INDIA: LACK OF MARKET DRIVERS FOR CLEAN TECHNOLOGY

UNCLAS SECTION 01 OF 03 NEW DELHI 003262

SIPDIS

SENSITIVE BUT UNCLASSIFIED
SIPDIS

E.O. 12958: N/A
TAGS: SENV ECON ENRG TSPL TRGY BEXP IN
SUBJECT: INDIA: LACK OF MARKET DRIVERS FOR CLEAN TECHNOLOGY


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1. (SBU) Summary and Comment: This cable will look at the investment
environment for clean technology in India and the potential role US
diplomacy, technology, and financing can play. A number of market
challenges such as the lack of a green market among consumers and
minimal involvement from the financial sector create barriers to
entry for foreign clean technology firms. In addition, policy
challenges such as insufficient knowledge of the social costs of
energy as well as conventional energy subsidies have kept the clean
technology revolution at bay in India.


Clean Technology - Good for Business?
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2. (SBU) Advocating the adoption of cleaner, more efficient
technologies to large Indian firms is straightforward for EmbOffs
because it will positively impact a company's operating profit.
Firms that adopt clean technologies will be better prepared for the
global economy which has been putting a greater emphasis on
corporate social responsibility (CSR). These firms are likely to be
viewed more favorably in capital markets and their products will be
more attractive to eco-friendly consumers in export markets. In
addition, there are a number of incentives provided by the
Government of India (GOI) for manufacturers and end users of
renewable energy systems, such as exemptions from excise duties, low
import tariffs on capital equipment, and soft loans according to the
website of the Ministry of Non-Conventional Energy Sources (MNES).
(Note: SciOffs attempted to contact MNES officials regarding details
of incentives, but received no response.)


3. (SBU) However, for small and medium sized enterprises (SMEs),
which represent 60% of Indian GDP and 35% of all exports, clean
technology is a tough sell. Rita Choudhury, Team Leader of the
Environment Division at the Federation of Indian Chambers of
Commerce and Industry (FICCI),stated that while large corporations
which already have a presence in the global marketplace have begun
to adopt clean technologies, the main challenge lies in raising
awareness among SMEs. These SMEs, she stated, have limited access
to information regarding the benefits of clean technology and more
importantly, lack access to the proper financial instruments
necessary to make these operational changes. While environmental
protection laws create a market for cleaner technologies, RK Sethi,
Director of Climate Change at the Ministry of Environment and
Forests (MOEF),told SciOffs that when it comes to SMEs there is no
enforcement of environmental regulations.

Bottom Line - Market Drivers Not Present
--------------


4. (SBU) Several concrete factors prevent clean technology market
penetration in India today:

-- Lack of awareness of impacts of climate change and the economics
of clean technology among consumers, manufacturers, and service
providers;

--Lack of enforcement of environmental regulations, especially for
SMEs;

--Cleaner technologies are not competitive due to heavy GOI
subsidies for fossil fuels;

--Reluctance of large foreign clean technology firms to scale down
to meet the needs of small Indian players; and

--Lack of financing options for consumers of renewable energy
equipment.


5. (SBU) In order for clean technology to flourish in India, we have
to create fundamental awareness of the impacts of climate change
among Indian consumers as well as educate Indian SMEs on the
long-term economic benefits of operating cleaner and more
efficiently. While there are financial incentives provided by the
GOI for renewable energy system manufacturers and end users, Indian
firms will need assurances of increased long term profitability to
justify the operational changes required to go clean. KP Nyati,
Head of the Environment Policy Division at the Confederation of
Indian Industry (CII),stated that while sentiment is growing, the
clean technology movement has not struck a chord with most Indian
businesses. He stated further that this was primarily due to the

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fact that most clean technology literature did not stress the profit
potential of clean technology, but relied on normative arguments
such as CSR, leading most Indian firms to view the adoption of this
technology as an additional cost that would have negative impacts on
their bottom line. In addition, most information on clean
technology is in English and thus not useful for the majority of SME
operators.

True Costs of Fossil Fuel Energy Unknown
--------------


6. (SBU) Conversations with the GOI in regards to adopting clean
technology typically end at the mention of upfront capital
expenditures. While initial costs are high, life cycle costs,
including externalities such as environmental and social costs, of
cleaner, more efficient technology versus conventional technology
tend to be significantly lower. This type of in-depth analysis of
externalities has not been done in the context of India and would
prove to be invaluable in future discussions with the GOI. Other
policy hurdles include heavy subsidies placed on conventional fossil
fuel energy sources. To alleviate the burden of the demand-supply
gap in electricity, the GOI has subsidized kerosene, a key energy
source in rural India, making it difficult for cleaner energy
providers to compete for this market.


7. (SBU) In terms of technology transfer between the US and India, a
common problem that arises is the fact that US technology firms are
unable to financially justify scaling down to meet the needs of
India's smaller firms. On the flip side, even if the technology
firms could manage to provide to individual Indian firms, the small
order sizes would drive up the unit cost of technology, making it
unaffordable.

Clean Technology Financing: Low Presence, Unattainable
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8. (SBU) Choudhury also remarked on the lack of involvement by the
financial sector in India in the realm of clean technology. This
limited involvement echoes the lack of a green market. A bright
spot is large corporations, which have already begun adopting clean
technology, readying themselves for the global marketplace. For most
SMEs, however, the lack of enforcement of environmental regulations
provides little incentive to make clean technology investments. A
major opportunity, particularly for solar photovoltaic (PV) devices,
lies in consumers that are not connected to the power grid such as
lower income households, rural communities, and the myriad of small
businesses that make up the informal economy. While financial
institutions in India provide low interest rate financing to buyers
of clean technologies such as PV devices, these populations are
typically denied access to financial services based on socioeconomic
status and are left to find funding from fledgling microfinance
institutions. While the microfinance movement is growing rapidly in
India, it is not available in most rural communities, where 70% of
the Indian population resides. Microfinance initiatives, however,
have had the unique success of reaching some of the poor via NGOs
and other effective grassroots networks. This approach has also
proven to be an effective solution for the proliferation of clean
technologies in rural homes and businesses. For example, Selco
India's solar panel project utilized innovative financing to provide
clean technology to populations denied financial services by
mainstream banks.

Market for Green Products Does Not Exist
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9. (SBU) In spite of the surging purchasing power of India's middle
class, consumers in this segment have yet to go green. Pritee Shah
of Ahmedabad's Consumer Education & Research Centre attributes the
apathy to a "chicken-and-egg situation" where industry doesn't see a
market for green products due to low awareness among consumers and
consumers are not aware of green products due to their limited
availability in stores. EcoMark, India's equivalent to the US's
Green Seal, has only been secured by 12 companies in its 20 year
existence and is widely regarded as a failure. Ecomark's struggles
led to a 1998 study commissioned by the MOEF which found that only a
handful of consumers in the wealthiest income bracket were willing
to pay more for green products and they would only be willing to
spend up to approximately 10% more for that product. Our GOI
colleagues have reiterated the line of reasoning that economic

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considerations will almost always supersede environmental health in
India.


10. (SBU) In our next cable we will explore po4ential solutions to
market and policy challenges to deployment of cleaner technologies
in India.

PYATT