The government needs to tilt its green manufacturing mix in favour of nascent industries of the future

The Indian government is switching gears on solar energy. The 2018 Economic Survey identifies renewable energy as a champion sector under the Make in India 2.0 programme. India currently meets almost 90% of its annual requirement of solar panels through imports (mainly China), impeding the growth of a nascent domestic solar manufacturing sector. Policy support for the solar sector is increasingly focussed on domestic manufacturing, both in the form of capital subsidies and considerations of trade regulation. However, are these interventions the right signals to send to an already uncertain solar sector? Do they comply with the global trade regime? And will they keep our renewable energy (RE) ambitions on track? These questions warrant examination through four lenses.

First, implementing trade remedies that have anti-competition implications has become commonplace, with clean energy becoming its newest victim. Two large solar energy markets, India and the United States, have either imposed or are contemplating the imposition of safeguards duty on solar panels. Trade remedies are attractive because they create tangible short-term benefits such as job creation, reduction in trade deficit, and higher local tax collection. However, such a move would also result in higher tariffs and make solar power less attractive for the already financially strained and RE-sceptical utilities. Analysis by the Council on Energy, Environment, and Water (CEEW) suggests that had a safeguard duty of 70% been implemented at the time of the Bhadla bid (₹ 2.44/kWh), the lowest bid would have been pegged at ₹3.46/kWh. The more than 40% spike in solar electricity prices would be accompanied by diplomatic tensions that follow the implementation of such measures, encouraging other major economies to retaliate with their own protectionist measures.

Ensuring compliance

Second, it is vital that India remains compliant with the global trade regime. Previous measures (for example, the domestic content requirement or DCR scheme) to assuage the concerns of the domestic solar manufacturers were challenged and overturned at the World Trade Organisation (WTO). The DCR scheme did not impose any restrictions on imported sources and only sought to secure an assured market for domestically manufactured panels. Other countries opposed the scheme as it discriminated against foreign solar cell suppliers. A draft policy (2017) aimed at promoting domestic solar manufacturing through a proposed 12,000 MW DCR component may evoke similar opposition at the WTO. CEEW analysis suggests that backing this programme could generate only 31,200 jobs as against one million full-time job opportunities had India followed through in achieving its solar and wind energy targets of 160 GW. Prioritising domestic goals without complying with international trade rules affects the much-needed stakeholder confidence required to achieve India’s clean energy target.

Third, India’s solar sector is currently caught in inter-ministerial cross-fire. The severity of the issue is evident in the power given to both the Ministry of Finance (MoF) and the Ministry of Commerce and Industry (MoCI) to implement trade remedies (safeguard duties and anti-dumping duties or ADD, respectively). In January this year, a safeguards watchdog under the MoF proposed a safeguard duty on imported panels, while a case for ADD was pending before the MoCI. In 2016, the MoCI proposed a unified entity that would handle both anti-dumping and import safeguard actions. But the idea was not adopted. Further, the Ministry of New and Renewable Energy (MNRE) has been grappling with issues posed by the MoF regarding the re-classification of solar panels as electrical motors (the current classification is photosensitive semiconductor devices), imposing additional duties and cesses on importers. An inter-ministerial committee headed by the MNRE must be constituted to coordinate moves among the MoF, the MoCI, the Ministry of Power, and the Central and State Electricity Regulatory Commissions. This committee should consider deliberate policy and regulatory nudges, keeping in mind the clean energy targets, other existing government initiatives such as ‘Make in India’, political considerations, and broader government fiscal concerns.

Case for unified voice

Fourth, developers and manufacturers in the sector need to voice their needs clearly and respond to policy implications in an unequivocal manner. Emergence of differences within these groups has led to problems. For instance, imposition of safeguards duty on imported solar products following the demands of a manufacturers’ association, raised concerns for solar manufacturing units in Special Economic Zones. To ensure a long innings for the sector, the industry needs one unified voice representing the key concerns of each stakeholder-category, without ignoring the broader interests of the sector.

Effectively balancing India’s goals of energy access, enhanced energy security, and climate ambition, is not impossible, but definitely difficult. In supporting the domestic manufacturing industry, the government may be backing a horse which may not run for long. Instead, the government could tilt its green manufacturing mix in favour of nascent industries of the future such as energy storage, electric vehicles, and IT solutions for grid integration. To get ahead in that race, India will need a comprehensive strategy on issues such as effective sourcing of critical minerals, investment in R&D, access to patient venture capital, and fiscal benefits for the industries of the future. The sector urgently requires a clear strategy and a co-ordinated approach to reduce the variables that make for an uncertain market.

Manu Aggarwal and Anjali Viswamohanan are Programme Associates at the Council on Energy, Environment, and Water