The Adani scandal poses a wider problem for?India

Did you hear about ‘The Corrupt Solar Project’?

If not, here’s a 180-word brief.

See, in 2019, Adani Green won the contract to develop one of India’s largest renewable energy projects from the Solar Energy Corporation of India (SECI), a government-owned entity. Adani would make $2 billion in profits from the project over the next couple of decades if it all went well.

But let’s just say that it didn’t go well at first. State governments did not want to buy the solar power from Adani. They felt the prices were exorbitant.

So the Adani Group had to do something to save the project. And what they allegedly resorted to were bribes. They paid over $250 million to smooth things over with the Indian officials. And just like that, the state governments agreed to buy the power in a jiffy.

But when Adani decided to raise money from US investors, the US authorities began to dig into the company’s past. They unearthed this damaging scandal. And they realised that the group had lied about its anti-bribery practices.

And since this entire deal is linked to solar power, the US authorities called it ‘The Corrupt Solar Project.

Of course, the Adani Group has refuted all these allegations and called it baseless. But that’s a boilerplate response. There’s still a long way to go in this matter.

Now we get it if you’re a little confused. Not by the Adani scandal but because we are talking about it in Money Order. After all, this is a newsletter that breaks down economic events. And the fallout of all this seems to be only impacting the Adani Group?—?global banks are hitting pause on lending to the group, Kenya has ordered the cancellation of Adani infrastructure deals, a Bangladeshi government panel has sought legal help to investigate a power deal with Adani, and Adani’s partner, the France-based Total Energies has said that it will not make any new financial contribution to Group.

So, why are we talking about it here?

Well, there are 3 ‘economy-related’ reasons.

Firstly, there’s a bit of worry that if Adani’s business is hit, it will have a ripple effect on the Indian lending system too because domestic banks make up 42% of the Adani group’s debt. And most of the money needed for the Group’s day-to-day operations come from Indian banks.

So, should we worry that a hit to Adani’s business is a hit to India’s banks?

Probably not. Because if we go by Adani Group’s claims, they’ve got plenty of cash. They say that their cash reserves totalling over ?53,000 crores alone is enough to cover the next ~28 months of debt servicing. And it’s not like the business is coming to an abrupt halt, they’ve got enough cash flows too.

Even if you take that with a bag of salt, at a bank-wide level, everything seems fine. Analysts at JPMorgan used the words ‘manageable’ and ‘contained’ in a note they published about banking exposure to the Adani Group. And here’s something else from Reuters.

India’s regulator requires that banks limit their exposure to any single business group to 25% of their eligible Tier 1 capital. This stood at a collective $258 billion in September, according to rating agency ICRA. If the industry utilised the full limit, it could lend up to $65 billion?—?more than double the conglomerate’s total borrowings.

So there’s no need to panic.

The second thing we have to talk about could have a wider impact on our economy. Especially for our renewable energy goals.

See, India’s per capita consumption of electricity is rising at a fast clip. But unfortunately, 70% of our electricity is still fueled by coal. And there are a couple of problems with that. For starters, coal’s a fossil fuel that’s not great for the environment. But from a financial angle, we import a lot of coal to meet our electricity needs?—?we’ve been spending a mammoth sum of nearly ?4 lakh crores on imports.

So you can see why we need to make that switch from coal to solar energy. And it should be easy because some reports say that among the major world economies, there’s no one else who receives as much sunlight as us.

Now one company that has been doubling down on this shift to renewable energy and solar power is Adani Green. They call themselves India’s largest ‘renewable energy solutions partner’.

And naturally, if this all does turn out to be true and Adani is implicated, it would be a blow to India’s solar dreams. Especially since the Group is bang in the midst of developing what will be the largest renewable energy park. It’s quite literally in the middle of nowhere in Gujarat, at a spot that didn’t even have its own pincode. But it’s land that’s 5 times the size of Pairs and slate to be a big boost to India’s renewable energy goals. But, if the Group does run into trouble, it could set India’s goals back a fair bit and cost us dearly too.

It might not even end there.

Because it appears that foreign investors in India’s infrastructure are spooked. They’re probably slowing down on fresh investments into the sector.

That’s a problem because this comes at a time when India’s net Foreign Direct Investment is already at a 16-year low. We need the foreign money to flow in.

And finally, there’s a question mark about not just the ease of doing business but about power dynamics in corporate India. Or put another way, about the government’s ‘national champion strategy’.

What’s that, you ask?

Think of it as an implicit push by the government that favours a small set of industrial houses. This one hope is that these folks will help take development in the country to new heights. That a concentration of business interests will create economies of scale, reduce costs, and help achieve the national objectives.

And that’s what the Indian government has been focusing on too in the past few years.

But the flipside of this is when an entity takes centre stage and becomes too big to fail.

Take the Adani group, for instance. As Reuters highlights,

The Adani group has cornered large market shares in key infrastructure segments?—?from ports and airports, where it controls close to a quarter of India’s capacity, to solar manufacturing, where it holds a 53% share of India’s installed photovoltaic cell capacity.

It plans to invest $90 billion more in infrastructure expansion over the next decade, Jefferies said in a report earlier this year. That would make it one of the largest private-sector players in the sector.

And when companies know they’re too big to fail, they might also believe that they can get away with anything?—?including bribery.

Now we’re not saying that the Adani Group or its personnel are guilty. It’s just an allegation.

But all this does should make us think about how we should be building India’s economy to the $5 trillion mark.

Don’t you think so?