Power sector is currently faced with challenges such as delay in coal linkages, environment concerns etc affecting the

order finalization as well as timely exec ution of the project. Moreover the weak financials of SEBs etc have forced them to cut / defer capital expenditure, thereby hurting the BTG as well as BOP equip ment producers. Ironically, chronic power shortages and delays in capacity expan sions co-exist affecting the industrial production growth. Since the equipment orders are placed only after coal linkages and environment c learance, the quality of orders in the books is good as far as power EPC players including BoP players are concerned. Some of the players in BoP segment have al so transformed themselves from simple equipment vendor to EPC players for comple te BoP package. Strong order book as well as transformation to EPC players gives strong revenue visibility for the industry players. Adding to this the cascading impact of hardening interest rates looming large. Larsen & Toubro, the engineering & construction major that was impacted by delay ed/slowed down execution in major part of the year turned in a steady performanc e for the quarter. Capital goods sector enjoys the comfort of strong orders book even while faced w ith delay / slowdown in order inflow on the back of issues such as environment, land acquisition issues, coal linkage for power plants, litigation etc. The slug gish order inflow now, will cloud the medium term prospects of the industry. Ind ia per se needs huge investments to build its infrastructure, and fortunately, t he government is taking initiatives to sort specific policy issues on environmen t, land acquisitions, coal linkages, litigations etc, which add sheen to long te rm outlook. Meanwhile, earlier there was drying up of orders from NHAI. But oflate it has st arted finalizing orders auguring well for players offering construction services /project development and construction equipment. However the intense competition especially in the lower-medium size road project signals still the pie is not l arge enough to accommodate all as the industry has seen surge of new players. On the power generation and transmission equipment side the concern of delay in ordering and excess capacity looms large. But as we are nearing the completion o f 11th five-year plan, the order for transmission and distribution equipment has to pickup leading to better capacity utilization and improvement in realization . As PowerGrid insists for local manufacturing in relation to HVDC orders, globa l competition in general and predatory Chinese and Korean players are kept out o f fray, but the competition is wide open in other segments. Moreover the hardeni ng interest rates are a cause of concern given its cascading impact on the indus trial capex and demand for capital goods. Overall the outlook in the medium term is gloomy though the long-term outlook for Capital Goods sector continues to be bright. this is largely on account of environmental issues, non-availability of land or delay in acquisition; lack of clarity in policy, tendering of unviable projects; getting long tenure funds etc. some of the important issues that should be addressed on urgent basis so as to b ring down the infrastructure deficit are (i) tending of unviable projects; (ii) bad quality of engineering and planning at DPR stage;(iii) lack of standardized and sub-optimal contracts;(iv) land acquisition delays and slow approval process es especially environmental and forest clearances:(v) insufficient optimization of procurement costs (of PSUs) (vi) weak performance management in nodal agencie s and PSUs and (vii) inadequate availability of skilled and semi-skilled manpowe r. Interest tax exemption on Foreign Currency Borrowings also calls for being resto red. Likewise, Withholding tax on interest payable by Indian power and infrastru cture companies on ECB facilities should be exempted from withholding tax, which would significantly lower the overseas borrowings costs for Indian companies an d go a long way in reducing tariffs for consumers and industries. Dividend Distribution Tax should be levied only at the ultimate parent company l evel and SPVs be exempted from the DDT. This should be considered in view of the re-investment needs by the holding company in the power sector. MAT rate should be brought down to its original level of 7.50%.

Service Tax exemption should be extended to development of infrastructure such a s power generation projects, power transmission and distribution projects which would also reduce the cost of power generation, as power producers are not entit led to credit of taxes paid on procurements. All excisable goods supplied for setting up of Nuclear and other Power projects should be exempted from payment of excise duty by way of a notification compared to current status of refund of excise duty as deemed export benefits so as to a void cumbersome procedure/delay in getting refund. These include environmental concerns and land acquisition, right of way issues e tc. Delay in finalisation of infrastructure projects as well as orders have also impacted the capital goods players. The capital goods sector continue to be bur dened with inverted duty structure and tax anomalies and this impacts the compet itiveness of the domestic industry in an open market environment. Capital goods sector is the only engineering sector where basic customs duty is 0% in case of mega power projects, nuclear power projects, specified goods for c oal bed methane operations, specified road construction machinery, goods require d for petroleum exploration licences/ leases, petroleum operations under specifi ed contracts under NELP and LNG facility project of Ratnagiri Gas & Power. It is argued that imports at 0% duty has been allowed with the specific objective of attracting investments in these identified sectors. Such duty concession are an aberration in a tax regime and puts the domestic industry at a cost disadvantage particularly in those cases where full deemed export benefits are not allowed. I n the budget 2006, levy of 4% additional duty of customs (SAD) was extended to a ll imports with certain exceptions, which includes various types of projects and other capital goods specified in table above. The purpose of imposition of 4% S AD on imports is to compensate for state level taxes. The exemption granted to l arge number of categories vide sl. no.1 of customs notification 20/2006 dated 1s t March 2006 goes against the basic principle of this levy. This adversely affec ts the indigenous capital goods manufacturers as Central Sales Tax (CST)/VAT is applicable on goods manufactured by them and supplied to such exempted categorie s. It amounts to negative protection, which erodes competitiveness of the domest ic industry. Industry expectations Levy customs duty on capital goods in general, and power generation equipments i n particular. Incorporate a specific entry for exemption of customs duties on Ultra Mega Power Projects in customs notification 21/2002. Impose 4% SAD on all types of projects and others which involve import of capita l goods. Import of capital goods under 0% category for project imports and others should be removed. Allow import of inputs by indigenous manufacturers at 5% customs duty for manufa cture of 23 specified high voltage transmission equipment i.e. at par with the e nd product. Rising commodity prices, change in project mix, unseasonal monsoon in the East Coast of the Country especially Tamil Nadu, Andhra Pradesh and Orissa have affec ted the project execution and the contractors/ equipment suppliers to the extent of their exposure. As Chinese turn aggressive with dolling up attractive pricing and funding the co mpetition has been intensified eliciting margin concerns on future orders for do mestic players such as BHEL, L&T, Thermax and BGR Energy as well as lack of orde r to run the full capacity especially for newer player.