Price it right

The government needs a cohesive economic strategy

Naturally, any new government wants to make a difference to various policies as soon as possible. This can lead to a large number of different suggestions being made. It is possible, for example, that the ministry of new and renewable energy might be reconsidering the subsidy set-up for solar power in India. It is important that India increase its output of solar power; it is equally important that it not turn on the subsidy tap for possible solar-power producers without ensuring that there’s an economic return at the end of the day. In particular, the history of wind-power subsidies in India demonstrates that a generation-based incentive – an output subsidy, in other words – works much better than a capital subsidy — for example, as “accelerated depreciation” in a producer’s tax return. The latter mechanism provides incentives for the creation of poor-quality capacity; in some cases, entire wind-power farms were set up, with tax incentives, that never produced wind energy, and just became real-estate plays. There is no clarity as to whether the renewable energy ministry appreciates the difference at all. Naturally, accumulated past subsidies should be paid; but is reform being considered, or just a quick administrative fix?

The worry is that, in cases such as these, intervention for intervention’s sake is the default option. Are common basic principles being kept in mind in each case? Another set of decisions is worth noting, for which the power ministry – run by the same minister, Piyush Goyal, as the renewable energy ministry – is partly responsible. On the one hand, the price of coal produced by Coal India is being reduced to well below the international price. On the other hand, the price of natural gas may be increased — to bring it more in line with international prices. Both might be justifiable decisions when seen in isolation. When seen together, they are contradictory, and suggest that the government simply has no overall energy strategy.

There is nothing wrong with having an active government. It is precisely these signs of life that investors have welcomed. However, activism must be placed on a cohesive map. Decisions can’t be taken in isolation, and without a clear economic ideology or strategy underlying them. Too often, such decisions will work in opposite directions. Worse, they may also become excessively interventionist, not allowing markets to work as they should.

Shortly, another decision will have to be taken by the government: on whether or not to apply anti-dumping regulations to foreign solar panels. On the one hand, domestic solar-panel manufacturers complain that subsidised imports of Chinese solar panels are killing their industry. On the other hand, some – including the renewable energy ministry – believes that it would escalate the cost of solar-power projects too much. These are both good arguments. Here’s the question: on what basis will the government decide between them, in the absence of an overall approach to pricing policy?