Import duty on power equipment may not make much difference for domestic manufacturers

COIMBATORE: The government's decision to impose a 21% import duty on power equipment may not mean much for local manufacturers such as Bharat Heavy Electricals (BHEL). With the order inflow presenting a bigger challenge and the threat of Chinese imports fading due to the sharp depreciation of the rupee against the yuan, local makers have more serious issues to contend with than worry about cheap imports, industry observers said.

"Import duty on BTG (boiler turbine generator used in power plants) equipment is a non-issue now for BHEL and L&T (Larsen&Toubro)," analysts at Nomura Equity Research said. The government has approved a 21% import duty on power equipment (comprising 5% basic customs duty, 12% counter-veiling duty and 4% special additional duty). Earlier, equipment for mega power projects (higher than 1000 MW) were exempt from the duty, while coal fired projects of less than 1000 MW attracted a 5% customs duty.

"The order inflow in itself is a much bigger problem for the sector right now and even for the next 2-3 years," analysts said. "The sector first needs to come out of these issues and then look for other catalysts." Moreover, competition from Chinese manufacturers is already on the decline due to the sharp depreciation of the rupee. The rupee has declined 26% against the yuan in the last one year.

While public-sector orders as well as expected UMPP (ultra mega power projects) orders have a mandatory domestic manufacturing clause, the private sector would not bring major orders, observers said. The proposed duty could be prospective in nature and will not affect the already-placed orders, they said.

But even a retrospective implementation of the import duty is unlikely to benefit major players such as BHEL meaningfully since most of these projects have reached an advanced stage of construction. "Project developers are unlikely to cancel their orders to Chinese vendors at this stage," observers said.