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NEW DELHI (Reuters) - India scrapped taxes on coal imported by power companies on Friday and although the move makes overseas thermal coal more attractive it won't be enough to boost purchases much beyond the 70-80 million tonnes already forecast by analysts for 2012/13.
Finance Minister Pranab Mukherjee announced in his annual budget that power companies would not have to pay a 5.1 percent import duty on thermal coal for a period of two years, trying to boost electricity generation in the energy-deficient country.
But the gap between domestic and international coal prices is still wide, discouraging imports. Power producers cannot pass on any increase in fuel prices to consumers.
"Global coal prices are about 40 percent more than domestic price," said Parth Bhattacharya, former chairman of state-backed Coal India(COAL.NS), which accounts for about 80 percent of the country's output.
Indonesia spot coal prices are currently around $65 per tonne while average domestic coal prices are 1,600-1,700 rupees per tonne.
"Here we are talking about a five percent cut in duties -- so it's an incentive but this will not necessarily make importers go for foreign coal in a big way."
Sambitosh Mohapatra, executive director at PwC, agreed.
"This is not going to prompt power producers to increase imports of coal because imports will still be far more expensive than domestic coal. Distribution utilities are already in a very difficult situation and will be little inclined to buy expensive power," he said.
Indian power companies will import about 65 million tonnes of thermal coal in 2011/12, industry and analysts expect, as extra generating capacity is added.
Coal India wants to raise prices by linking them to global benchmarks but the government has forced it to put the hike on hold until at least April.
Using current benchmark Newcastle coal prices at $110 per tonne, and CFR prices around $120 per tonne, the impact of removing the duty is a benefit close to $6 per tonne, according to Prakash Sharma, coal market analyst for WoodMackenzie research consultants.
"Any decrease to the differential between domestic and imported coal will increase the flow of imports," Sharma said.
"I don't see a major spike in imports, but definitely it is an incentive."
Output from Coal India has stagnated over the past three years, raising demand for imported coal. It aims to produce 464 million tonnes of coal in 2012/13 from 440 million tonnes in 2011/12.
India also abolished a five percent import tax on liquefied natural gas (LNG) for the next fiscal year in its budget, a move that still may not spur imports due to limited infrastructure to get the fuel to power plants.
Mukherjee also said India needed to adjust its fuel prices to cut hefty subsidy payouts and the economic adviser to the prime minister said he expected action on reducing diesel subsidies could be taken in 2012/13.
India's economic survey published on Thursday favoured a fixed-rate subsidy on every litre of diesel sold to conserve use of diesel, which accounts for over a third of refined products consumption, and partially reflect high global prices.
The government said in July 2010 it would liberalise diesel prices but has so far failed to do so.
Reporting by Krittivas Mukherjee, Nidhi Verma and Sanjeev Choudhary; Editing by Jo Winterbottom