Finally, solar manufacturing policy heads in the right direction

In November, the Union Cabinet of the Government of India approved a major expansion to the Production Linked Incentive scheme, consequent to which production-linked incentives will be offered to ten critical sectors over the next five years. The sectors include high-efficiency solar photovoltaic modules, to which ₹4,500 crore (45 billion) will be allocated. This is a welcome change in policy and it comes not a moment too soon.

For the better part of the current decade, the Government of India (GoI), irrespective of the political party in power, tried various different policy tools, mainly tariff and tariff-like measures, to promote domestic manufacture of solar panels and modules. This was first done with the attempt to introduce domestic content requirements (DCRs) for solar cells and solar modules under the Jawaharlal Nehru National Solar Mission (NSM).

This was challenged by the United States of America in February 2013, which contended that that these DCRs violated World Trade Organisation (WTO) provisions requiring equal legal treatment to products imported from one contracting party, such as the United States, into another, such as India. I had suggested at the time that this would be a good case for India to lose. https://www.business-standard.com/article/opinion/a-good-case-for-india-to-lose-113051100630_1.html.

This was not for any lack of patriotic fervour on my part, but because I believed that DCRs were likely to be harmful for India, for various reasons, including the following:

First, Indian solar modules were (and in most cases still are) more expensive than many panels made overseas. Forcing Indian developers to buy expensive Indian panels would have led to solar power becoming more expensive than it needed to have been – higher costs for the consumer. Second, many foreign-made panels were of better quality and therefore more efficient. Buying them would have given Indian solar power producers access to better technology. Third, requiring domestic content would have cut off access to cheaper export credit finance, which by definition is available from a country only if equipment produced by its manufacturers are purchased. Last but not least, India’s legal case lacked merit, given that it appeared prima facie to violate the principles of international trade law that India had signed up to. 

In due course, as predicted, India lost the case, failing to convince the WTO that the “government procurement” exception applied not just to the panels and modules that were producing the electricity but also to purchase of the electricity generated using those panels. https://www.thenewsminute.com/article/india’s-‘solar’-loss-wto-could-be-indian-taxpayer’s-gain-39898.

Bids in Phase II Batch I of the NSM, had provided an excellent illustration of the uncompetitive nature of Indian equipment and the price that the country pays for it. Here, the GoI allocated 375 MW each to the open and domestic categories. Project developers were required to bid on the basis of the extent of subsidy they were seeking over and above the tariff set in the bid. The lowest winning bids in the domestic content category came in at Rs.13,500,000 per MW and the highest at Rs.24,560,000 per MW. The equivalent numbers under the open category were Rs.1,750,000 and Rs.13,500,000, demonstrating clearly that Indian-made panels were significantly more expensive.

This evidence did nothing to deter the Government from attempting to promote domestic manufacturing through tariff-based tools of dubious utility. In July 2018, spurred on perhaps by the objectives and the rhetoric of the Make in India programme, the Ministry of Finance, disregarding the protests of the Ministry of New and Renewable Energy (MNRE), introduced a safeguard duty on the import of solar cells, whether separate or in modules or panels” into India from China and Malaysia. This duty was to start at 25%, reducing to 20 and then to 15% over three years. Earlier this year, these levels of duty were revised to just under 15% ad valorem minus anti-dumping duty payable and will stay in place at least till the middle of 2021. MNRE has also proposed a 20% basic customs duty on imports of solar cells and modules. 

Most importantly, over the entire period that these policy measures were in place, manufacturing capacity in the solar sector has remained low. According to Mercom, India currently has approximately  8 GW of operating module manufacturing capacity. Cell manufacturing capacity, as of Q3 2020, is approximately 3 GW, nowhere near what the GoI would like and paling into insignificance as compared to China. 

The GoI has always had access to other types of policy tools that could directly incentivise domestic manufacturing, instead of indirect tools such as tariffs and DCRs, which generally have the effect of increasing the cost of goods and provide less certainty that domestic manufacturing will come in to replace imports. Potential measures could have included subsidies to domestic solar manufacturers, fiscal measures such as deemed export benefits leading to exemptions from terminal export duty, profit-linked deductions under the Income Tax Act, VAT deferrals and low cost financing through IREDA. 

In adopting the production-linked incentive scheme for the solar sector, the GoI seems finally to be making at least a partial shift towards recognising that incentives are likely to be more effective than tariffs or DCRs in promoting manufacturing in the solar sector. The way the scheme is expected to work, based on how a similar scheme has worked for mobile phone manufacturing, is that qualifying entities will be identified, a base level of production established and incentives of 6%, diminishing to 4% over time, will be offered as a grant, through MNRE.

Whether the scheme turns out to be a success or not will depend on how effectively it is implemented and to what extent domestic panels manufactured under it are competitive with imported panels but, at least in principle, it is a step in the right direction.