The MNRE has announced plans to levy basic customs duties (BCD) on imports of solar PV modules and cells to help reduce India’s reliance on external supply and promote domestic solar manufacturing. While this is laudable, the proposed measure (rates of 40% on modules and 25% on cells) merits closer examination on three counts.

  1. Trade barriers alone may be inadequate for encouraging domestic production; policymakers must study other possible interventions to identify effective complementary measures.
  2. They must ensure an evidence-based approach is followed in determining the duty and the period of its application. If not set at the right levels, duties may not have the desired impact on domestic manufacturing.
  3. India’s domestic module and cell manufacturing capacities of 10 GW and 3 GW, respectively, fall far short of its annual requirements of 25 GW.

Import dependence in the short and medium-term is unavoidable; duties imposed should not be onerous on developers.

A CEEW-CEF analysis indicates it is possible for India to achieve greater self-reliance in solar manufacturing through the time-bound application of BCD at much lower rates—around half of the ones announced. The first step is to understand the reasons for the competitive disadvantage of domestic manufacturing relative to imports.

Indian versus Chinese solar manufacturing: Last year, we found that domestically-produced modules were 33% more expensive than their Chinese counterparts on average, assuming that producers in both markets factor in viable returns in setting prices. A third of this gap may be attributed to lower capacity utilization levels of domestic facilities, stemming from weak demand amid competition from imports. If we assume identical capacity utilization, this gap narrows to 22%.

The bulk of the 22% price gap may be attributed to the higher cost of cells, EVA backsheets, and other raw materials. China’s vertically integrated ecosystem provides module-makers cheaper access to raw materials, whereas Indian firms rely on imports in the absence of cost-competitive domestic options. Higher unit labour and overheads in India account for the remainder of the price gap. Greater vertical integration, scale, and lower business overheads for Indian PV manufacturing can bridge the competitiveness gap. But demand uncertainty from the potential competition with cheaper imports deters new investments. So, policymakers must design interventions that create demand certainty and lower costs.

Creating demand certainty for domestic manufacturing: Import duties and domestic procurement schemes are two possibilities. The first intervention raises the landed price of imports, and the second mandates the use of domestically-produced cells and modules in solar tenders. Duties can be rendered ineffective by a reduction in prices. India’s safeguard duty on cell and module imports, starting at 25% in July 2018 and tapering to 15% by July 2020, is a case in point; international module prices declined by around 30% over the same period, negating the impact of duties on the landed price of imports. The duty has since been extended to July 2021.

Domestic procurement is a more durable source of demand certainty, though global trade rules limit such procurement to specific kinds of tenders. CPSUs, Kisan Urja Suraksha evam Utthan Mahabhiyan, and residential rooftop schemes contain domestic procurement requirements. Together, they represent a 20-30 GW demand for domestic modules, enough to support a manufacturing capacity of 10 GW over a three-year period. Since a portion of this capacity has been tendered, scaling up such schemes should be a priority.

Rationalizing BCD: Based on the foregoing, BCD of 20%, rather than the excessive 40%, on modules may be sufficient to bridge the price gap between domestically-produced and imported modules. Other cost-reducing measures, such as manufacturing parks offering low-cost logistics and electricity, or the proposed PLI scheme, can further bolster competitiveness and reduce the required duty amount.

As domestic production scales up, duties can be tapered down and subsequently withdrawn over a pre-defined time frame. We estimate duty support over a ten-year period is sufficient for the Indian industry to achieve competitiveness, after which it should be allowed to compete globally without major support. That is how a more evidence-based and integrated approach can simplify India’s pursuit of atmanirbharta in solar manufacturing.

Source: Financial Express