29th February is almost upon us – and it will bring with it much change as the Union Budget is announced. Today, India is an increasingly attractive investment destination, and the 2016 Union Budget should undertake reforms necessary to support this momentum.
From a macroeconomic standpoint, the budget needs to provide for the looming global slowdown and make provisions to protect the economy from changes such as the anticipated oil prices rise. It can ensure macroeconomic stability and protection from Rupee depreciation by focusing on:
- higher consumer demand and purchasing power which can be spurred through growth oriented mechanisms such as reduced tax value
- higher exports facilitated by providing economic incentives
At the same time, it is equally important that various initiatives like Goods and Service Tax (GST), clarity about capitalization of banks and other reforms be undertaken on fast-track basis.
The renewable energy sector is striving to fulfil the government commitments made last year. The targets of 175GW renewable energy by 2022 and 30% to 35% carbon emission and renewables comprising 40% of the energy mix by 2030 make up a $200 billion opportunity for India. Hence, efficient financing in the renewable energy needs special focus in the upcoming budget. By continuing with the current fiscal benefits, the sector will witness certainty in investment and continued momentum.
The major expectations from the budget are:
- Accelerated Depreciation (AD) and Section 80 IA benefits need to be maintained, and General Based Incentives (GBI) should be continued for at least 5 years
- GST for renewable energy should be pegged at zero rate
- SMEs should be supported by 5% interest rebate for using renewable energy for captive requirement
- Finance should be made available at a reduced rate (example, rebate of 5%) for projects that procure products having 70% content in value terms from domestic suppliers - similar to Brasilian Make in Brasil policy
- Companies should be allowed to issue tax-free bonds, especially those holding certain credit ratings
- Draft a policy for sharing hedging risk for borrowings in the sector, thereby reducing cost of energy, making renewable energy more competitive and addressing the forex risk involved in obtaining international funding
- Provide support to facilitate innovative financing, increase capabilities, facilitate job creation and meet the Make in India initiative and goal. Some recommendations include:
- Continue duty and excise exemption on certain components' import
- Same incentives for wind and solar sectors
- Provide financial incentives to encourage domestic manufacturing of solar photovoltaic(PV) cells, thereby reducing imports dependence
- Implement the practices of China – EXIM and USA – EXIM that give a line of credit of $1billion and $2 billion respectively, in the case of exports by local companies
- Clarity on tax and other regulatory matters relating to InvIT will help in developing new streams of financing which is at par with other countries
The Union budget needs to focus on giving a boost to the renewable energy sector, enabling energy security for the nation, facilitating a low carbon economy and providing sustainable and affordable energy for all.