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Will the new Tamo sub-brand be able to change Indian consumers’ perception of Tata Motors?
Tata Motors is out to regain its place in the Indian automotive market, where it continues to suffer from a lack of trust among consumers.
Launched in February, Tata Motors’ future mobility sub-brand, Tamo, is intended to act as an incubation center of innovation’ to push new technologies for developing future mobility solutions…
Read our article published on Automotive World.
With more than 25,000 outlets operating in 75 countries, Starbucks is rightly said to be the premier retailer of specialty coffee globally. With the mission to “establish Starbucks as the premier purveyor of the finest coffee in the world”, the brand continues to rapidly expand its retail operations by opening stores in new markets, particularly with focus on Asian countries. Starbucks has already captured a solid customer base in China and Japan, and it is aiming to expand in other parts of the region, especially in India. While partnerships with local players have been beneficial to the company’s expansion strategy, Starbucks uses an interesting mix of product localization ideas to suit consumer preferences and local tastes to make a mark in the land dominated by tea drinkers.
With plans to open 12,000 new outlets globally over a span of five years, out of which nearly half are to be opened in the USA and China, Starbucks is planning to take its chain to a total of about 37,000 outlets globally. Asia is increasingly important to Starbucks’ growth strategy. As of 2016, the company operated 6,443 stores in 15 countries in the China/Asia Pacific (CAP) region that includes Australia, Brunei, Cambodia, China, India, Indonesia, Japan, Malaysia, New Zealand, Philippines, Singapore, South Korea, Taiwan, Thailand, and Vietnam. Potential for growth in this region is great, not only measured in the number of stores, but also in per store revenue – the CAP region currently accounts for 25.7% of Starbucks stores count, but generates around 14% of the company’s revenue.
Starbucks – Expanding in Asia by EOS Intelligence
Starbucks follows a two-pronged approach to grow its business in the Asian markets (and other emerging regions). The first tactic of approaching these markets is to partner with regional players to have an easy access. For instance, the coffee maker entered the Japanese market in 1995 with a 50-50 joint venture with Sazaby League, a major Japanese retailer and restaurateur, and in 2014, Starbucks took over the full ownership of its Japanese operations. Similarly, the first Starbucks coffee store that opened in India in October 2012 was in alliance with Tata Global Beverages, Indian non-alcoholic beverages company and a subsidiary of Tata Group. These partnerships allowed to company to get a strong entrance to the local markets, navigate through diverse market environments, and to fulfill regulatory requirements imposed on foreign investors by local governments (which otherwise would leave Starbucks unable to tap these high-potential markets).
The second tactic that Starbucks has successfully implemented in most Asian markets was to tweak its menu to suit the tastes of the local population. Considering that since its inception, Starbucks has been synonym for coffee, adjusting the menus to suit tea-drinking consumer tastes without diluting the brand has surely been challenging. Although the Asian tastes evolve and more consumers start to drink coffee, basing the menu on coffee beverages alone would be a risky move. One of the moves Starbucks did to accommodate the local preferences was the 2016 launch of ‘Teavana’ line of tea beverages for Asian countries that includes matcha and espresso fusion, black tea with ruby grapefruit and honey, and iced shaken green tea with aloe and prickly pear, flavors not typically found in the company’s western stores.
Starbucks’ strategy in the region seems to be paying off. As of December 2016, in China, Starbucks store was said to be opened every 15 hours, making it the company’s fastest growing market, the highest revenue generator in the region, as well as the second largest market globally in terms of stores count. Overcoming challenges of reaching out to consumers with heterogeneous tastes in this vast country, partnering with local players, and creating a menu that suits the taste buds of local consumers have been a game changer for the coffee brewer in mainland China.
Japan is another key market for Starbucks in Asia. The company was able to successfully tackle the Japanese market, as it chose to focus on providing excellent customer experience to better resonate with Japanese culture that emphasizes traditional etiquettes and personal respect. Starbucks outlets in Japan do not ask for the customer name while placing order as privacy is highly valued in Japanese culture. To fit in the local culture, Starbucks in Japan has come up with the ‘concept stores’ that offer products based on local needs. Starbucks has the one of a kind ‘black apron-only’ store boosting of certified coffee experts in Japan.
India, a relatively new addition to the company’s Asian portfolio of markets, might turn to be a problem child for Starbucks. Since entering the Indian market, the company has been trying to take full advantage of the opportunities lying in the increasing income of the middle class population in India. Having opened more than 80 outlets in less than four years since inception, Starbucks in India (known as Tata Starbucks Private Limited) seems to be on an extension route in the Indian subcontinent. But with retail figures saying the opposite, with only 10 new stores in 2016 up against average of 25 stores in last three years and a few closed over infrastructure mishandling, the picture does not look very positive. India’s devotion to tea is a hard nut to crack for Starbucks, and while the company followed its standard move to include tea beverages in local stores, they do not always suit local tastes, as they differ greatly from chai that majority of Indians are used to and love. The scenario in south India might seem more favorable, as the locals have been accustomed to drinking coffee since long before Starbucks came to the country. But the local preference if for traditional filtered coffee, very different from anything on Starbucks’ menu, and bulk of it is consumed at home. With not much being said about the opening of new stores in the near future in any regions of the country, Starbucks in India needs to realign its strategic move to be able to see persistent growth.
While many enterprises fail to understand the impact of consumer behavior and preferences over the success or failure of a business, Starbucks offers a finely tailored customer experience to its consumers. For the most part, the company has managed to combine its exciting American flair with the underlying values of the Asian cultures to create a localized, unique experience.
With continuous and consistent expansion of its store base by adding stores to higher growth markets, Starbucks aims at standing as one of the most recognized coffee brands in China and Japan, and increasingly in other CAP countries. In those regional markets, where Starbucks has achieved the greatest success, China and Japan, the company’s efforts to offer consumers new coffee (and non-coffee) flavors in a variety of forms, across new categories have led to Starbucks’ continuous strong performance, and over time translated to acceptability of the American coffee-brewer in the lands of tea drinkers.
However, the coffee brand’s take off in India has been bumpy. The company has less than 100 stores in India, incomparably fewer than its competitor, Café Coffee Day, which has more than 1,500 outlets across the country. In terms of geographic spread in India, Starbucks has till now only concentrated on opening its stores in the largest metro cities, where to some extend it could justify its products’ high pricing (for local market standards). But in order to be successful, the chain needs to reach consumers in tier 2 and tier 3 cities, and appeal to them with more affordable products by marginally compromising on product prices (yet still remaining elitist, as it stands no chance to appeal to the clientele of traditional tea-corner stands which offer a cup of hot tea or coffee for virtually a fraction of Starbucks products price). If the company ensures expansion beyond tier 1 cities, continues to launch new stores offering localized products, it should be able to reap benefits of the rising income of the fast-expanding middle class largely interested in the foreign-feel-like experience and social statement that visiting Starbucks offers them along with their tall Frappuccino.
Due to various macroeconomic factors, the Indian automotive industry has not achieved its full growth potential during the last 12-18 months.
In addition, the government’s recent demonetization policy has impacted consumer spending and created an unfavorable environment for the auto industry on the whole.
Amid these challenges, key stakeholders within the auto industry were hoping for a favorable budget which could revive consumer demand and catalyze growth in the industry.
What was expected
The auto industry had a fair bit of expectations from the Union Budget 2017 (annual budget of India). Many industry players expected last week’s budget announcement to offer reductions in existing tax structures, various incentives for R&D expenditure and promotion of hybrid and electric vehicles (EVs), and lower interest rates on auto financing. Some of the key items on the industry’s wish list were:
In order to support and boost government’s ‘Make in India’ program aimed at encouraging companies to manufacture their products in India, the industry expected some impetus in the form of lower taxation and other financial incentives
To increase vehicle sales, the industry expected lower interest rates on auto financing and larger fund allocation for the development of mobility infrastructure
EV and hybrid carmakers hoped for various tax exemptions and subsidies under the Faster Adoption and Manufacturing of Hybrid and Electric Vehicles in India (FAME) scheme
OEMs expected the government to continue its 200% weighted deduction on R&D expenses
Industry players hoped for further clarifications with regards to incentives, timeline, etc. for vehicle scraping policy
What was received
Slashing 5% of corporate tax for enterprises with turnover under ₹500 million (US$7.4 million). This will benefit tier-2 and tier-3 auto components manufacturers and help them in further expanding their business as well as their R&D capabilities
The government earmarked ₹1,750 million (~US$25.9 million) in funding for the FAME scheme, which will further enhance the promotion of eco-friendly vehicles in the country
EOS Perspective
Although there were no substantial announcements in the budget that could directly benefit the auto industry, it surely has provided growth opportunities for it. Firstly, the government has increased its fund allocation by 11% to ₹640 billion (US$9.5 billion) for the development of national highways. In addition, 2,000 km of coastal roads are planned to be developed to improve the connectivity of ports and remote villages. These measures are expected to fuel demand for commercial vehicles in the coming years. Secondly, the income tax deduction of 5% for individual tax payers earning under ₹500,000 (US$7,425) is expected to boost personal consumption and spur demand among first-time buyers of passenger cars. Furthermore, the budget focused on boosting rural consumption by allocating more funds through various schemes. It is projected that these schemes will stimulate the demand for farming vehicles as well as two-wheelers in rural India.
For now amid no significant changes, all eyes are on the goods and services tax (GST) implementation expected to take place in July 2017. Industry experts anticipate that the rollout of GST will not only help to standardize various tax aspects, but it will also reduce costs across the industry’s entire supply and value chains. Therefore, a significant share of the impact will be seen only after the implementation of GST. Given the current scenario, we anticipate growth in the industry to rebound largely driven by government’s strong focus on enhancing consumer consumption and infrastructure development.
An anticipated slowdown in the global smartphone sales forecast for 2016 due to lack of new first-time buyers in large markets such as the USA, China, and Europe, has been alarming for large players who have turned their focus to other emerging markets. To fit the expectations and financial capabilities of price-sensitive consumers in these markets, companies are lining up to sell refurbished smartphones as a strategic move to increase sales volume. However, competition – primarily from new smartphones – in these markets is still fierce, due to some smartphone makers (such as Chinese mobile phone manufacturer Tecno Mobile) reaching consumers with more economic devices. Are second-hand smartphones capable of outshining new devices in emerging markets?
The global smartphone market has been witnessing a slowdown in sales during 2016 in comparison to previous years, partially because some markets, such as the USA, China, and Europe have become saturated (in large part with mid-range and high-end models, such as Apple’s iPhone and Samsung’s Galaxy). Therefore, to avoid a decrease in sales and a subsequent loss in profits, smartphone makers are readjusting their strategies to focus on marketing economic second-hand sets in developing countries.
According to a 2016 Deloitte report, refurbished smartphones global sales volume is expected to increase from 56 million units sold in 2014 to 120 million in 2017, growing at a CAGR of 29%. Large part of this growth is likely to occur in emerging markets, such as India, South Africa, or Nigeria, which is a sound reason for large players to venture into these geographies.
Most smartphone buyers in these markets are highly price-sensitive and frequently precede their phone purchasing decisions with intensive online research to get a good understanding of options that are available to them based on their financial capabilities. These consumers are likely to prioritize price over features and appearance of a smartphone. Therefore, refurbished devices from well-known brands, such as Samsung or Apple, need to offer satisfying functionalities yet be available at affordable price in order to be attractive for buyers in these emerging economies.
Emerging markets, despite their favorable dynamics that should at least in theory offer a great environment for refurbished phones sales to skyrocket, are not easy to navigate through, especially for high-end devices makers.
Some markets are becoming protective of their local manufacturing sectors, and introduce regulations that make it difficult to import smartphones, especially refurbished ones. India is one such case. In 2014, the Indian government rolled out the Make in India program, with the idea to promote local manufacturing in 25 sectors of various industries, one of them being electronic devices (including smartphones).
Coincidentally, two years later, when Apple initiated efforts to start importing and selling its refurbished smartphones as a way to increase the iPhone’s market share in the country, these efforts were unsuccessful. The Indian government rejected Apple’s plan, justifying its decision with a concern about the electronic waste increase caused by a deluge of refurbished smartphones entering the country. As a result, the refurbished version of Apple’s iPhone is currently sold only by online commercial platforms (e.g. Amazon, Snapdeal) from vendors that are not always official company retail stores. This could fuel sales in a parallel market, not necessarily benefiting either India’s local manufacturing or Apple.
In case of South Africa and Nigeria, both markets share similarities in terms of advantages as well as potential barriers for refurbished smartphone sales volume to grow. Nigeria’s GDP contracted by 2.06% in the second quarter of 2016, causing wary consumers to maintain their old phones or purchase very economic options due to decreasing disposable income. In South Africa, consumers are also highly price-sensitive with a very limited brand consciousness.
The rapid level of smartphone adoption registered in both markets is seen mainly in handsets with retail price of US$150 or less in South Africa and US$100 or less in Nigeria. Therefore, refurbished high-end models may dazzle local consumers, but low-cost devices can be expected to represent an obstacle for brands such as Samsung or Apple, as these smartphone makers are likely to sell their refurbished devices for half the original price which is still above the consumer-accepted purchase price in these two markets.
In case of India, the recent rejection of Apple’s plan to import and sell refurbished smartphones is an indicator that similar issues might be faced by other large players willing to do the same in the future. However, as one of the world’s largest smartphone markets, India is likely to continue building a strong sense of brand loyalty among consumers, especially towards Samsung’s and Apple’s brands in general (smartphones and beyond), and consumers will demand access to these brands (Samsung and Apple already held a 44% and a 27.3% market shares, respectively, in 2016).
The risk of India’s market being flooded with refurbished smartphones sold in a parallel market or online commercial platforms without proper regulation by authorities could result in lost control over excessive e-waste in the country, without necessarily driving local production of competitive products. Consequently, India’s government might have to consider the possibility of allowing large manufacturers to import factory-certified second-hand smartphones into the country, perhaps under the condition of refurbishing the devices in India.
In Nigeria and South Africa, the consumer price sensitivity and limited brand loyalty seem to be the most pressing issues for large players such as Apple or Samsung intending to sell their refurbished phones. In both markets, the rivalry is rather fierce, mainly due to a relatively strong presence of smaller regional manufacturers and large Chinese companies (e.g. Xiaomi) that offer affordable smart devices. While consumers in these markets are willing to spend up to US$100-150 for a device, in most cases they lack brand loyalty.
Apple or Samsung are likely to be negatively affected by this when launching their refurbished high-end handsets at half of the device’s original retail price, which in most likelihood would still be above the price consumers in these markets can and are willing to spend. As a result, large players may have to set their eyes on a long-term horizon, and slowly build the brand loyalty sense in local consumers and temporarily relinquish on large profits in order to enter these markets and settle among their potential customers.
From smart glasses that allow a surgeon to operate having his patient’s medical records at sight to an intelligent contact lens that measures glucose levels of its wearer, technological innovations are changing the world as we know it. Wearable medical device market growth has been promising and the industry is expected to reach a value of US$7.8 billion by 2020, growing at a CAGR of 19% from 2015 to 2020. Since 2015, the USA and Europe have been two key markets hosting majority of users of these new technologies. However China, India, and Brazil are expected to increase its demand for wearable devices driven mainly by rapid expansion of smartphone users and an increasingly aging population. Is these emerging economies’ current set-up favorable for medical wearable to maintain a steep growth?
The use of wearable medical devices is skyrocketing due to aging populations, fast adoption of new trends, and greater incidence of chronic conditions around the world. An increase in health awareness across the globe and a simultaneous increase in worldwide wearable medical device shipments estimated to reach 97.6 million units by 2021, growing at a staggering CARG 108% between 2016 and 2021, might indicate the industry’s large growth potential.
Brazil, India, and China (BIC), in particular, have been registering increasing rates of chronic diseases such as heart failure, diabetes, and obesity for the past several years. Therefore, these countries have started to be considered as the next destinations to focus on in search for high growth-potential wearable medical devices markets.
Regardless of the fact that wearable medical devices are thriving in the USA and Europe, in countries such as Brazil, India, and China, these devices are bound to face challenges that could translate into major roadblocks for the market to grow. For instance, although wearable medical devices have proved to be a significant aid when monitoring and preventing illnesses, these are not yet considered an essential product for healthcare consumers. Consequently, BIC buyers, who tend to also be highly price sensitive, may refrain from purchasing such solutions if the retail price is high in comparison to their purchasing capabilities. As a result, this behavior may lead to a stalling sales volume in these markets and, subsequently, a slowdown in the wearable medical market growth.
In addition, the growth of wearable medical technologies in BIC is challenged by deficient regulatory frameworks with regards to categorizing and supervising such devices for their import and commercialization in each market. Currently, regulatory frameworks are mostly outdated and do not include specific category for wearable devices with proper security measures. Moreover, as these wearables are battery-operated, improper testing due to lack of regulation can affect their safety as well as may reduce the trust consumers need to develop in order to accept and use the device. Further, this inadequate regulatory scenario may drive away potential market players (including key providers).
Global wearable medical device market is witnessing a steep growth driven mainly by changes in demographic profiles of many populations and a growing incidence of chronic conditions. In developed economies, wearable medical technology is experiencing high adoption rates and its role in the healthcare sectors is strengthening, mainly because physicians already use such solutions during consultations, whether to monitor, diagnose, or treat a patient. In emerging economies such as Brazil, India, and China, wearable medical technology has even more room to continue expanding, however, current scenarios in these countries may partially impede this growth.
Some of the key issues in these markets include the problem of import regulations unfitted for wearable medical devices, and this seems to be an important issue which needs to be sorted out in the short term to avoid driving potential players and manufacturers away from BIC markets. At the same time, the high retail price makes the wearable devices unaffordable for a large percentage of the population causing low rate of adoption among patients, and hindering medical wearables’ market growth.
Further, the fact that healthcare providers are not planning to include such devices in public health insurance schemes and reimburse the cost of wearable devices as part of their health plans, lowers the chance of this technology reaching higher number of consumers. This limited accessibility to wearable medical devices in BIC markets may result in low consumer’s awareness about their benefits, or even their existence.
Local governments should reform and adapt their import regulations to fit the wearable medical devices characteristics, allowing a better flow of these products to enter the countries without risking human health. At the same time, for wearable medical devices to healthily grow in these promising and widely populated markets, manufacturers and retailers should aim to lower a wearable device retail price. A way to achieve this could be by adding wearable devices to private health care plans (and encouraging public health insurers to do the same) – especially for chro
nic diseases patients and people over 60 years old. This will most likely allow consumers to purchase such a device at a lower retail price or rely on their healthcare reimbursement policies.
Indian aviation industry is aiming high and intends to grow at a fast pace. Studies forecast that India could become world’s third largest aviation market by the end of this decade. In June 2016, the Indian government opened doors to 100% foreign investments in the Indian aviation sector. With an aim to establish one of the most FDI liberal economies across the globe, the government has taken steps to ensure easy and smooth inflow of foreign currency to India. This move has triggered mixed reactions – some raised their eyebrows while others welcomed the change.
With the objective of driving growth in the local aviation market, spurring airport infrastructure improvements, as well as giving the employment sector a push and creating new jobs in the country, the Indian government announced amendments to the FDI policy for the aviation sector. Under the new regulations, 100% FDI is allowed for both greenfield and brownfield projects through the automatic route. Regulations have been updated also in other categories of aviation operations. In Scheduled Air Transport Service/ Domestic Scheduled Passenger Airline Service, though Non-Resident Indians continue to be allowed to invest up to 100% FDI without any approval, foreign investment is capped at 49% under the automatic route and any investment beyond this share must go through the government approval route, however allowing for the possibility of 100% FDI by only non-airline players. This effectively maintains the previous limitation for foreign airlines to bring in only up to 49% of the capital in Indian carriers operating scheduled and non-scheduled air transport services.
Under substantial ownership and effective control, any foreign airline that invests in domestic carriers via non-airline investors, is bound to have an Indian chairman and at least two-thirds of its directors of Indian origin, so that majority of the ownership rights are vested in the hands of Indian nationals. Indian Civil Aviation Ministry say that though the new provisions allow full investment of foreign parties in the national aviation sector, 100% foreign ownership dominated airlines will still not enjoy the freedom to fly internationally. International investors can own full stakes only in domestic airlines but will have to bear the heat of the government procedures and approvals to fly overseas. Though the new changes in the policy give hope to increase the ease of doing business in the country thus increasing FDI inflow, a question still remains why an international carrier would enter the Indian market to operate primarily on the domestic front. Also, owing to heavy debt, high input costs, and rigid competition, most of the domestic players are already registering business losses, so whether a new entrant in this segment would earn profits is rather questionable.
EOS Perspective
Foreign air carriers face various hindrances when planning to enter the Indian civil aviation landscape. The leverage offered currently by the Indian Civil Aviation Ministry allowing 100% foreign direct investment in the sector may look rosy but it comes with fine print, i.e. despite allowing 100% FDI, the regulators still kept several limitations, effectively reducing the attractiveness for foreign players to invest in India.
The relaxation in the FDI norms is likely to attract many overseas carriers to invest in existing airlines that were looking to expand their operations in India. The deteriorating financial condition of domestic players is expected to improve with investment from foreign players.
Improved service standard, professionalism, and adoption of industry best practices are likely to be seen in existing air services within the country. Nevertheless, a doubt still remains whether these amendments in the FDI regulations that aim at boosting the aviation sector will really be fruitful.
After 16 years from the conception of the idea, in August 2016, the Indian parliament finally passed the much awaited Constitution Amendment Bill for the introduction of Goods and Services Tax (GST) which is set to replace almost all indirect taxes in the country by April 2017, effectively simplifying India’s tax system. GST, a value added tax, is a single tax levied on the supply of goods and services from the manufacturers to the end consumers. As per this new tax regulation, the dealer of the product will be liable to pay tax only on the value added by him in the supply chain, thereby offsetting tax credits paid on inputs. Thus, the consumer will bear only the GST charged by the last party in the supply chain.
Under the previous tax regime, the state and the central governments levied different charges such as income tax, sales tax, excise duty, central tax, and security transaction tax separately. The GST is set to replace this procedure of implementing multiple indirect taxes with a single comprehensive tax regime under the GST umbrella. The new regime will have a dual structure with the central government and the state government having administrative powers to charge GST across the supply chain. It will include three kinds of taxes: the central GST, the state GST, and an integrated GST to handle inter-sate transaction.
This new tax reform is said to have far reaching impact on the Indian economy. It aims to eliminate the shortcomings of the current way of applying taxes across the supply chain involving numerous multi-layered policies and to remove the ‘cascading effect’ of multiple taxes on goods and services. The old regime of imposing separate taxes on goods and services and dividing transaction values for taxation purpose led to administrative complications and high compliance costs. The new system of uniform and integrated tax rates is likely to facilitate ease of doing business in the country, while the removal of inter-state taxes is likely to reduce time and logistics cost of the movement of goods. In addition, the integration of taxes and removal of Central Sales Tax (CST) is expected to lead to a decline in prices of domestic goods and services. Lower transaction costs combined with the removal of CST are likely to facilitate a rise in the competitiveness of the country’s goods and services in the international market and boost exports.
A robust IT infrastructure will be the backbone of the GST system, initiating ease of tax administration for the government and transparent and easy conduct of tax services, such as payments and registrations, for the citizens. Only a comprehensive IT infrastructure is likely to enable smooth transfer of tax credit across the supply chain, keeping a check on leakage. The new system is also expected to lead to a decline in the cost of tax collection, thereby generating high tax revenues for the government.
The GST system is also believed to be of significant importance to the consumers. Multiple indirect taxes levied by the central and state governments led to incomplete input tax credit availability which had to be adjusted against tax payable leading to the inclusion of various hidden taxes in the cost of goods and services. The GST system will levy a single tax from the manufacturer to the consumer, providing transparency and clarity of taxes paid. Further, efficient business conduct and reduction of leakages will lower the tax burden on the goods.
While the GST promises to streamline the indirect tax regime with a single tax, it has to overcome various challenges to be successful. Since the country is adopting a dual structure with the central and state governments, the main issue would be the coordination between different states. The central and state governments will be required to come to an agreement regarding the GST rates, administration efficiency, and the implementation of the GST, which might prove to be a cumbersome procedure. Further, IT infrastructure, which is said to be the foundation of the GST regime, will be a critical factor affecting the success of the new system. A strong technology support connecting all state governments, banks, industry, and other stakeholders on a real-time basis will be required for the efficient conduct of business. In addition, since the working of the GST tax regime is different from the indirect tax system, proper training will be required for the tax administrative staff at central and state levels regarding legislation and procedures within the GST. Another factor the government will need to consider is to adjust the new tax in a way that the tax revenue remains at least same without any revenue loss. For this purpose, a Revenue Neutral Rate (RNR) will need to be calculated and critically evaluated, as such a rate is likely to have a great impact on the Indian economy.
GST is a much awaited revolutionary tax reform in the Indian economy. If implemented properly, it is believed to add 2% to 2.5% to the nation’s GDP in the long run. It promises ease of doing business, economic growth, and higher tax revenue. Even with the diverse challenges the new tax regime is likely to be faced with, the GST has the potential to be a game changer for the Indian economy in the near future and is said to pave the way to a ‘one nation, one tax’ system.
India is seen as an upcoming solar energy investment hotspot after its announcement of an ambitious target to install 100 GW of solar power capacity by 2022, which we wrote about in our article “Solarizing India – Fad or Future?” in July 2015. However, in view of record low tariffs following the competitive bidding, investors have begun to raise concerns over the viability of such solar projects and doubt to earn desired returns on their investment.
Indian government has been strongly in favor of competitive bidding or reverse auctions in order to bring down the cost of solar power. Though the solar power costs have significantly declined, aggressive bidding wars have resulted in irrational competition and unsustainable business models. Amidst concerns over viability of solar projects with such low tariffs, investors have become extremely cautious and suspect solar might be a risky investment. Developers may soon find themselves in financial constraints if the investors’ confidence continues to wane.
In such a scenario, Indian government should review the reverse bidding process of solar projects to balance the bid tariffs with viability. Another alternative is to device low cost financing avenues for solar projects. For instance, the government is planning to raise US$600 million for renewable energy projects by issuing tax-free bonds. This fund will be made available for development of renewable energy projects (including solar projects) at an interest rate of 10.5%, which is lower than the rates offered by the domestic banks. Solar projects are highly capital intensive and the government will need to be at the forefront in raising adequate funds to achieve its ambitious solar target in time.