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India can convert a crisis into an opportunity

Posted on September 5, 2013 by Ritesh Pothan

India can convert a crisis into an opportunity. Our current account deficit has swollen, but we can find structural solutions to reduce the gap. I have two initiatives to suggest.

Exports have to focus on manufactured goods. India missed the bus on garment exports initially, by letting China, Bangladesh and Vietnam capture most of a $50-billion shift from high-cost to low-cost countries after the quota dismantling in 2005. Now, India’s share of exports has gone up from 3% to 3.2% only, while that of China has jumped from 28% to 37%.

But we have another chance to at least double our garment exports and create two million additional jobs. India is competitively well-positioned due to its huge textile infrastructure and large pool of low-wage workers, unmatched by any other country except China. We can now produce fabric and garments at prices competitive with China’s. Yet, China’s exports are 11 times that of India. To get there, the government has to take some policy decisions.

PICKING UP THE THREAD

One of the most important changes relates to rigid labour laws. Garment exports have a thin margin of 3-4% of revenue. There are no long-term contracts. Every quarter, a garment exporter starts on a clean slate and has to compete globally for the next quarter’s business. Besides, there is seasonality of demand.

How can anyone achieve profitability with fluctuating and uncertain demand but constant fixed labour costs? The only way is to constrain your business to the level of the lowest season. This is highly suboptimal. Rigid labour laws hurt garment workers by keeping organised employment lower than its potential. Flexible labour laws will result in higher exports, employment and wages through productivity improvement. The government can also divert some NREGA funds to train workers in sewing operations to be absorbed by the garment industry.

A Ray of Hope

On the import side, the biggest culprit contributing to the current account deficit is the inelastic demand for oil imports. A solution that kills many birds with one stone is for the government to facilitate the development of solar power in a big way under public-private partnership (PPA). This will cost next to nothing.

The government should act as a credit enhancer to tie up $50 billion from multilateral agencies in the US, Japan and China to import solar panels. This will enable development of 50 gigawatts (GW) of solar power.

It should assure solar developers that anyone who signs a valid power purchase agreement with any state electricity board (SEB) will automatically get a low-interest rupee loan for 70% of the total project cost at the same interest rate in rupees as the dollar interest rate at which the government has borrowed.

The government can guarantee SEB payments on the solar PPAs against any state default and adjust that against disbursement to states. This will reduce the perceived risks for early movers and investors.
The central government’s risk will be diversified across 28 states. It can also encourage insurers like LIC to provide takeout financing for fully-commissioned projects. This enables recycling of equity to be deployed for the next project, and provides a steady yield stream for insurers, ideal for their requirements.

SUN IS THE LIMIT

It should offer a Rs 1 per kilowatt-hour (kWh) subsidy to SEBs if they pay solar generator on time. This can be funded by the Renewable Energy Fund, already substantially built up through a cess on coal production. Together, these will enable developers to offer solar power at a rate of Rs 5 per kWh, which will fall further over time from technological enhancements. Solar is competitive even now as it displaces peak power, generated with diesel on the margin costing Rs 14 per kWh, while solar costs Rs 8 per kWh. The latest long-term bids from thermal power plants were north of Rs 5 per kWh and will rise over time.

The benefits of this solar initiative to the country will be enormous.

It could generate net savings of $500 billion over the next 25 years, from reduced diesel consumption. A rapid solar build-up will supplement thermal power, which has slowed down. A solar plant can be built in 6-9 months against 48-60 months for a thermal plant.

This will work because the government borrows to facilitate solar power development at 4% dollar interest cost, while the returns in dollar terms on solar investment for the Indian economy are in excess of 17-18% per year. That is because 80% of solar generation happens during peak demand and will save on diesel power.

Rahm Emanuel, the mayor of Chicago, once said, “You never let a serious crisis go to waste. It’s an opportunity to do things you think you could not do before.”

We can take advantage of two crises. Historically low interest rates produced by the global financial crisis to finance solar power, and our crisis of governance that has beaten down the rupee, to boost garment exports. Is our leadership capable of this? Yes, it is.

Source: ET

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About Ritesh Pothan

Ritesh Pothan, is an accomplished speaker and visionary in the Solar Energy space in India. Ritesh is from an Engineering Background with a Master’s Degree in Technology and had spent more than a decade as the Infrastructure Head for a public limited company with the last 9 years dedicated to Solar and Renewable Energy. He also runs the 2 largest India focused renewable energy groups on LinkedIn - Solar - India and Renewables - India
View all posts by Ritesh Pothan →
This entry was posted in Renewables, Solar and tagged China, current account deficit, India, kilowatt hour, Solar Power. Bookmark the permalink.
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