The power of the budget to reform

For an economy reeling from the effects of covid-19, the 2021 budget brought some hope. It contained announcements for the power sector, centred on power infrastructure.

A sum of ₹3 trillion (US$41 billion) spread over five years has been allocated for a revamped, reform-based and result-linked distribution sector scheme. This financial package depends on outcomes and results, making it clear that funds are to be allocated only to entities, which perform successfully and show substantial progress. Funds will be released to the distribution companies (discoms) for infrastructure creation, including pre-paid smart metering, feeder separation and upgrades to systems, each of which is linked to financial improvements.

This result-oriented approach has been tried in the past as well, without success. The Ujjwal DISCOM Assurance Yojana (UDAY, a financial turn around and revival package for electricity discoms) was announced in 2015, and vide which ₹1.08 trillion was invested in the sector over five years. To help discoms survive the economic consequences of the pandemic, the government in May 2020 announced an infusion of ₹900 billion through the Power Finance Corporation and the Rural Electrification Corporation. Despite several financial restructuring packages, however, the losses incurred by the discoms are at an all time high.

The budget acknowledged the near monopolies created by public and private discoms and proposed to create a framework that provides consumers with alternatives to a single distribution company. This followed the announcement from the Ministry of Power in September 2020 when draft standard bidding documents were issued for the privatization of distribution licensees, with the intent to increase private sector participation and competition in the market.

The Ministry of Finance announced a capital infusion of ₹10 billion to the Solar Energy Corporation of India, and ₹10.5 billion to the Indian Renewable Energy Development Agency, both of which are the steering agencies for the allocation of renewable projects and for the development of renewable power generation. The announcement is in line with the decision of the Ministry of Power to retire old coal-fired thermal power plants and replace the capacity with renewable generation. To promote the local manufacture of solar panels and solar cells, a phased manufacturing plan for such cells and panels is proposed. To encourage domestic production, customs duty on imports of solar inverters has been raised from 5% to 20% and of solar lanterns from 5% to 15%. While the increase in customs duties may help to bring about Aatmanirbhar Bharat [the self-sufficient India project], it may also cause substantial cost overruns in ongoing projects.

A comprehensive National Hydrogen Energy Mission 2021-22 is also proposed, which will encourage the generation of energy from green sources. Green hydrogen is a new technology and the proposal to build capacity in it indicates the desire of the government to keep pace with emerging technologies. The budget proposed the monetization of transmission assets. While highlighting the importance of the monetization of public infrastructure assets, the budget also announced the transfer of transmission assets worth ₹70 billion to the Power Grid Corporation of India Limited infrastructure investment trust (InvIT). To encourage compliance, the Ministry of Finance announced that dividend payments to InvITs will be exempt from tax deducted at source.

Some of the measures in the budget demonstrate boldness by the government in pursuing its reform agenda. However, the success of many announcements will depend on firmness in their implementation and on managing the politics of reform. Measures such as the introduction of competition in power distribution and discom restructuring require broad political consensus and political will for them to succeed. The recent problems of the Electricity (Amendment) Bill, 2020, in the wake of the farmers’ protests show there are many gaps between proposal and achievement.

The reforms in the 2021 budget have been welcomed as paving the way for a more organized power sector. While the packages announced by the Ministry of Finance seem very promising, the key to their success lies in a comprehensive framework that can enable effective implementation.

Abhishek Nath Tripathi is the managing partner and Anura Gupta is a principal associate at Sarthak Advocates & Solicitors