Is India’s 25 per cent safeguard duty for solar imports hampering the market?
It was only recently that the Supreme Court of India restored the safeguard duty of 25 per cent for all imported solar cells and panels. There were uncertainties in the market for the last few months regarding this. Earlier this year the Directorate General of Trade Restrictions (DGTR) had suggested a 70 per cent safeguard duty to all imported panels. The idea behind the safeguard duty is to, of course, safeguard and promote domestic manufacturers.
Though India is one of the most attractive solar markets — with an ambitious target of 100gigawatts (GW) by 2022 — it has failed to promote domestic manufacturing; with the market being is largely dependent on imported panels. Almost 90 per cent of the panels in India come from China.
India’s solar industry has failed to bring along its domestic manufacturers to the forefront as the market expands. India’s annual manufacturing capacity for solar cells is only around three gigawatts, compared with the average requirement of 20GW. There is simply not enough supply to cater to the sudden demand in the market.
There are several reasons for the decline of the domestic solar manufacturing industry in India. And the main reason is the cheap panels coming from China.
Most Indian manufacturers didn’t have the scalability to compete with Chinese companies. Even though the Chinese panels that are dumped into Indian market are often criticised for being of subpar quality, it’s worth noting that the quality of most panel manufacturers in India has been subpar as well, which also results in them being unable to handle the competition from outside manufacturers.
It is also true that the market has witnessed a sudden expansion.
The solar boom started in 2015, right after the Prime Minister Narendra Modi announced India’s massive targets. Suddenly the Indian market became attractive to outside players. The domestic manufacturers could never meet these requirements. In addition, the price-sensitive market led to cheaper panels coming from countries like China.
What the government should have done, instead, was to first strengthen domestic manufacturing and then at a later stage expand the market to make sure the domestic supply could locally cater to the increasing demand. With the sudden expansion and heavy competition, it had become difficult to domestic manufacturers to survive and many faced financial collapse.
On January 5, 2018, the Director General of Safeguards (DGS) of Customs and Central Excise proposed a 70 per cent safeguard duty, based on an application filed by five cell and module makers from India on Dec 5, 2017. Though the 70 per cent safeguard duty was not implemented, it did create confusion amongst the developers. India’s solar industry was backed by low priced panels from China, which resulted in record low tariffs. The confusion in the market led to a slowdown with many developers backing out from participating in tenders.
When the government implemented the safeguard duty of 25 per cent, it was challenged by ACME Solar in the Odisha High Court and had managed to get a stay. But the recent Supreme Court ruling restored the safeguard duty of 25 per cent.
Even though the reason behind this safeguard duty is to promote domestic manufacturers, many experts suggest that it may backfire for the industry. The safeguard duty has been implemented for a period of two years, and will be gradually decreased every six months or so. Right now, however, India does not have enough manufacturing capacity to cater to the market requirements. No new players would invest in manufacturing plants because of the safeguard duty of two years, and after the two-year mark, the willingness of potential manufacturers to invest remains uncertain.
This would work if there was an already existing domestic manufacturing industry — these two years, then, would have given them enough leverage to build up their capacity and be ready for global competition.
Sadly, this is not the case with India, barring a few manufacturers.
Another issue with regard to the details of the safeguard duty, is that according to the circular, products manufactured in special economic zones (SEZs) are considered imported and they too have to bear 25 per cent safeguard duty. A major chunk of manufacturing units are located in SEZs and thus cannot fail to reap the benefits of this move. Instead, they too are burdened with an additional 25 per cent safeguard duty which ultimately hampers the domestic manufacturing industry.
The disadvantages of the safeguard duty can be observed in the market. Many developers are unwilling to participate in tenders. In the last few tenders, India has had historic record low tariffs. Recent developments in the duty and GST have increased the cost for developers and this has raised the bidding tariffs. But the Distribution Companies (DISCOMs) and even the Solar Energy Corporation of India (SECI) are retendering and renegotiating with the developers over the increased bid — it is a tug-of-war over tariff and many developers find it tough to provide for earlier tariffs.
The safeguard duty is also counterproductive in achieving India’s 100GW solar target for 2022.
The latest forecast by Bridge to India, a renewable energy consultant, shows that there will be around 49 per cent slowdown in solar installation for next year. The duties will benefit only a fraction of the production capacity in India and will make many under-construction projects unviable.
This will be a heavy burden on the developers and will affect many jobs.
One of the arguments made by those supporting the safeguard duty is that there will be more jobs created by the local manufacturing sector. But many experts believe this is exaggerated and a major chunk of the job creation happens at the project-development phase and afterwards.
Even the jobs created by manufacturing sector will be under threat if the government does not exempt manufacturers within the SEZs. Mundra solar, one of the companies who filed the application for safeguard duty is inside SEZs, in effect too will have to pay 25 per cent safeguard duty.
There will be heavy losses which have to be borne by developers for the under-construction projects, most of which were earlier bids with lower tariff.
A 25 per cent safeguard duty will lead to a 15 per cent rise in capital cost and a subsequent increase in tariff by Rs 0.40 per unit as per Bridge to India.
Though it is true that Chinese manufacturers benefit the most from India’s solar boom, a safeguard duty may now be counterproductive even for them and will hinder growth. Many developers have raised their concerns.
Already the solar industry is witnessing a tough period because of the price wars; where many small developers are not able to compete with big players who bid aggressively. With the added burden of safeguard duty, most of these small developers will find it difficult to exist in the market and may face bankruptcy and financial collapse.