, talk of a decision has once again started doing the rounds—it needs to be aware of the impact this will have on the industry. A 15% devaluation itself will raise power costs by 2-3%, so once you add a 14% import duty to this, the total cost of producing power will rise by around 5% or by around 15-20 paise at the consumer end once you take into account the theft and distribution losses. At a time when regulators aren’t hiking consumer tariffs to even take into account fuel cost hikes, this will add to the power sector losses.
The larger point made by the forum of private sector power producers, of the indigenous power equipment industry not having the ability to meet their demand also needs to be kept in mind as higher import duties can slow the setting up of additional power capacity. The other issue raised by the private power producers’ forum is of the capacity of banks to lend to the power sector—if banks have nearly exhausted their headroom to lend to the sector, the fact that purchases from overseas suppliers often come tied with suppliers’ credit cannot be ignored. Getting power producers to buy equipment from local suppliers, L&T chief AM Naik has pointed out, is
important because “one power plant manufactured in India creates more than 10,000 jobs for four years in a row”—Naik said this in the context of the fact that Chinese suppliers have bagged orders for a third of the capacity set up in the last five years. While that’s probably true, the government needs to take a call on what the job losses are for each year of delay in setting up power plants and for every 5-10% hike in power tariffs. Rushing to protect one industry is all very well, but it has repercussions on other industries.