Can India push China out to make its place in the sun?

The world awoke to renewed uneasiness on June 15 as news of brutal clashes between Indian and Chinese troops in Galwan valley in Ladakh filtered through. As tensions escalated to the highest levels in decades, the conflict quickly expanded beyond the geographic battlefield. In many ways, this makes the matter infinitely complex as India and China are major trading partners.

In the immediate aftermath of the skirmish on the border, the Indian government fired the first shots in the field of trade. On June 29, 59 Chinese smartphone applications were banned in the country owing to security concerns. On July 3, Union power minister RK Singh announced that India would stop imports of power equipment from China, which forms the bulk of India’s imports from the country, and Pakistan. The ministry had, a week earlier, proposed a Basic Custom Duty (BCD) of 15% and 25% respectively for solar cells and modules imported from China once the current safeguard duty of 15% on solar cells and modules originating from Malaysia and China expires on July 31, 2020. An import duty of 20% has been proposed for solar inverters. Subject to parliamentary approval, the BCD could further be hiked to 40% in 2022.

Like the banning of Chinese apps, the prohibition of Chinese power equipment is also linked to security concerns. Notably though, the move has also been linked with the ‘Atmanirbharta’ campaign of self-reliance that the BJP-led NDA government has put its weight behind in recent weeks. Similarly, the BCD is seen largely as an extension of the safeguard duty that was in effect for the past two years with an objective of promoting domestic manufacturing of solar cells and modules.

According to figures published by the Directorate General of Commercial Intelligence and Statistics (DGCI), electrical machinery and equipment accounted for about a third of the total imports of ₹26.08 lakh crore ($392.29 billion) in the six years between 2014 and 2020. Along with machinery pertaining to nuclear reactors, the proportion of imports related to energy and power to the total stands at a staggering 50% over the past six years. Chinese investments in India, which are skewed towards energy, technology and infrastructure, have also come under the scanner in recent weeks. According to the China Global Investment Tracker (CGIT), a database maintained by the American Enterprise Institute and Heritage Foundation, India received US$14.75 billion worth of investments from Chinese entities during the 2007-19 period with energy and tech ruling the roost. A Brookings report released in April 2020 claims that net Chinese investment in India grew five-fold from US$1.6 billion to US$8 billion between 2014 and 2017.

However after the clash at the border, several states have moved to end existing contracts with Chinese firms, while as many as 50 investment proposals from Chinese companies have come under renewed examination. Additionally, recent funds announced for DISCOMs through the Power Finance Corporation (PFC) and the Rural Electrification Corporation (REC) will be done with import-dependency on China as a criteria.

Adieu to the record solar bid era?

As the Ministry of Power announced that it would seek to hike the BCD on solar cells and panels imported from China to 40% by 2022, a 2GW solar auction conducted by the Solar Energy Corporation of India (SECI) on June 30 managed to attract a record low bid of ₹2.36/unit from Spain’s Solarpack Corporacion to build 300MW of PV projects. Additinally, the auction was oversubscribed by 1.8 GW with nine bidders in total. 

Ultimately, all seven winners, after the reverse bidding process, bid lower than the previous record low tariff of ₹2.44/unit. Interestingly, as pointed out by Bloomberg NEF, winners of the SECI auction will effectively be exempt from the BCD under the “Change in Law” clause of their power purchase agreements since bids were placed before the official announcement of the new taxes. The Bloomberg report explains the aggressive bidding in the auction as a result of the temporary window of nil import taxes that has effectively opened up, and the availability of cheaper foreign debt to overseas companies.

With imported solar modules and cells from China set to become more expensive as the temporary window closes, the recent record bid might stand for a while despite costs of modules and cells continuing on a downward trend. “With imports from China becoming more expensive, there is a good chance that we might see an increase in tariff in the near future. Auctions might still be held but the SECI might find it difficult to sell this down the line to DISCOMs. This might have an impact on India’s renewable targets. Demand for PV modules, given the capacity addition targets, is more than what domestic capacity can cater to, and at prices that don’t allow bids of sub INR 2.5 as we’ve been seeing recently” says Kanika Chawla, director at the Centre for Energy Finance at the Council on Energy, Environment and Water  (CEEW).

Over a longer term, however, the effects will be marginal, believes National Solar Energy Federation of India (NSEFI) CEO Subrahmanyam Pulipaka. “Nobody can say for sure how tariffs will evolve. Even with the reported record bids, there are several nuances of the contract that are not publicised in the media, which actually could increase effective costs. In the short term, module prices will increase and this might get reflected in bids in the near future. Right now, there are 111 projects worth 30GW of energy that have already been bid out. These are eligible for the “Change in Law” compensation, which the government has said it will consider case by case. Similarly, rooftop solar in the pipeline must also be grandfathered,” says Pulipaka. “Over a longer term, how tariffs develop depends on our domestic manufacturing capabilities. After all, energy transition without energy security means little.”

Regarding the proposed BCD regime, the power ministry has clarified that duties will not be imposed retroactively and solar projects with PPAs will be exempt. The government has ensured that it will provide Viability Gap Funding (VGF) to bridge the gap in costs once the new regime is enforced for projects that were signed before the announcement. Although details regarding how the VGF shall be determined and disbursed remain sparse.

The Manufacturing Gambit

Improving the manufacturing capacity of solar cells and modules in the country has been high on the government’s list of priorities for some time now. The safeguard duty, due to expire this month, was put in place two years ago to increase competition between domestic manufacturers and their Chinese and Malaysian counterparts. The measure though has not yielded the desired results as growth in manufacturing capacity has remained minimal. “The safeguard duty failed to accelerate India’s solar manufacturing capacity, since the measure was undercut by the government’s move to grandfather projects that had been affected and provide funding for the price difference due to the duty.  Similarly, Chinese manufacturers also managed to offset some of the cost increase from the duty by providing cheaper rates,” says Vibhuti Garg, a senior energy specialist at the International Institute for Sustainable Development (IISD).

However, this is unlikely to happen with the BCD regime, feels Pulipaka. “The BCD regime is more permanent than the safeguard duty and can be revised upwards, and more countries could be brought into this net, so solar developers and manufacturers will consider the BCD more seriously in their planning processes than they did the safeguard duty. The COVID-19 pandemic has also been a game-changer since supplies from China were the first to be hit, the vulnerability of the supply chain has re-awoken solar developers to the need for strong domestic manufacturing capacity.”

India’s current manufacturing capacity for solar cells and modules stands at just over 3GW and 11GW respectively, with imports occupying about 85% of the current Indian market – most of which are Chinese in origin. Current Indian demand for cells and modules stands at about 20GW and 10GW respectively, manufacturers have failed to scale up owing to high costs of setting up plants, and the competitive advantage in terms of price enjoyed by their Chinese counterparts. Although the manufacturing capacity of modules is higher than the current demand, domestic supply lags demand due to chronic under-utilisation of manufacturing plants. Manufacturers have also claimed that the ‘approved list of models and manufacturers’ (ALMM) regime which involves enlisting at a hefty fee deters upgradation and effectively punishes innovation.

India, in 2017, mandated Domestic Content Requirement for solar projects with different proportions of domestic cells and modules mandated for different categories of projects. This DCR has effectively created a sizeable demand in the country, including India’s 25.75GW solar pump programme, KUSUM, and the 40GW rooftop solar programme. This, and demand borne from other larger scale projects, currently outstrips India’s manufacturing capacity. The central government is reportedly busy outlining a strategy to incentivise solar manufacturing in order to facilitate rapid expansion in coming years. Curiously, while India’s manufacturing infrastructure is unable to meet domestic demand, Indian manufacturers registered a doubling in the export value of cells and modules last year.

The reason for this, says Pulipaka, is that exporting to Europe and the US routinely fetches better prices than the Indian market where competition with cheaper Chinese imports in rife. “On an average, Chinese cells and modules are 20-30% cheaper than Indian manufactured equipment. So while DCR has created sizeable demand, manufacturers who are confident of their qualitative advantage over Chinese products would still prefer to sell to western markets rather than compete with imports in the Indian market. The hope is that this will change with a progressive BCD regime, which will make indigenous equipment more competitive.”

But it isn’t just the price that has hindered solar manufacturing from the achieving economies of scale. What’s crucially missing is comprehensive manufacturing policy, which must begin with interest compensation, adds Pulipaka. “A big competitive edge foreign manufacturers have enjoyed is easy access to capital, which can be achieved in India through interest compensation. Apart from this, India must move to subsidise and incentivise innovation and technology in the field, which it has so far failed to do,” he says.

The task of setting up a self-sufficient solar supply chain is easier said than done. “While increasing India’s module manufacturing capacity has been within reach for a few years now, we are far from creating our own supply chain as we still depend on China for cells, wafers, polysilicon, and the machines for manufacturing such equipment. Unless we  strategically determine the balance of being self reliant and well integrated with global supply chains, our position in the value chain is open to manipulation,  and gains from increased manufacturing will be in a compromised” says Chawla. “The 20 – 40% BCD regime might fare well in improving Indian capacities of manufacturing but self-reliance is equally dependent on innovation and progressive upgradation of indigenous technology and capacity, which needs to be incentivised. Ploughing back the revenue from duties could go some distance in incentivising manufacturing, which did not happen with the safeguard duties.”

While the situation on the Indo-Chinese border has de-escalated over recent days, relations between the two countries though will undoubtedly remain strained for the foreseeable future. In fact, if global precedence in recent decades is to be given due consideration, it can well be assumed that economic measures and countermeasures between the two countries will only compound over the coming years. India has fired the first shots, with aim firmly set on the power and energy sectors, recognising the importance of the Indian market for Chinese companies and investors. 

Unfortunately, India’s clean energy transition, too, will then depend on how Indian manufacturers manage to fill the gap that has been created. The prohibition of certain imports and the hike in import duties can only be the first small step in ensuring self-reliance. More critically, these need to be followed up with measures that can sustain a self-sufficient supply chain — which currently is little more than a distant mirage. Failure to do so will guarantee collateral damage, which might even jeopardise India’s clean energy future.

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Shreeshan V

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