NEW DELHI (Dow Jones)

India Friday proposed to remove import taxes on coal and liquefied natural gas and allow electricity producers to raise cheaper funds overseas as it sought to give a much-needed breather to the power sector reeling under losses due to lower tariffs, higher fuel expenses and costly debt.

Power producers are also hurt by a short supply of coal, which fuels more than half of India's total power generation capacity of 190.5 gigawatts. Its shortage was so severe late last year that some power stations had to stop or cut production, raising concerns about future investments in the sector.

In order to improve the supply situation by increasing imports, Finance Minister Pranab Mukherjee proposed scrapping of a 5% customs duty on coal and LNG.

"In power generation, fuel supply constraints are affecting production prospects," Mukherjee said while presenting the federal budget for the fiscal year that starts April 1.

Coal shortage this fiscal year is estimated at 114 million metric tons, which is expected to double over the next five years as the monopoly producer, Coal India Ltd. (533278.BY), faces output stagnation.

Also, production of natural gas has dropped--it fell to 9% to 3.96 billion cubic meters in January--mainly due to a fall in output from Reliance Industries Ltd. (500325.BY).

"The customs duty removal will help in lowering of regassified natural gas prices," Petronet LNG Ltd. (532522.BY) Chief Executive Ashok Kumar Balyan said. "It will renew interest in gas business, make prices competitive and will be favorable for the industry."

Petronet is India's largest LNG importer by volume.

Mukherjee proposed to allow local power companies to raise funds overseas to refinance a part of their rupee debt as domestic banks reach their limit for lending to utilities.

Lending to the power sector has grown to 7.64% of gross bank loans in December 2011 from 4.54% three years earlier, virtually exhausting bank's lending capacity to utilities and slowing the rate of increase in loans to the power sector, ratings firms Moody's said last month.

Raising funds overseas has become more attractive for local industries because of high interest rates at home.

Shares of power companies such as NTPC Ltd.(532555.BY), Tata Power Co. (500400.BY), Reliance Power Ltd. (532939.BY) closed lower after the budget announcement.

Analysts said this was due to no announcement for reviving cash-strapped state agencies that purchase electricity from the power producers. Their troubles affect the ability of power companies to raise production.

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