Manufacturing hopes not steeped in fundamentals

22 August 2020 |

ReNew recently made a surprise announcement to set up a 2 GW PV cell and module manufacturing line. Adani and Azure, the latter in partnership with Waaree, are already due to set up cell and module manufacturing capacity of 2 GW and 1 GW respectively as part of their win in the manufacturing-linked tender. Several other companies, including both manufacturers and project developers, are believed to be in advanced stages of considering setting up new manufacturing capacity. The list includes Vikram Solar, Premier Energies and US-based First Solar amongst other names. As per a news report, MNRE has received proposals aggregating total manufacturing capacity of about 10 GW.

  • The government is planning to throw everything from duties to cheap capital and land to demand certainty for growth of domestic manufacturing;
  • Most companies seem to be making opportunistic short-term bets based on government incentives;
  • Government incentives alone cannot be a sufficient basis for investment decisions of private investors or developing manufacturing into an engine of long-term economic growth;

The tide of company announcements comes in the wake of fervent plans of the Indian government, which seems to be throwing everything at manufacturing. In addition to extending safeguard duty by a year, it is looking to levy customs duty on all imports. There are plans to offer 5% interest rate subsidy and subsidised land with automatic project clearances. The government has also directed public financial institutions to offer debt financing of up to 75% of total capital cost to manufacturing ventures. Historically, lack of any debt financing has been a major business barrier as companies have found it difficult to fund the capital-intensive business.

How much all of this actually plays out is anybody’s guess. There is a huge gulf between Indian manufacturing businesses and their Chinese competitors on technology, scale, in-house business capability and external eco-system. Government support can be fickle at the best of times and does not provide a sound foundation for long-term investment decisions. Uncertainty of policy design and poor implementation have been amongst the biggest challenges in the sector. The government has already failed to implement customs duty from 1 August 2020 onwards as promised. Our best guess is that about 5-7 GW of new downstream manufacturing capacity would be actually set up over the next three years.

But the new businesses do not unfortunately herald India’s manufacturing resurgence. The rush to set up manufacturing capacity is not based on strong business fundamentals. Almost all companies seem to be making opportunistic short-term bets based on government incentives and trade barriers rather than plotting a long-term roadmap to develop business competitiveness. If the Indian government is serious about developing manufacturing as an engine of long-term economic growth and wants to move beyond rhetoric, it will have to work much harder than offering incentives.

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