India’s Solar Dilemma –A story of “Economies of Scale”

By Aditya Prakash Pandey (BKFS 2016-18)

The World Energy Outlook Report of 2015 suggests that India has the potential of around 750 GW of power through the solar energy of which it has set itself a target of 100 GW of power by the year 2022 with a current installed capacity of 12 GW (Data till March ’17). Solar capacity of 750 GW is three times of the current energy demand and hence has huge potential for fulfilling future needs. With five years till the deadline and 88 GW to go, the target seems difficult but achievable. However, project funding, cost of land and equipment and low efficiency are hindrances that cannot be ignored.

Challenges:

1)    Low capacity utilization factor (efficiency)

2)    Transmission and distribution losses amount to 40% of the energy generated

3)    Unpredictable weather patterns and low strength of sun at times present challenges

4)    Land acquisition – Land scarcity, high cost of land acquisition and strict regulations

5)    Lower demand as –

  1. Coal sourced power is cost effective means of energy
  2. Unpredictability of power supply to grid by solar plants due to its reliance on sunlight

6)    High initial cost, large area required for installation, maintenance, skilled labour, high temperature in some areas and lack of environmental awareness are other issues that need to be addressed

7)    The auction price of solar projects has decreased drastically – Rs 15 per unit in 2012 to Rs 5 per unit in 2015 to Rs 3.3 per unit in Feb 2017. This requires cost effective solar solutions

Economies of scale – The elephant in the room

In a typical solar project, the solar module accounts for approximately 60% of the projects’ cost. The price of solar modules has declined by 35% in the past 2 years and is further expected to decline by 20% in 2017. This decline is due to the production of modules at ultra large scale by Chinese companies which enjoy economies of scale and technological and operational efficiency. The cost of these modules is around 30-35% less than the cost incurred by Indian manufacturers. Due to this, countries like China, US, Taiwan, and Germany are dumping their products in India making the sector highly competitive for Indian producers. Flexible pricing, better quality, predictable delivery and utilization of latest technologies have added to the competition. Indian manufacturers are now on the brink of shutting down their shops despite the huge domestic potential. The competition has eroded the financials and the banks are hence not willing to finance these companies. The willing FI’s are offering debts at unaffordable rates to the companies.

The other aspect is the scale at which power is being generated through solar sources. Due to variability in production (which depends on sunlight) and a limited number of plants and limited connectivity, power grids are facing challenges in anticipating the demand and supply mismatch which would vary by the hours of the day. Solar power generation of large scale will ensure sustainable growth of the solar power sector. Also, large scale projects will help in adding technological solutions (like automated maintenance) to the system to make the process effective and efficient.

Conclusion

In current scenario, solar power generation requires a capacity expansion, which depends on cost effective solar modules. Governments push to the solar manufacturing sector must be backed by financial support to these companies, therefore ensuring self-reliant sustainable growth of the sector. For Make In India to work along with cost effective green power, focus needs to be laid on financing this sector. This will also contribute to minimizing the trade deficit and contributing to the GDP.

Given the current situation at Doklam, what could be the possible outcome of the Indo-China standoff?

#Fincabulary19 – Mancession

MeaningAn economic instance in which the unemployment rate is substantially higher among men than it is among women.

The term “mancession” was coined during the financial crisis of 2008-2009, during which men bore the brunt of the job losses in the United States, at rates close to 50% higher than those of women. Analysts have tried to understand the mancession phenomenon, and have offered a few possible reasons. First, during the financial crisis of 2008-2009, the majority of jobs that were initially cut were in the male-dominated manufacturing and construction industries, leading to disproportionate levels of joblessness among males. Also, at the time it was reported that women in the United States accounted for nearly 60% of the college degrees handed out during that period, meaning that a greater number of women were working white-collar jobs, especially in publicly-funded industries such as education and   healthcare, which saw far fewer cutbacks than male-dominated industries.

#Fincabulary18 – Chandelier Bid

MeaningA bid that is announced by an auctioneer during an auction that has not been signaled by a participant, but has rather been fabricated by the auctioneer in order to create the appearance of greater demand for the item.

Chandelier bids are so named because the auctioneer announcing the bids may point to the ceiling or other areas of the room rather than at actual bidders. This gives the illusion that bids are being made. Chandelier bids are not illegal, but can be frowned upon by bidders who don’t like the idea of competing against imaginary competitors. They are most likely to be used when the seller has placed a reserve price on the item, with the auctioneer having leeway at increasing the “bid” until the reserve price is reached.

One Nation One Tax – GST Decoded

– By Varun Krishna Gupta and Chandra Sekhar Routray

At the midnight-joint session of Indian parliament when the gong sounded, the iconic goods and services tax was rolled out. This was only the fourth such occasion in the history when such a session was conducted. GST replaced 17 state and federal levies on everything. Earlier sellers went through a nightmare of central and state sales tax, entry tax, turnover tax, service tax, excise, and octroi. This cascading effect of taxes made India one of the highest indirectly taxed nations in the world. GST effectively terminates this cascading effect and embodies the essence of “One Nation, One Tax”.

GST Models across the Globe

France, became the first nation, to implement GST in order to curb tax- evasion. Since then, more than 140 countries have implemented GST.  Some countries like Brazil and Canada have implemented a dual model of GST. India has also implemented the dual model of GST. According to a report from Nomura Holdings Inc. GST rollout fueled inflation in countries like Australia, Japan, Malaysia, and Singapore. The reason being the tax rate was lower than pre-existing rates. U.S.A does not have GST, as it ensures high autonomy for the states.

Indian version of GST

India customized the dual GST model to synchronize with the needs of its economic transaction.

Particulars

India (Proposed) Canada UK
Standard Rate 0% (for food staples), 5%, 12%, 18% and 28% (+ Cess for luxury items) GST 5% and HST varies from 0% to 15% 20% Reduced rates- 5 %, exempt, zero rated
Threshold Exemption Limit 20 lakhs (10 lakhs for NE states) Canadian $ 30,000 (Appx ₹15.6 lakhs) £ 73,000 (Appx ₹61.32 lakhs)
Returns and Payments Monthly and one annual return Monthly, quarterly or annually based on turnover Usually quarterly. Small business option- annual
Reverse Charge
Mechanism
Applicable on goods (new) as well as services (currently under Service tax) Reverse charge applies to importation of services and intangible properties. Applicable
Exempt Services A number of food items have been exempted from any of the tax slabs.
Fresh meat, fish, chicken, eggs, milk, butter milk, curd, natural honey, fresh fruits and vegetables, flour, besan, bread, all kinds of salt, jaggery and hulled cereal grains have been kept out.
Real estate, Financial Services, Rent (Residence), Charities, Health, Education Medical, Education, Finance, Insurance, Postal services

Chinks in the GST Bill Armor

Different Tax Slabs – AC and non-AC, outdoor and indoor will be having different tax rates. So, a restaurant having both has to make different arrangements.

Anti-Profiteering Rule – The law doesn’t clarify how the costs incurred on account of the transition from GST to non-GST era are to be factored in. It also doesn’t specify how loss-making units pass on the benefits. Many companies are producing two sets of price tags for the same product to avoid confusion. But a comparison of profit or loss for pre- and the post-GST period would be difficult for companies.

Unorganized Sector– India being mostly an unorganized economy with smaller companies comprising nearly 45 percent of manufacturing, an establishment of this supply chain is difficult.

Tax Credit – There is little clarity on input tax credit on the old goods produced before July 1. GST isn’t a retrospective tax and since traders have already paid taxes for the existing stock, there are concerns about their old stocks.

GST Return Forms – According to GST rules, businesses will have to file 37 forms in a year—three each month for CGST, IGST and SGST, and one at the year’s end. For a company with operations in 20 states, it means 740 annual returns.

Conclusion

GST aims to create a uniform tax structure pan-India, removing several layers of taxation. As the time progresses, clarity will follow on many fronts. According to analysts, GST can increase India’s GDP by 2%, by transforming India into a common market larger than Europe, the US, Brazil, Mexico, and Japan combined.