India Considers Expanding Tax on Imported Power Gear

For instance, earlier this year an Indian joint venture between BGR Energy Systems Ltd. and Japan's Hitachi Ltd. won a contract to supply boilers to NTPC Ltd., India's largest power producer by capacity, "by quoting prices which were close to that offered by companies from several countries—including China—for similar tenders," a power-sector analyst said. "So, if the prices continue to be about the same in the future, the government would obviously like to promote Indian industry rather than Chinese."

However, government figures show that Indian electricity-generation companies favor Chinese imports—not just because the imports are generally cheaper, but also because the companies get access to overseas loans at lower rates than at home.

Of the 146.48 gigawatts in equipment that Indian power producers have on order for delivery by about 2020, nearly half is from overseas companies. About 42% is from Chinese manufacturers, including a $10 billion contract Reliance Power placed with Shanghai Electric Group Co. in October 2010.

The Association of Power Producers, which represents several Indian private-sector utility companies, said a tax on imported gear will increase costs and hurt consumers.

"One should have a long-term view of the sector," said Ashok Khurana, APP's director general. "How can the government even think of such a move when it has planned a massive expansion of power generation in the long-run?"

Expect Chinese companies to respond if the tax is imposed, said Sanjeev Zarbade, a Mumbai-based analyst at Kotak Securities Ltd.

"Chinese manufacturers will not keep quiet if a duty is levied," he said. "They will offer some other incentives, such as more attractive low-cost financing."

This could be key, with Indian companies facing high interest rates and a weak rupee.