Safeguard Duty on Solar to cause 30% Decline in Demand

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As one of the fastest growing economies, India decisively opted for solar development, understanding its potential to lift the country out of financial, social, and industrial darkness. The announcement of targeting 100 GW solar energy by 2022 evidently created an environment of urgency and brought forth a plethora of opportunities for industrial development. As a result, our country quickly became the second most attractive renewable energy market in the world. However, Government of India’s decision to impose Safeguard Duty on solar imports stands to undo the growth India accomplished through enhancing domestic solar manufacturing capacities. Many in the industry argue that the new policy is completely opposite of what our Solar mission and Make in India initially stood for.

Current Scenario

Hon’ble Supreme court’s decision to rule in favour of imposing 25% safeguard duty on solar imports, even after the Orissa High Court requested stay of proceedings until the next hearing comes as a surprise to the solar industry; as it targets not just imported solar modules and cells from China, Malaysia, etc but SEZ based solar manufacturing units in India. If we look at India’s growth plan, we will see that most part of it depends upon building a strong manufacturing sector within the country, which will create jobs, help us claim the export market, and bring in a new age of industrial, social, and economic progress. Factoring that in, it does not make sense to impose duties on India’s own manufacturing capacities in the most lucrative sector: solar.

As the situation stands, currently there is a 25% safeguard duty on SEZ based solar manufacturers effective from July 30, 2018. And otherwise, the next hearing introduces a different result, the manufacturers in India will have to shell out this tremendous amount of money to do business in the domestic market, where they already have less than 10% market share (Chinese suppliers have claimed 80% share due to India’s continued solar importing).

Safeguard has To Be Amended

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It is true that our domestic solar manufacturing sector needs a push and support to grow within the domestic market, and 25% safeguard duty on solar module and cell imports would have helped the industry creating demand for domestic manufacturing sector. However, as the safeguard duty also targets domestic solar manufacturing units within the special economic zones (SEZ), there will be no benefits of this initiative but stands to deal and damaging blow to the solar manufacturing market in India.

It is important to note that Special Economic Zones (SEZ) in India were built to enhance industrial capacity of the country. To support the manufacturing units growing in SEZs, the Government forwarded benefits like- tax holidays, single window clearance, lower charges on electricity, water and other facilities.

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As a result, 40% of Solar panel Manufacturing Units and 60% of Solar Cells Manufacturing Units are currently located in SEZs. However, not exempting SEZ based manufacturing units of safeguard duties, will make solar equipment made in the SEZs expensive, therefore, snatching any chance of competing with global suppliers like China.

Therefore, currently, safeguard duty does not present any opportunity, but stands to do more harm than good. Increase in solar module production price, which safeguard duty imposition will introduce, will lead to job losses, as the demand for domestically manufactured modules and cells fall. Research shows that this scenario will lead to more than 30% solar demand in India.  Demand in Q1 2019 is suspected to go lower than 3.5 GW. Additionally, it is to be noted that China’s recent solar policy is going to make imported solar modules and cells cheaper than it is, and therefore, making the 25% duty imposition incapable of efficiently blocking incoming solar module influx from China, thus pushing domestic manufacturers out of the market.

On a similar note, we also need to highlight that present solar industry growth has been affected by continuous solar tariff drop (at the insistence of Government of India)- as an example we can highlight that projects standing at the cumulative capacity 3.9 GW were cancelled in 2018 by GUVNL, UPNEDA, SECI in a bid to drive down the tariff even lower. Additionally, policies like- setting up a manufacturing unit to win solar projects (e.g- SECI’s 10 GW solar project continues to fail in attracting bidders) have discouraged developers.

Possible Remedy

Limiting safeguard duty on the SEZ manufactured module’s input cost cleared to DTA can help the SEZ based domestic solar manufacturing sector. Additionally, safeguard duty should not be applicable on the value addition done in manufacturing units located in SEZ and exempt projects, which have already been auctioned out from the ambit of duties of Safeguard to remedy the situation. It is important for India to understand that imposing duties on most promising manufacturing sector in India (solar) and importing solar modules from China defeats announced policies and initiatives like- ‘Make in India’, and Indian Solar Mission. Importing rather than manufacturing also puts India’s vision for solar reliance in question.

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It is important to highlight that in FY 15-16, India’s solar import expenditure reached to $2.3 bn and within FY 16-17, it was $3.2 bn, while in FY 17-18 it jumped to $3.8 bn, giving Chinese suppliers more than 80% market share in the domestic market. In this situation, when domestic manufacturing industry is already facing challenges, imposing 25% safeguard duty can destabilize the domestic solar industry. This development threatens to expose Indian manufacturing industry to a huge exposure to currency risk, since we are so dependent on imports.

It is a necessity now to exempt SEZ based solar manufacturers from safeguard duties. Stabilizing solar tariff is also needed to maintain investor interest within the industry and project bidding has to be simplified, omitting demands that threaten to scare developers and investors away.

Additionally, prioritizing domestic manufacturing is extremely important as it was the primary goal of Indian growth plans and it is how dominating solar countries have scaled such heights.

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