India: Demonetization program could boost solar industry, says Mercom Capital

The current demonetization program coursing through India could well play into the hands of the country’s solar PV industry, flooding banks and distribution companies (DISCOMs) with hitherto scarce cash and thus greasing the wheels for further lending, believe analysts Mercom Capital Group.

The decree issued by Prime Minister Modi has so far been slightly chaotic, but its impact is delivering a handful of unexpected boosts for various sectors.

In an effort to halt the spread of black money holders across the country, the government has mandated that old Rs. 500 and Rs. 1,000 are no longer legal tender. Citizens that have hoarded such cash can exchange the notes for newer, different bills, or pay the monies into a bank account. The notes can also be used to pay pending, overdue or future utility bills – and it is this combination that could potentially boost solar.

Banks poised to receive an influx of cash would be more likely to loosen their lending criteria, enabling would-be solar customers to secure lower interest rates. More tangibly, DISCOMs are likely to be boosted by a rush of bills being paid as customers seek the easiest ways to get rid of currency.

Further, an amnesty on taxes and penalties provided to black money holders will inject additional revenue into government coffers, the Transmission Corporation of Telangana Limited says, and this can be allocated for infrastructural development and funding new projects.

"India is largely a cash economy so in the short-term demonetization is going to hurt installations as small developers will find it tough to pay for land acquisition," said an official at the Ministry of New and Renewable Energy (MNRE). "But in the long term it will be beneficial as DISCOMs will get paid, lending rates will fall and foreign investment will increase in the face of a falling rupee and rising dollar."

According to Maharashtra State Electricity Distribution Company Limited, DISCOMs operating in the Indian state of Maharashtra have already seen payments of outstanding bills top $14 million since demonetization was announced, while the removal of large swathes of cash from areas such as Jammu & Kashmir, Jharkhand, Odisha and Andhra Pradesh may help limit insurgency activity, boosting morale and in turn leading to an uptick in development.

There is, however, caution among the lending community that more money deposited in banks and paid to DISCOMs will necessarily result in a slew of government-funded projects and developments, particularly if people choose to withdraw their deposited cash early next year in the new, legal denominations.

"Demonetization, though chaotic, is turning out to be an overall positive event for the renewable sector in the long run," said Mercom Capital Group CEO Raj Prabhu. "This combined with the rapid decline in solar components costs is making a lot of low questionable bids feasible. However, we have to wait and see how government agencies handle the situation – especially payment issues – going forward."

It was felt that last week’s tepid response to a 500 MW solar tender issued by Tamil Nadu Generation and Distribution Corporation (TANGEDCO) was largely a result of demonetization, but Mercom Capital reports that the MNRE sees this as an exception, and not the rule.