Budget 2020 Part 2

From Down to Earth

Union Budget 2020-2021: Suggests closure of carbon-intensive coal power plants. But mere suggestion may not work for these repeat offenders.NEXT BLOG By Soundaram Ramanathan, Last Updated: Saturday 01 February 2020.

While proposing Rs 4,400 crore as incentives to improve environmental sustainability and for mitigating climate change, Union finance minister Nirmala Sitharaman in her budget speech on February 1, 2020 advised companies that operate old coal-based thermal power plants to close their operations at the earliest and put the land into better use.

India has pledged to reduce carbon emissions as part of its Intended Nationally Determined Contributions (INDC), submitted under the Paris Agreement, 2015. As implementation of INDCs will have to be rolled out from January 1, 2021, shutting down old coal power plants, which are the largest emitters, will help achieve the target, Sitharaman said during the speech.

While it is not clear how much of the budget will be spent on shutting old coal power plants, the target in all likelihood appears difficult to achieve. Consider this. India generates 34 gigawatt (GW) electricity from old coal-based thermal power stations that started operating prior to 1990.

These power stations by design operate at lower efficiency than newer ones and require huge investments in pollution control equipment to meet the revised emission norms announced in 2015.

Considering the techno-economic constraints, in 2017 these plants agreed to retire almost 15.5 GW of the 34 GW capacity, according to a survey by the Central Electricity Authority (CEA). In January 2018, CEA revised the projections and said in its National Electricity Plan that 22.7 GW would retire by 2022.

However, a submission by the Union Ministry of Environment, Forest and Climate Change to the Supreme Court shows that only 4.7 GW of the 34 GW had retired by March 2018. Though the ministry had said another 4 GW would be retired by March 2019, till date only 1 GW of the 4 GW has retired. No clear action plan is available in the public domain on retirement of the remaining capacity.

Some of the key reasons these old inefficient power stations are still operations are issues related to employee rehabilitation, residual equity value of the plant and lax regulations of electricity regulatory commissions. For instance, electricity regulatory commissions have relaxed norms for heat rates and auxiliary power consumption for old power stations which make them profitable. Also they are good sources of employment. Most old power stations are state assets from whom discoms can buy power even on credit.

If the Union government is serious about shutting down these old plants, then it must ensure that part of the budget is allocated towards reviving financial health of discoms, ensure the availability of cheaper power to states and formulation of better policies on land use and employee compensation.

Please find enclosed reaction quote on behalf of Dr. Niranjan Hiranandani President, NAREDCO and MD, Hiranandani Group on Budget 2020-21.

REACTION QUOTE
Direction wise, it is a good budget; the Finance Minister has covered almost all major sections of the economy in her proposals. Having said that, I would say that the amount allocated for the proposals seems grossly inadequate, this is a concern. Secondly, the proposals seem structured for medium to long term results, we do not see anything which would have an immediate impact, would kick-start the economy. Thirdly, the liquidity issue which is a major challenge for the economy in general and real estate in particular, here too one does not see any major relief.

For real estate, ‘affordable’ remains the government’s favourite in housing, with the previous tax exemptions for both homebuyers and developers being continued for one more year. Commercial real estate segments may witness a boost, with the focus on warehousing, data centres, schools, hospitals and hospitality. Again, the market reality is that there is a difference between ‘circle prices’ and the price points at which transactions are actually taking place, provision for this could have been done."

Dr. Niranjan Hiranandani President, NAREDCO and MD, Hiranandani Group.

Union Budget: Infrastructure & Real Estate Impact

The Union Budget reflects government’s intent to infuse investment in infrastructure, create job and fuel consumption demand. It was already envisaged in the Economic Survey report that the government will push infrastructure spending and also try to attract private investments in the sector. The announcement of setting up investment clearance cell is in line with that strategy. The allocation of Rs 1.7 trillion for transport sector, Rs 22,000 crore for energy sector, adding 104 more airports under UDAN scheme and announcement of completion of Delhi-Mumbai expressway and two other projects by 2023 will catalyze further economic activities and employment generation. Important concern will be to sync them with the existing programs and roll out the implementation without any delay. Announcement of developing five archaeological sites was needed to ensure continuity with the on-going large scale infrastructure projects such as Smart Cities, AMRUT, as these projects have longer gestation period.

The real estate sector was expecting more favorable announcements in terms of input tax-credit; passing additional tax-rebate to buyers in some form; industry status of RE sector and provisions on single-window clearance. Moreover the suggestion of Survey on slashing property prices may not be significantly possible by developers, as the input costs have been escalating. Overall, we see it a quite balanced budget that should put the economy back on recovery curve. Caution points will be to keep check on the fiscal deficit front. However, I feel that there will be more policy reforms which will be introduced in follow-up announcements. Faster rollout of these announcements are key to improve cash flow in market.

Pradeep Misra ,CMD – REPL, (Rudrabhishek Enterprises Ltd.)
About REPL
REPL is Infrastructure & Real Estate Consultancy firm, listed at NSE. The group company is working on many of the flagship projects of GOI, including Smart Cities, PMAY & AMRUT. REPL is also an integrated consultancy service provider for Real Estate sector in designing and implementing the projects.