India's FY2015 budget has limited short term impact on power sector: Fitch

Where are the specifics for achieving improvement?

It has been observed that the measures announced relating to India's electricity sector in the budget for FY2015 are directionally correct but involve relatively small steps or lack specifics to support a meaningful improvement in the short-term.

According to a release from Fitch Ratings, there are entrenched structural issues affecting the performance of the power sector of India and the solution would require a sustained and disciplined policy focus.

For background, the release noted that in the Indian budget for FY15, the finance minister announced several measures for the power sector.

These include an extension of the tax holiday for power projects to March 2017 from March 2015, which Fitch considers to be positive for investment activity.

The budget also called for the provision of adequate quantity of coal to power plants commissioned by March 2015, said the release. However, the budget lacked very specific measures detailing how this will be achieved.

Here's more from Fitch Ratings:

Fitch believes that it will not be possible to raise the production of coal significantly within a year. Aside from inadequate domestic production, infrastructure bottlenecks such as rail infrastructure also continue to act as a constraint to ensuring adequate coal supplies to power plants.

Among the announced measures is the rationalisation of coal linkages to reduce transportation costs of coal; while this is a good measure, we believe such a reallocation of coal resources would have operational issues and can take some time to achieve.

Domestic coal production is much lower than the requirements of the power sector, and hence we think the coal shortage at various power plants will continue.

India's total coal based power capacity at April 2014 was around 140 gigawatts (GW). This is expected to increase by around 15GW per year, which would require an additional 60 million tonnes of coal.

There needs to be a sustained and long term plan in order to consistently increase domestic coal production. The entire ecosystem of the power sector - from generation to distribution - needs to be strengthened. The financial health of the various state utilities needs to be improved through tariff rationalization and by addressing transmission and distribution losses.