Protectionist thrust is understandable, but Narendra Modi has picked the wrong target HENNY SENDER  Add to myFT India's government has announced plans to introduce a 70 per cent duty on solar panels imported from several countries © AFP Share on Twitter (opens new window) Share on Facebook (opens new window) Share on LinkedIn (opens new window) Save Save to myFT Henny Sender YESTERDAY Print this page5 In the hinterlands of eastern Uttar Pradesh and Bihar in the Indian heartland, there are few reasons for optimism. Trains wind their way across the plains at speeds barely improved in 30 years, while many roads have worsened. Jobs are scarce. Unemployed young people sit listlessly in the shade. Yet in some places, the evaporation of irrigation canals in place since British times has slowed thanks to solar panels placed above them. More importantly, these have meant that villages in remote areas have electricity for the first time. Solar energy has been a great success story in India at a time when cities such as Delhi, which borders Uttar Pradesh, have been choking on the foul air caused by their dependence on thermal power, generated by plants that burn dirty coal and lack the most modern scrubbing technology. While the pricing of solar energy does not always measure the cost accurately, it is fast becoming competitive with coal-fired power plants. Or at least that seemed to be the case until January, when Narendra Modi’s government announced it planned to introduce 70 per cent tariffs on solar panels imported from several countries — but mostly directed against China. India barely has a solar panel manufacturing industry. Indeed, with a few exceptions, it doesn’t have much manufacturing at all. The prime minister’s much-vaunted “Make in India” campaign hasn’t really happened. So, in some ways, India’s latest protectionist thrust is understandable. Manufacturing has historically been the way developing economies grew and their people prospered. India needs to create 1m jobs a month to absorb its young people as they move from rural villages. Yet, before the government stopped releasing data last year, India was creating fewer than 1m jobs a year, and many of them low-end service posts. Both the ruling BJP and the opposition Congress party have long blamed China for the lack of their own manufacturing competitiveness. But to try to focus on solar panels makes little sense. India needs manufacturing that is labour intensive rather than capital intensive, given the abundance of workers and the high cost of capital. But solar panel production is costly and does not require many workers. In introducing the plan (which is tied up in court wrangling), the Modi government “hasn’t thought through many issues such as what happens to existing contracts or input costs”, said one former senior official. The worry also is that protectionism becomes about protecting the well-connected and inefficient rather than the capable and economically rational. Many coal plants, for example, are owned by powerful industrialists with a stake in raising the costs of solar to preserve the viability of their plants. In some cases, they won government contracts to supply power by bidding at low prices, seemingly in the belief that the government would come to their rescue if needed. Recommended Martin Wolf Modi’s India is on course to top China for growth Plants have also been funded with borrowed money. If these operations cannot generate sufficient cash flow, it may lead to another round of bad debts in the system, hitting state-owned banks such as State Bank of India and Punjab National Bank. Ashish Gupta of Credit Suisse in Mumbai estimated that $25bn of debt in the sector would go into default, having already been classed as “stressed”. This could make banks less willing to lend to companies in India — and without adequate credit the economy cannot grow. “Everybody knows thermal doesn’t have much of a future,” he said. “They are already asking the government for relief.” Making the situation even more vexing is that some of those operating the ailing thermal plants have ambitious plans to get into solar power by bidding for government mandates. These include Adani Power, Tata Power and JSW Energy — although some analysts said that these have an interest cover of less than one times their earnings before interest, tax, depreciation and amortisation on their power operations. “Those rates will make solar equally unviable,” Mr Gupta predicted. “It is an unjustifiable race to the bottom,” said Ajay Gundecha of infrastructure consultancy Apta Ventures. Sadly, though, not for the first time. Trapped between an appeal to populism and policies catering for a few privileged tycoons, the PM needs to find a more consistent way to boost the Indian economy. henny.sender@ft.com