Affect of Demonetization on Indian Solar Industry

The largely cash driven economy of India has seen a major hiccup in transactions after a landmark move by the government to replace all INR 500 and INR 1000 notes. With a large part of the economy trading in the black/grey zone, many industries have seen a serious affect on their operations with no money to transact. The Solar industry too has been hurt badly as can be seen in the extremely poor response received in a recent reverse auction put up by the southern state of Tamil Nadu. While the state had put up 500 MW of solar capacity up for grab, only about 23% of the capacity was bid for though the tariff seemed quite attractive at INR 5.1 per unit (around 7.5 cents/kWh). This compares quite favorably to what has been seen in recent tenders which have gone at as low as 6 cents.

The major reason cited for the poor response was the criteria for the developers to own the land before bidding for the solar projects. This made it extremely difficult for solar developers as in the last one month land transactions have come to an almost complete halt. The reason is that most of the land buying and selling takes place in cash, though the amounts are extremely large. This is done because black money is used and people want to evade taxmen as sellers do not want to pay any capital gains tax and even avoid stamp duties on the land that they would sell. Typically a large portion of the money is paid in cash only. Developers who had not tied up their land for the bids were left hanging as the landowners refused to sell the land without the major cash chunk. With almost no cash available in large amount, these deals did not go through.

I do not think that the demonetization will have any long term effect on the solar industry and the economy in general. In fact, it will bring more transparency and lower prices going forward with people paying their taxes and leading to increased prosperity. The hoarding of money by tax evaders will go down leading to more fair and equal distribution of income. This will in turn increase the demand for power which would be fulfilled mostly by solar energy given its ever decreasing prices and green quotient.