What does the new budget mean for India’s solar market?

Finance minister Arun Jaitley announced the new budget for the financial year 2014-15 on 10th of July. The Indian solar sector was looking forward to it as the new administration had signalled strong support and ambitious plans for the industry. Unfortunately, there is very little in the budget for the solar sector. It is, perhaps, still too early, in the new administration, for game-changing policies. There were four key announcements:

  • The ten year income tax holiday (section 80 IA) on solar projects has been extended till March 2017
  • A total of INR 5 bn (USD 83 m) is dedicated to the development of new ‘ultra-mega’, GW-scale solar projects in Rajasthan, Gujarat, Andhra Pradesh, Tamil Nadu and Ladakh
  • Customs duty is waived on copper wire ribbons (used in modules), back sheets and EVA sheets. There are also waivers on duties for imported machines used in the manufacture of solar equipment such as cells and modules
  • The clean energy cess on coal and lignite has been doubled from INR 50 (0.8 USD) to INR 100 (1.67 USD) per tonne

We think this budget is a disappointment for the solar sector. This is a surprise. Prime Minister Narendra Modi is widely regarded as a strong believer in solar. Many (including BRIDGE TO INDIA) expected a more far reaching, directional and visionary budget. Perhaps it’s still too early to expect this from the new administration.

The budget speech in parliament is a legacy of the British Raj. It serves very little practical purpose other than it being a good platform for the government to communicate its policy intents. Although the government has given some importance to solar when compared to other renewable energy technologies like wind or biomass, it has not laid out a comprehensive policy program on solar, nor has it provided details on how the modest proposals are to be achieved.

The key announcements:

  • Encouraging the “ultra mega”, GW-scale solar power projects in Rajasthan, Gujarat, Andhra Pradesh, Tamil Nadu and Ladakh. Going by the budgetary estimate (a paltry INR 5 bn or USD 83 m), this would only be used for the initial feasibility studies and planning. (This is a start, but not more.)
  • The government has allocated INR 4 bn (USD 66 m) towards funding solar powered water pumps for agricultural uses.
  • INR 1 bn (USD 17 m) will go towards developing solar canal projects.
  • Continuation of the 10-year tax holiday for all power projects until 2017. This is an important announcement and well appreciated by the sector. However, an extension of the 80% accelerated depreciation benefit on solar projects has not been announced.
  • Support for solar manufacturing in India through waiving of import duties on manufacturing supplies and equipment. This makes little sense, if the government wants to seriously incentivize domestic manufacturing.
  • The clean energy cess on coal and lignite has been doubled from INR 50 (0.8 USD) to INR 100 (1.67 USD) per tonne to garner funds to fund clean energy projects. The government will likely collect over INR 50 bn (USD 833 m) going only by Coal India’s target for 2014-15. Considering the fact that only INR 10 bn (USD 167 m) worth of funds have been proposed in this financial year, the excess fund utilization is a mystery. How will this be utilized? Details are sorely lacking.

The misses:

  • The budget failed to set a clear road map for India’s solar future. It also sorely lacked on specifics. The industry expected an upward revision of the National Solar Mission targets and a commensurate budgetary allocation. The MNRE received a budgetary allocation of INR 39.41 bn for the FY 2014-15 that is almost identical to the last financial year (INR 39.15 bn). There was also no mention of a boost towards distributed/off-grid generation. The 30% MNRE subsidy has completely dried up in the last two years and the industry expected the finance minister to revive this by a larger allocation.
  • The manufacturing sector also missed out. The concessions are mere tokens. The customs duty on solar manufacturing equipment was reduced to 5%. Flat copper wires (an insignificant component contributing 2.25% of module cost) were exempted from customs duty. If the government believes that this is enough to revive domestic manufacturing, it is mistaken. The government needs to adopt a holistic, long-term approach to incentivize manufacturing of solar cells and modules. The budget has given no indication of such an approach.
  • There was no mention of rationalizing grid power tariffs, preventing power theft through e.g. smart metering (the only reference to ‘smart’ was with respect to ‘smart cities’) or restructuring the debt of DISCOMs. Ultimately, large solar power projects require a healthy off-taker and a stable grid, which means debt-free DISCOMs. This is one of the key barriers to private investment in the power sector. A holistic approach to completely de-regulate power prices and improve the economic situation of DISCOMs was missed in this budget.
  • Lastly, the industry expected the accelerated depreciation benefit to be extended to homeowners of solar systems. This would have created a vibrant market for the 1-5 kW rooftop market. Although there was some talk in the market about this, it was completely left out in the budget.

The new government has been in office for less than two months. Given this, one cannot expect too much. Also, one should not read too much into the budget speech and the budget itself, because it only has a directional quality. Nevertheless, we believe that the budget is a good platform to showcase the government’s vision. In that, we are disappointed. Our score for the budget is 3/10.

Mudit Jain is a consultant at BRIDGE TO INDIA.

6 comments

  • Whether Back Sheet & EVA Sheet contributes insignificant part in manufacturing of solar module.
    Whether extending 80IA benefits to March 2017 is not sufficient enough in lieu of accelerated depreciation.
    Whether Fully Excise duty exemption along custom duty exemption on raw materials and components is not a good sign to revive the local industry.
    We need to concentrate on the basic issues affecting Solar Projects and what was the industry’s specific demand in this regard.
    Whether Central Govt. can improve the Discoms financial state of health
    Whether Canal projects, Agri Pumps Projects are good initiative or not?
    Pls. guide

    • Dear Sudhir,

      The clarifications for the queries are as follows:

      1. Back sheet and EVA sheet are not insignificant components in module manufacturing
      2. 80 IA benefit is applicable to standalone solar project and benefits all the investors whereas, benefit of accelerated depreciation is passed on to the group company. 80 IA benefits are limited because of MAT applicability in India
      3. Excise duty and custom duty exemption is definitely a good sign for the local industry. But since most of the manufacturing units are already present in the SEZs, most of these benefits were already applicable
      4. The biggest issue surrounding the solar project today is the payment security
      5. Central government can definitely take steps in revival of discoms. Debt restructuring of the discoms is one such example
      6. Both canal projects and agri pumps are definitely good initiatives but the total contributions is small when compared with expected contribution from parity based demand

  • Yes ! I agree that the budget did not do much in solar sector as it was expected by the Industry. Given the current economic situation of the country, it looks that the government has focused on much larger issues in an attempt to revive the economy.

    Anti-dumping versus local manufacturing versus ambitious target of 20 GW is unclear and conflicting issue that has not been addressed. Is there any development on anti-dumping issue ? will it continue or going to be reversed ?

    Nevertheless, Bridge to India work is commendable. Many thanks ! Prasanna Gargava, Renewable Energy Professional

  • No doubt, that Solar Micro Inverter will be leading the Solar Roof Top market as far as on-grid home generation systems of lower capacity are concerned. But it seems the policy makers have completely missed this home generation sector. Are there any furter announcements on import of Micro Inverters either as a Ready Product or CKD/SKD state?

  • The budget is as good as I expected. Actually best budget for common man, business sector, retail sector and so on. The best budget as compared to all other previous budgets. But same as last budget the the budget is not for solar sector. I also hope that government will do something for solar sector to cope up with the progress of other sectors.

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