When a government signs an order on a separate sheet of paper that no one outside the inner circle of bureaucrats and lobbyists realizes at the time, there is a certain unease that permeates the industrial supply chain. This is a situation that repeated itself over the past two weeks, and the fallout has spread to a corner of Indian power-equipment industry that doesn't often make the news: The makers of the giant air-cooled condensers that enable thermal power stations to operate without consuming millions of litres of precious water daily.

The impetus to this was a security-clearance regime governing bids from land-border countries that was imposed on the industry following the Galwan clash in 2020, and was waived on four Chinese-origin entities that operate factories in India, after months of wrangling, by an order from the Ministry of Finance. The MOP had requested the relaxation in January, claiming that some critical projects had hit supply constraints which could only be overcome if it could clear a way for extra capacity, including Chinese related capacity. The order did not imply anything more than that it was not intended as a precedent to the broader industry. The rest of the sector has not been deterred by that caveat, and have taken this as a fissure in a door that they believed was welded shut.

The market had an immediate and clear response when the news broke on July 3. The stock fell by over six per cent in one session, taking its share price to around Rs 33,775 to less than Rs 31,600, triggering a dip in a share price that still trades at a multiple over 140 times its earnings. GE Vernova T&D India closed down by over five per cent, CG Power declined by over four per cent and Transformers and Rectifiers India by over three and a half per cent. Taken together, these losses wiped out thousands of crores of investor values within hours, reflecting how much the market had priced in the assumption that China suppliers are not allowed to be part of India's critical infrastructure construction program.

In this background, the manufacturers of air-cooled condensers, which are almost compulsory in water-stressed states like Rajasthan and Gujarat in new thermal capacities, have been making appeals to the government to extend this opening further. They're not making as broad an argument as the blanket protectionist argument. The air-cooled condenser is located deep within the turbine island of a plant, surrounded by other vacuum systems, condensate return lines, and plant controls that are designed for twenty-five to thirty years of service life for a generating unit. The supplier that gets that far in ingratiates himself or herself into the system and is not easily replaced when a relationship goes sour or a border dispute breaks out. These manufacturers are seeking a dedicated carve-out instead of a reversal of the overall exemption because that's the kind of exposure they have, versus, for example, sourcing a batch of transformer bushings.

A worldwide-market context gives a point its edge. Global demand for air-cooled condensers is estimated to be approximately USD 5.3 billion this year and is expected to increase at an annual rate of more than six percent over the next decade, with power generation use accounting for nearly 50 percent of the market and the Asia-Pacific region representing nearly 40 percent of the total. The lead from these Chinese manufacturers, including Shuangliang, is already nearly a fifth of the world's production, and the cost of their production measured by volume has been much lower, having grown over two decades as India's capacity, with the support of Thermax and a few specialist fabricators, has increased at a slower rate and at a higher unit cost. Domestic fabricators are worried about a level playing field and a cost advantage since Chinese-related companies can now access Indian thermal tenders, at a time when power demand is surging to new highs each summer.

Not everyone is alarmed. A document widely circulated by Systematix Research makes the point that directly state-run companies like NTPC and Damodar Valley Corporation have always preferred local equipment for thermal projects, irrespective of what the rulebook says, and that most of the contracts from the Chinese were won by the private sector, and not by public companies. In the same note, Bharat Heavy Electricals points out that it has an order book of more than 7 years while the smaller specialised component makers don't have anything like that. The fear behind the current lobbies is the assurance that the diversified, major industry is providing is not being offered by a niche manufacturer, with a large portion of its pipeline dependent on two or three large thermal tenders per year.

But there's another, more measured and strategic interpretation of this episode that looks at the balance sheets too. Those who argue for a more cautious view point out that critical power infrastructure is at the nexus of energy security and national security, and that a two-year period that's billed as a transition period is likely to become a transition period forever when new supply chains and contractual arrangements become entrenched. A cancellation of an exemption by Chinese companies after they have won and partially executed orders is more politically and legally complicated than it is at this stage of the order, while the companies are still in the process of winning it, which is what the condenser makers are hoping to see Delhi consider before the order is granted.

It is an uncomfortable structural truth that has emerged, either because the government is considering a change in the exemption, or because it is not considering such a change. India's desire to rapidly add gigawatts of thermal capacity is coming into conflict with its equally true desire not to have any Chinese firms in its vicinity that conduct themselves in Chinese fashion for anything that is load bearing on the national grid. Both objectives cannot be accomplished simultaneously and in the coming months, when tenders under the new exemption will roll out, it will be seen which one Delhi will give priority to when both of them clash on a bid document.