Brand Perception and India

With the existence of monopolies and public sector dominance, and in the absence of competition and multinational companies; Indians pre 1991 were resigned to buying what was available. Those who had desires and the monetary power, opted for the parallel black economy that sold “imported” goods. It was a mini nation of the elite living in another nation which was crawling on its knees. With the lowering of import duties and removal of the licence Raj in 1991, the flood gates opened. A swarm of international and private companies occupied the Indian consumers’ time. Instead of selecting only between Thums Up and Limca, the Indian consumer now had three colas to choose from – Thums Up, Coke and Pepsi. Even the “lime and lemony Limca” fought a fierce battle of supremacy against 7 Up and Sprite.

Every industry segment witnessed new entrants (both domestic and international) – from FMCG[1] to media to aviation to automobiles. With each player trying to maximise its market share, organisations embarked on the road to establishing their unique selling points (USP). During the industrial revolution non-local manufactures undertook “branding” exercises to increase awareness and acceptance of their products. This was an attempt to try an associate a certain experience or quality with the product in order to create a follower base. Some of the first brands thus to be established during that era were Coca-Cola, Quaker Oats and Campbell Soup[2]. Similarly to entice customers, Indian companies post 1991, embarked on a journey to create their own brand image.

This quest reached a level where even election rallies were being driven as marketing campaigns. Remember the “India Shining” tag line of the Bhartiya Janta Party (BJP) in the last general elections! It’s sad that despite an innovative approach to Indian politics, the BJP lost elections[3].

It is not just BJP, but a number of Indian firms have spent millions of dollars on brand building exercises, unsuccessfully. Remember Onida television – “neighbours’ envy, owner’s pride”, or Amul chocolates – “a gift for someone you love” or my personal favourite – ECE “Bhool na jana ECE bulb lana[4]” the jingle was sung in a multitude of Indian languages one after the other!

Today, while there has been some success, urban Indians still recognize very few Indian names as “brands”. This conclusion is the result of a survey[5] with Indians in the age group of 18 to 62, living either in Indian metros or overseas and across professional backgrounds. Each participant was asked to respond to a simple question “what do you think of first when you hear the term Indian brand and the term international brand”. The results were quite fascinating. About 11% of the respondents replied stating that the term “Indian brand” made them uncomfortable denoting inferior quality or service, however, international brand to these individuals meant quality, expense or luxury. Only one of the 55 respondents actually said that his/her instantaneous reaction to “Indian brand” was trust in quality while “international brand” made him/her suspicious.

Leaving aside these responses, an analysis of the remaining answers came up with a very interesting tally. There was one Indian name that came out as being the strongest brand in India – Tata, with 44% of the respondents thinking of Tata as their Indian brand. In fact, if two other responses that belong to the Tata group of companies are added to this set[6], then the Tata Group walks away with almost 50% of the votes. On the international side, it is a same number of voters, 44%, who came up with varied answers which no one else in the analysis group had covered. So urban Indians relate to more foreign brands than Indian, might be a fair analysis. To further substantiate this thought is the fact that the most popular “international brand”, Coke, received 22% of the votes while only 22% of the respondents came up with Indian brands which were different from the choice of any other respondent! Thus, in a country with the most listed companies globally, the urban Indian middle class seems to miss the palpable brand equity domestically.

One reason for the weak brand recognition in India is that the middle class which has the largest targeted audience group is undergoing a brisk attitude change. Globalisation is rapidly altering the life style expectations of this segment of the society. For any “brand” to have a tangible “brand equity” there needs to be consistency in the message delivered to the aimed market segment. With the end consumer’s needs and desires changing from day to day, the product marketing also changes accordingly. This causes disruption in uniformity of message delivered, leading to a weaker “brand” perception.

Uniformity of message is also very difficult to maintain in a country like Indian which is culturally very diverse[7]. Thus the second reason for weak brand development in India is the different needs and mental makeup of Indians residing in different parts of the country. If a glamorous product appeals to the more materialistic north India, it loses its sheen in the more conservative South India. Similarly, while local handicrafts are still preferred in the east, there is a very conscious following of western fashion in west India. Food habits, lifestyles, intellectual curiosity are all different in this country of over 300 languages. Thus western brand building concepts cannot be used in India and we Indians need some more time to develop a branding system that works within our cultural diversity and sensitivities.

While it is true that a country which has seen a plethora of brands only in the last two decades, will take some time to develop its own unique marketing and brand building framework, a very important third reason for underdevelopment of “brands” in India is the shareholder attitude. Majority of Indian firms are family run with controlling stakes and management say vesting with the family, who are very conscious of the cash flows. Brand development requires significant investment into researching the target audience attitude, analysing varied marketing strategies and then finally undertaking a thought through long term marketing campaign. In the absence of the desired investment happening, the “branding” exercise is half hearted and hence the outcome is similar.

Substantiating the longetivity and stability of campaign and the investment are the two leading “brands” of the mentioned survey. Coke and Tata have had consistency of logo and experience for the consumer in their marketing despite customisation to address the local audience suitably. On the flip side, it can be seen by the experience of the Indian IT industry that lacklustre effort in brand development leads to non recognition. Globally India is the most known today for its ITeS[8] industry, however, only 2 of the respondents thought of an Indian IT company as a brand[9]. And if one comes to think of it, there is nothing that can actually be described about the Indian IT players except for their low cost base. Given that now even eastern European economies are proving to be equally cost effective with a significant workforce capable of managing outsourcing, Indian IT firms are facing competition. Thus in the absence of another quality associated with Indian outsourcing, the industry is threatened in losing its cash cow status.

Most developed economies are home to some of the most globally recognised brands. As India is progressing on its growth path, Indian companies also need to pay more attention to the “brand” awareness that they create; especially when they enter the overseas markets. India Inc’s brand awareness will improve its own revenue stream, build investor confidence in the country and support India Brand Equity Foundations’ attempts to promote the nation as the Fastest Growing Free Market Democracy.

[1] FMCG = Fast Moving Consumer Goods
[2] Source: Wikipedia
[3] Of course the reasons for BJP’s defeat were much more complex than just their marketing campaign
[4] Literally translated as “Do not forget to get an ECE bulb”
[5] Details in Appendix 1
[6] Titan and Taj
[7] Madhukar Sabnavis had a very interesting column in Business Standard on this topic. The article can be found on http://www.business-standard.com/india/news/madhukar-sabnavis-culture-sensitive-marketing/351047/
[8] IT enabled Services (IT = Information Technology)
[9] Surprising, given that almost 13% of the respondents are or have been IT professionals.

Corporate Governance - Further Info

Further to my last piece, it is quite startling to know that the last three years' Satyam annual reports state that the audit committee has no financial expert on it. According to the disclosure, the company had been unable to find an appropriate candidate. Now that seems to be incredibly lame. When the company could get a phenomenal board of directors consisting of domestic and international big-wigs, it is just impossible to believe that they were unable to find a financial expert. Maybe the company was unable to find a financial expert who would agree with their ways of transacting.

This puts even more of an onus on the auditors and the CFO. Both should have been in a position to highlight the discrepancies in the accounts. The question that amazes the most is how did the auditors provide for the cash balances without bank statements? If those bank statements existed, then were they forged? If they were forged, was the CFO aware of the same? Are audit firms in a position to identify forged bank statements?

Another important issue that comes to mind is that in the absence of a mandatory attendance requirement of independent directors, what was the board composition at the Satyam results' board meetings. Were the results questioned?

Leaving the Satyam issue aside, an important disclosure point has been raised with the merger of Bank of America and Merrill Lynch. Albeit a legal question, this still makes an investor want to have higher disclosure standards. Read the FT article on:

http://www.ft.com/cms/s/0/2ac14f58-e363-11dd-a5cf-0000779fd2ac.html

Corporate Governance in India - Still a Half Hearted Measure?

With the end of November of 2008 came India’s own 9/11; and with the dawn of January 2009 was born India’s own Enron (or WorldCom if you wish). While the two events are not comparable at all, they do have one common causal factor – the failure of governance and administration at the helm. Both tragedies have impacted the unsuspecting and the innocent the most, but those who are accountable and responsible are yet to take stand in the courts of justice.

In the particular case of Satyam, an expectation of legal proceedings commencing this early might be premature; however, it is probably high time that corporate governance reforms are implemented in India. Given that Clause 49 of SEBI’s[1] listing agreement already calls for measures akin to the Sarbanes Oxley (SOX) act of the US, is there any further room for regulatory improvement? A brief analysis underscores a few avenues where further amendments, to increase the corporate governance and transparency standards, are possible.

To begin with, independent corporate governance assessment (CGA) and its disclosure should be made mandatory for all listed firms.[2] While this might seem an extreme reaction, it will have an impact; as desiring at least presentable public disclosures, firms would be forced to improve internal controls. All assessments being widely available will potentially promote competition, thereby improving governance standards on the whole. And most importantly, increased transparency and control will have a positive impact on the share price. Historical and current data support this share price increase argument. The mere announcement of the introduction of Clause 49[3], in May 1999, caused large cap companies’ share prices to increase by c. 10% over a 2-week window.[4] Infosys, the most revered company for its corporate governance, by both CRISIL and CARE[5], gained 1.33% from 7th January 2009 (the day Satyam CEO disclosed the fraud) to 9th January 2009 (the next trading session). In the same time period, Satyam shares lost 50% of their value while the NIFTY Index lost c. 1.62%[6]. In fact even the introduction of SOX in the US in 2002, caused an upward swing in the share price movement. Thus CGA is not just a cost centric exercise alone but can translate into significant tangible gains for an organisation.

With majority control being held by insiders, earnings management is a highly probable event. While not totally illegal, the practice leads to deficient disclosures and ambiguity in financial statements. In order to align interests of the promoters (typically also the senior management of the company) with the wider shareholder base, there needs to be minimal earnings management. To successfully implement this, the audit committee must have on board at least one independent director with financial expertise. Clause 49 requires that the audit committee has one independent director and one financial expert. However, it does not make it mandatory for both characteristics to be represented by the same member. A study conducted by Carcello, Hollingsworth, Klein and Neal in 2006[7] concludes that the inclusion of an independent director on the audit committee with in depth financial knowledge and experience is the most efficient in extenuating earnings management. The study also highlights that this is in particular true for firms with weaker corporate governance standards. Given that most Indian firms are family owned mid sized companied, maybe the Clause 49 requirement should be amended to require an independent financial expert being a member of the audit committee. Additional experts and/or independent directors will only strengthen the team.

It is interesting to note at this point that the Satyam board, which had many a reputable name from the industry as members, could not identify a fraud of this magnitude right under their noses. There are questions surrounding the monitoring of the Satyam audit committee. Here Khanna and Black’s study, Indian Corporate Governance an Overview, provides an interesting input. Apparently less than 70% of the 293 Indian corporates they sampled, have bylaws governing the audit committees. The reality and implementation of these bylaws is further questionable. Clause 49 probably needs to further detail the working of the audit committee and its reporting. A more focussed watch and detailed analysis might cost Indian companies a little extra, as independent directors begin to demand higher remuneration for their time and efforts. However, that will be money well spent and hopefully will lead to improved corporate performance and a more credible shareholder base.

Corporate performance also depends on the investments, fund raisings, capital utilisation resolutions passed by a CFO’s office. These key financial decisions impact the balance sheet of the company; shaping the return on capital. The 2008 derivatives’ scandal in India, which caused multi million dollar losses for the small and mid-cap companies, illustrated how unknowing CFOs took decisions to the detriment of the shareholders. In the absence of knowledge and expertise, an investment made by an individual without the board approval, puts the company’s balance sheet even in greater danger. In numerous cases, the derivatives investments made by SMEs were not approved by the company boards. Thus the board, under Clause 49, probably needs to be empowered to regularise the dealings of the CFO’s office.

Away from the company, one avenue that requires new legislation is that of generally accepted accounting principals. The Institute of Chartered Accountants of India (ICAI) has made proactive efforts in bringing international accounting standards to India; to integrate local policies with the global practices. To this extent, ICAI has even adopted 15 International Accounting Standards (IAS) out of the 33 IAS. However, due to the absence of prescribed statutory obligations, accounting standards in India still remain inadequate and non-uniform; dependent on the interpretation of the company auditor. Take the case of FCCB issuance in the country. While most securities issued will redeem at a premium to the issue price, there is no requirement for companies to account for the accretion of the bonds. This has the potential of creating significant liability mismatch upon maturity of the bonds. In the absence of a market norm, every company follows an accounting standard different from its peers. In some instances, the company follows one standard that has a partial impact on the balance sheet and then ignores another standard only to protect the financial statements from being further impacted.[8] There needs to be a concerted effort by ICAI and the law-makers to limit the alternate interpretation of accounting standards.

Corporate governance is not only about finance and economics. However, since most global corporate governance scandals revolve around these two issues, maybe the capitalistic society needs to address these two aspects before any other pillar supporting corporate governance is touched for refurbishment.


[1] SEBI: Securities and Exchange Board of India
[2] Currently only 50 of the 4,700 listed firms have undertaken the CGA exercise. Of these 50, only 19 have disclosed these assessments. Source: www.livemint.com
[3] Clause 49 of SEBI’s listing agreement
[4] Source: Black, Khanna; Can Corporate Governance Reforms Increase Firms’ Market Value: Evidence from India
[5] Source: www.livemint.com
[6] Source of statistics: www.nse-india.com
[7] Audit Committee Financial Expertise, Competing Corporate Governance Mechanisms, and Earnings Management
[8] A study conducted by Shankariah and Rao, using a sample set of 40 private an public companies, showed that the majority of the sample companies (65%) disclosed using five to ten accounting policies. 22.5% of the sample companies disclosed using more than ten standards. The remaining disclosed using less than 5 standards. 87.5% of the sample public limited companies complied with five to ten accounting standards.

Economic Impact of Mumbai Attacks

People have been debating about impact of last week's Mumbai attacks on the Indian economy. In the short run mostly the cinema and restaurant businesses will be impacted. However, in my view there will be no direct and immediate impact on the equity markets as there is no money left for the FIIs to pull out. In fact global investors such as Mark Mobius of Tempelton have reiterated in the last few days that India remains an investment destination despite the current turmoil.

The more major and indirect consequences are linked to the budget of 2009 in my view and here are my first thoughts:

1. If the defence budget was to increase to the detriment of infrastructure and education spend, then there will be a serious impact. These are the two most important sectors for economic growth and are screaming for cash. Not related to budget, the country needs to focus on investing in renewable energy from a long term and acquiring overseas carbon fuel sources for the short term, if we are to become an energy sufficient nation.

2. Any increase in taxes in the name of domestic security, will further reduce spending and hence cause a drain on the economy.

3. The biggest danger, however, would be an increase in the country's deficit due to increased or imbalanced defense budget. Then not only would the economy suffer directly but the sovereign credit rating would also be in jeopardy and that will cost India Inc as well.

Indian Economy - Approaching Times

The value erosion and the risk aversion that the global markets have witnessed in the last few days have hit India already. This, however, could just be the beginning. The high inflation, high oil prices and depreciating rupee have reduced the foreign currency reserves to c. USD 300bn. With an external debt of c. USD 221bn this makes the Indian economy quite vulnerable.

As of March 2008
GDP ---------- $ 1232.946bn
Current Account ---------- ($ 37.865bn )
External Debt ---------- $ 221.212bn
Trade Balance ---------- ($ 90.06bn )
As of July 2008
Inflation ---------- 12.36%
Foreign Currency Reserves---------- $ 296.869bn
Table 1: Selected Macroeconomic Data[1]

An initial analysis of the external debt components, however, brings some relief. Only a quarter of the outstanding amount is short term liability (including trade credit of less than one year). Moreover the country’s deposit base at c. USD 760.511bn (87% of the funding source of the Indian banking system) provides a comfortable cushioning. Further, c. 88% of these deposits are with the local banks whose balance sheets are minimally impacted vis-à-vis their foreign counterparts.

As of March 2008
Trade Credit ---------- $ 10.267bn
External Commercial Borrowing ---------- $ 60.019bn
Short Term Debt ---------- $ 44.313bn
Multilateral ---------- $ 39.312bn
Bilateral ---------- $ 19.613bn
Others ---------- $ 45.688bn
Total ---------- $ 221.212bn
Table 2: External Debt[2]

External Commercial Borrowings (ECB) comprise a quarter of the country’s external debt and that is a concern. Typically ECBs have a three to five year tenor and were issued in abundance from 2005 onwards. Thus there could be a refinancing wave about to hit India. Table 3, elaborates on the difficult refinancing conditions. The primary funding source for Indian firms is banks. Regulatory policy which is fighting inflation is constraining liquidity with the domestic banks. Foreign banks have very limited spare capacity at this point in time. In addition, the credit market has widened very significantly[3], implying that the cost of raising money will be much higher. The global capital markets are not conducive to any fresh fund raising ruling out any meaningful equity or public debt issuance. Hence, options for Indian corporates are limited.

As of March 2008
Bank Credit ---------- Rs. 174,566 cr.
External Commercial Borrowing ---------- Rs. 160,221 cr.
Equity capital Markets ---------- Rs. 64,502 cr.
Others ---------- Rs. 148, 202 cr.
Total ---------- Rs. 547,491 cr.
Table 3: Funding Sources for Indian Corporates[4]

With record profits in 2006 and 2007, Indian corprates could have the money to repay any debt maturing in 2008 and presumably in 2009 as well. However, the picture for 2010 maturing debt does not look promising unless the companies either raise the required money at the earliest or extend their debt maturity profile. 2010 becomes a critical year because it is not only India but Asia overall that has a significant redemption schedule coming up in 2010. A recent Morgan Stanley research puts the 2010 redemption figure at over USD 70bn representing 30%+ of the total outstanding Asian corporate debt.

Firms that require funding 10 – 15 months down the line for capex, refinancing or expansion should raise the money now whatever be the cost. On the one hand it will keep them away from competing for funding with everyone else a few months down the line and secondly it will allow them to focus on business opportunities. In short it will put them in a stronger position to capture the upswing in the market.

While everyone is examining their own houses, corporates should also start to recognize the importance of having a diverse and stable investor base on board. This should also extend to having a healthy mix of domestic and foreign banks in their core banking syndicate.

Size, influence and brand no longer ensure longevity. It is a time to go back to basics and tread ahead cautiously.

[1] Source: RBI Website, IMF
[2] Source: RBI
[3] Investment grade credit spreads have widened 100bps in 2 days and there is very little clarity on pricing of illiquid and high yield debt
[4] Source: RBI

LEH Mishap

The last two days have created history. Two of the half a dozen and more “bulge bracket” houses have ceased to exist, US economy is witnessing events that had been considered unconceivable[1] and well the pain is only beginning. The financial world or shall we say the world will never be the same again.

This calamity started as the now infamous sub prime crisis, was fuelled by the increasing oil prices and the increasing inflation sent the world into a credit crunch. While oil is now trading at around USD 92 a barrel, inflation and the credit crunch have shown no signs of abating. Global economy is in a state of shock and there is a wide spread belief that it is only a matter of time that the fire will cross the Atlantic to hit Europe.

How bad will be the impact in Europe? To answer that question one needs a closer look at the macro economic factors, the exposure of individual economies to the housing market and the strength of the local financial system.

Table 1: Macroeconomic and Financial Soundness Data[2]

With the highest forecasted GDP growth rate, the healthiest current account and a relatively low CPI, Germany seems to be the most resilient economy in Europe. The positive net lending[3] and the low mortgage debt to GDP ratio bring comfort that (i) in case of an economic turmoil the economy has some cushion to weather the storm and (ii) the country will not suffer excessively due to a downturn in the housing market.

The situation, however, is completely different for the UK. Not only does the country have an alarmingly high mortgage debt to GDP ratio, it also has a current account deficit and a negative net lending ratio. Further more the UK economy is heavily dependent on the financial services sector and any further impact on the industry will skew the unemployment rate away from the current forecast. Any further increase in unemployment along with the high inflation will cause significant economic turmoil in the country. According to an IMF research, almost 50% of the loans[4] made by UK banks are external loans. This means, that an impact on the UK financial sector will also have presumably far reaching consequences outside the country.

While similar to the UK in terms of high a mortgage to GDP ratio and high current account deficit, Spain probably will not have as much of an impact on the world (given that only c.10% of its loans are external). Moreover, the Spanish banking industry is quite fragmented and supported by solid deposit bases. This in itself could contain some of the impact. However, given the strong emphasis on the construction boom in the recent years, Spain is definitely vulnerable in the current global economic situation.

It is interesting to note that while the 5-year senior USD CDS levels indicate that Germany is indeed believed to be a safer bet currently, the market has not priced in sufficient risk for the UK. On the flip side, the equity markets have penalized Germany relatively more than the UK, despite a Northern Rock and a Bradford & Bingley in the UK.

Table 2: Credit and Equity Market Data[5]

In conclusion, I believe that the doom and gloom might not be as bad as being portrayed. After the US though, it is now UK’s turn to see a changing landscape of the finance industry. With the weaker dominance of these two majors maybe finally the scales have shifted in favour of those who are located eastwards. But does eastwards mean the Continent or does it mean the Far East is yet to be seen.

[1] AIG is trading 92% below its value a year ago as I type and still struggling to raise USD 70bn for survival
[2] Source: Bloomberg, International Monetary Fund, Morgan Stanley Research
[3] Net Lending = Savings - Investments
[4] Loans includes corporate and sovereign debts
[5] Source: Bloomberg

Indian Energy - A Renewable Asset

India by no means is an energy secure country and in order to grow and mature into a developed nation we need to ensure that safe and affordable energy is available to all citizens for all times to come.

Currently coal is the most important fuel source in the country satisfying c.55% of our energy needs. While India houses the world’s fourth largest coal reserves, these are low thermal grade reserves which will deplete within forty years at the current rate of consumption. Oil and gas on the other hand are not available domestically[1] making the country reliant on foreign supplies and susceptible to external shocks. In addition to limited resources, traditional energy in India is largely State owned[2] leading to inefficiencies and low productivity. There needs to be increased privatisation of these industries in order to support the desired pace of economic growth. The government also needs to encourage Indian ownership of foreign fuel supply assets, which however, could potentially threaten national security and international alliances[3], making the task slow progressing and costly.

In the short run largely it is fossil fuels that will satisfy the country’s huge energy appetite. Thus privatisation and relieving bottlenecks of fuel supply should be tackled with urgency. Albeit with global oil, gas and coal costs at almost all time highs and in the absence of timely action in the past, this will be a costly proposition for the country. In the long haul, however, conventional energy is neither sustainable nor viable. There has to be diversity in the energy mix and an increased contribution from renewable energy. India is in a unique position to that extent.

The country has the potential to generate 150,000 MW of hydro power. India has in excess of 200 clear sunny days annually which can potentially translate into 5,000 trillion kilowatt hours of power. In 2007, it is estimated that the country had 8,000 MW of installed wind energy capacity; which can be further scaled to c. 65,000MW. Annual agricultural residue and surplus biomass could further generate 17,000 MW of power. And if all that was not sufficient our coastline of c. 7,600 km can potentially secure 9,000 MW of power using tidal energy. These staggering numbers indicate that in renewable energy India can find energy security and if exploited efficiently and timely, it could be a great investment opportunity. In fact the planning commission’s eleventh five year plan suggests that the Indian renewable energy sector is a USD 125bn prospect for the domestic and international investor community in the next four years[4].

The biggest gain from this investment would be for corporate India (not just for companies investing in the sector) as it is the highest consumer of power in India accounting for almost 45% of the consumption. India Inc is heavily reliant either on setting up captive capacity or self-generation back up options (60% of Indian firms resort to these means) for smooth operations. Easily available affordable power would mean that while setting up manufacturing units an additional component would be taken care of (i.e. setting up power source), freeing capital and man hours. Further, the average industrial power tariff in the country in 2007 was INR 4.50 while domestic tariff was as low as INR 1.14 in certain states. These low and unsustainable domestic tariffs led to a drain on the resources of power companies. With additional cost effective capacity coming on stream the tariff disparity could reduce and also stabilise profit margins for power producers.
Renewables offer solutions to a number of problems; however, these are not uniform across all segments. There is a cost, potential and policy trade off involved in every subdivision. The numbers below highlight this fact

Source: MNES[6], New and Renewable Energy Policy Statement 2005

While hydro, wind and biomass seems to be efficient sources; solar photovoltaic energy can be extremely expensive. The payback period for solar photovoltaic technology is also debatable with some experts citing times as long as 8 to 11 years for a system with a life of 30 years. If one considers the disposal of acid used by solar cells, then this not a truly “environmental friendly” medium. Despite this data and knowledge it is surprising that solar energy is the only renewable energy form to be a part of National Action Plan for Climate Change unveiled by the Indian prime minister on 30th June 2008.

Wind energy is amongst the cheapest and most scalable of renewable energy forms. Not only is there installed capacity in India but there are also global wind energy experts such as Suzlon present in India. In fact India is a global hub for wind energy equipment manufacturing. This means that there is an opportunity to gain from exporting certain renewable technology as well. Thus it is baffling why wind energy has not been included in the National Action Plan. The attention being given to nuclear energy also becomes contentious in the light of the capacity potential and low capital costs of some of the renewable energy forms.

There are further challenges for India in providing a regulatory and policy framework that will encourage investments and channel funds towards projects that will increase the country’s energy efficiency. For one India still does not have a renewable energy law. A draft exists; however, it could be a little too aggressive[7] and is far from being implemented. Next, there is no uniform policy across the states ranging from tariff decisions to duration of PPAs[8]. Foreign investors have little faith in the Indian financial and legal systems upholding contracts and contractual obligations under times of stress and added to that currently only joint ventures are permissible with 100% FDI under the automatic route still being under consideration. With foreign technological and financial assistance key to the development of this sector, it is key for the government and regulators to address these issues.

Every economic downturn seems to be followed by a bubble. The 1998 crisis emerged into a technology bubble. When that burst, the real estate bubble began to build and while we are still trying to come out of the real estate ruins, there is another bubble surfacing – the renewable energy bubble[9]. If India wants to be the early bird and ride the high tide of this bubble then we ought to begin now. Else we will once again be in a position that the current traditional energy industry is in – a little too much but a little too late.

[1] India has 0.4% of the world’s proven oil reserves and 0.5% of the proven global gas reserves
[2] c.35% of NIFTY index is the energy sector of which more than 50% is government owned
[3] The Iran-Pakistan-India gas pipeline is a good example of international tensions rising due to domestic energy constraints
[4] c.60% of this investment is required for generation and the remaining 40% for transmission and distribution
[5] A range of price indications provided by a number of states as available on www.newenergyindia.org
[6] Ministry of Non-conventional Energy Sources (MNRE as it was called until 2006)
[7] The draft aims at 10% of power generation being sourced from renewables by 2010 i.e. 2 years
[8] PPA = Power purchase agreement
[9] A bubble can be defined as a phenomenon where a large pool of money is chasing the same asset class. At some point this demand supply imbalance leads to overpricing of the asset class disturbing the sustainable equilibrium