Punitive tariffs on components will cripple a growing sector
The government has decided to implement a basic customs duty of 40 per cent on solar photo-voltaic modules and 25 per cent on solar photo-voltaic cells. This duty will come into force in 2022-23, allowing for some time to adjust, and is in effect designed to upgrade and replace the current 15 per cent safeguard duty on such imports from specific countries, including China. The government’s thinking on these issues is opaque and contradictory. But, seen together with some other recent moves, it is likely that policymakers feel there is an excessive dependence on imported solar power generation components in the Indian renewables sector. Some claim this raises security issues; for others this means supply chains are not resilient. However, these concerns must be examined against the costs of protectionism for the sector, and that does not seem to have been done.
Other policy changes in this sector include the launch of a large production-linked incentive scheme for solar component manufacturing, which the Union finance ministry has said would involve an investment of Rs 4,500 crore from the government, which would in turn, according to the prime minister in February, catalyse investment worth Rs 14,000 crore from private industry. Another shift in policy earlier this month from the Union Ministry of New and Renewable Energy was to create a list of “approved” manufacturers for the public sector. This list of 24 approved manufacturers would exist not just to benefit from government schemes or direct procurement, but even reportedly to the choices made by generation companies that hope to sign power purchase agreements with electricity distribution companies.
Put together with the incentives and tariffs, this is nothing less than the return of licensing in what should be a major growth sector.
The government seems to think that its relatively tiny investment of Rs 4,500 crore, together with ambitious targets for renewable energy capacity overall, will create a domestic supply chain for photo-voltaic equipment. For several reasons, this may turn out to be somewhat optimistic. The question is why the government wishes to take this risk in the first place, at a time when its renewable energy capacity addition targets are under threat. In spite of the one-year lead in time for the new customs duty, many currently feasible projects will now begin to appear uncertain in terms of their finances. According to ICRA, the new duties will raise the cost of new solar energy capacity in India by 23-25 per cent. This effectively negates India’s extraordinary achievement in recent years of managing the lowest unit cost for large-scale solar installations anywhere in the world.
The current problems faced by the sector, which include discoms’ reluctance to purchase renewable energy, will be worsened. And new growth areas within the sector — such as rooftop or consumer-focused solar energy, crucial to address energy starvation in India while managing carbon emissions — will be crippled even before they are in shape. The clear costs of this policy of protectionism and licensing do not seem to have been weighed properly against the chance that it will create an efficient domestic production base in this sector.