Blanket Safeguard Duty: If Implemented It Can Have Disastrous Effects on Indian Solar Industry

Director General of Trade Remedies (DGTR) initiated Safeguard Duty investigation on import of  Solar Cells, whether or not assembled in panels or modules in December 2017. The Director General of Trade Remedies in its preliminary findings recommended to impose 70% safeguard duty on imported solar cell and modules imported in India. Recently Committee of Secretaries decided to not impose Safeguard Duty based on preliminary findings and it decided to take call on duty once DGTR releases it’s final findings.  However, we should evaluate the scenario that will unfold if the duty is imposed.

 

Safeguard Duty: A Boon or Roadblock?

Indian solar industry is growing and the consistent progress portrays the Government initiatives in a bright light. However, the industry is still at a nascent age and requires constant support in development of a favourable environment for growth. And although, protecting domestic manufacturing industry seems to be the right move (Domestic players had a market share of 13 per cent in FY15, which is estimated to decline to 7 per cent in FY18), we have to understand that blanket Safeguard duty could lead to counterproductive results.

 

Impact on Manufacturing Industry

In March 2018, DGTR in its preliminary findings recommended safeguard duty to be imposed for a period of 200 days to curb imports of solar cells and panels. Although, Government has decided to not act on preliminary recommendations and wait for final findings, closer inspection would highlight that the blanket imposition would hurt larger portion of domestic manufacturers. Especially when the Safeguard duty lists domestic SEZ solar manufacturing units as potential target for duty imposition.

2 GW of India’s ~3 GW cell manufacturing capacity and nearly 4 GW of the country’s ~9  GW module manufacturing capacity is located in Special Economic Zones. Therefore, levying safeguard duties on SEZ units will definitely have adverse effects on the whole solar industry in the country. Establishment of SEZs in 2005 was a decisive step taken by the Government of India to support and nourish Indian manufacturing industry. SEZ units were given tax holidays, single window clearance and other facilities to support growth. Solar components manufactured by SEZ units were given exemption from custom duties. This helped Indian domestic manufacturing industry capacity to grow and reach incredible heights. However, if Safeguard duties is levied and domestic manufacturers in SEZ comes under its ambit, would lead to counterproductive results, which will push domestic manufacturers out of the race.

 

Impact on Project Development

Safeguard duty imposition (estimated to raise the project costs by 25%) will adversely affect project growth within the country.

Nearly 4 GW of solar projects, which were auctioned in last quarter of 2017 and are currently under implementation. The progress of these projects depends on the module prices that are already agreed upon, and since the projects were auctioned at low tariffs, increase in module prices (if Safeguard duty is imposed) would lead to shrinking the profit margin of developers and make projects economically unviable.

The private market of open-access and rooftop solar will also be affected as the developers and investors hesitate to bid for solar projects.

 

Impact on Energy Tariff

When Government of India is trying their best to reduce the solar tariff, making it cheaper than coal for rapid solarisation, Safeguard duty imposition will raise the tariff, by increasing equipment cost.

India’s failure in getting DISCOMs to fulfil their RPO mandates will show even a deteriorating picture, as DISCOMs will be more incapable to purchase renewable energy at increased rate (after Safeguard duty imposition).

 

So, if Safeguard duty is imposed without exempting manufacturing units located in SEZ, it will completely defeat the purpose of the duty imposition: protecting domestic industry.

We need to understand that India has to achieve the solar deployment targets but it has to be based on modules manufactured in India. Government needs to balance the solar deployment targets and needs of solar manufacturing industry. Only then we can achieve the solar targets along with energy security.

 

Share your thoughts with me on this at @gyaneshc.

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