Bridge India

Weekly Update: Solar manufacturing in India: can the new government make it happen?

In the budget, presented last week, the new government took further measures to support solar manufacturing by eliminating the ‘inverted duty’ structure. ‘Inverted duty’ meant that while there was an import duty exemption on finished solar modules, there was no similar exemption on raw materials and components used in module assembly, thus putting Indian manufacturers at a disadvantage vs. exporters to India. This includes, for example, EVA sheets, back sheets and ribbons. Removing this bias is sound.

  • A sound business strategy for creating a healthy domestic manufacturing industry in India is missing
  • BRIDGE TO INDIA believes that India does not need to have its own solar cell and module manufacturing industry, if it is much cheaper to buy from abroad
  • If India needs to have a domestic solar cell and module manufacturing industry, then two key pieces need to be kept in mind: Strong solar demand and a long-term vision

We welcome the elimination also because it supports manufacturing in India in a way that helps solar as a whole to grow, by reducing the end consumer cost of solar power. However, while there are fragments of policy support – some positive and some negative, a larger strategy for creating a healthy domestic manufacturing industry in India is still absent. Other fragments are: domestic content requirements, a potential anti-dumping duty and the SIPA manufacturing policy.

A closer look shows that they are not in tune – some help manufacturers, but throttle the market by imposing higher solar costs. They grow the fish by shrinking the pond – a very short-sighted approach. Also, as a whole, they do not come together in a comprehensive strategy for India. There is too much short-termism in the industry and in politics. The government reacts to industry demands for protection and industry bets on being protected by the government, rather than on a sound business strategy.

The anti-dumping duties are a case in point. The Prime Minister’s Office (PMO) is thought to believe that this will help establish domestic manufacturing. However, this would only be true, if two conditions are met: firstly, that it is a useful intermediate step to making Indian manufacturing globally competitive without government help at some point in the future. Secondly, that the short term hurt to the market as a whole will not derail the entire Indian solar story. We have strong doubts on both accounts.

At BRIDGE TO INDIA, we do not see why India needs to have its own solar cell and module manufacturing industry, if it is much cheaper to buy from abroad. Over the last 20 years, India has grown its economy significantly by dropping the long-held notion that it needs to achieve autarky for all products and services. India has warmed to the idea of international trade and benefitted from it. Cells and modules are fairly low margin, highly commodified components of the value chain. China, the US and Taiwan have already built a significant manufacturing base in these – and at some subsidy expense. India can benefit from these efforts by buying cheap and instead focus on other components of the smart, distributed, clean energy future, such as meters, transmission and distribution solutions, inverters or storage solutions. In other industries, India does not mind importing from abroad. What makes solar cells and modules so special?

However, let us put this assessment aside and, for the sake of the argument, assume that it is necessary for India to have a domestic solar cell and module manufacturing industry. How could that best be achieved? We think, it needs two key pieces: Strong solar demand and a long-term vision. Without these, it will be difficult to entice investors and banks to place their bets on India. On the first point: India’s solar demand is stable at a low level, compared to the country’s potential. Unlocking its potential depends crucially on a low and falling cost of solar power. India is on the cusp of achieving significant solar parity with grid electricity on the consumer side, followed soon by parity on the generation side (for example, with new coal-fired power plants). Once this is achieved, India is bound to become one of the largest solar markets globally (in this prediction, we are not alone: the IEA thinks India will overtake China as the largest market by 2025). Once India is a thriving market, manufacturing in India will be easy to encourage. A look at the car market is instructive. Most global players as well as leading Indian companies have set up large factories in the country. However, measures such as duties or domestic content requirements raise the cost of solar and weaken demand.

On the second point: If India wants to have a competitive manufacturing industry, it needs both scale and vertical integration. Manufacturing sites need to be larger by a factor of 5 to 10. For that, they again need a market. This can be done in India (if demand is not throttled) or abroad (if other countries don’t place the same trade restrictions on Indian manufacturers as India places on them). It is also important to be vertically integrated all the way through to the silicon, ingots and wafers. Here, the cost of electricity – which is high for industry in India –  plays a key role. If the government wants domestic manufacturing to thrive, it needs a strategy to achieve both scale and integration. This would require a significant, long-term commitment by the government with very large subsidies. Success would by no means be guaranteed. Other countries have lost too much money in supporting solar companies.

Jasmeet Khurana is a consultant at BRIDGE TO INDIA.

7 comments

  • Hi Jasmeet: If you look at the car manufacturing industry in India closely as you suggest; I believe the prime reason we have established manufacturing here is because there is a duty on imported fully assembled cars. If we had a zero duty on fully assembled cars about 2 to 3 decades ago just as the industry was starting; Indian car manufacturing would not be as large as it is now. You cannot import cars at zero duty like PV modules. With our cost of money; it is impossible to do anything capital intensive and be competitive. BUT; we need manufacturing jobs here……

  • In the car industry, early attempts to create a domestic industry were highly flawed (Hindustan Motors, Fiat JV). I believe that demand comes first. India’s demand for cars is high now and as a result it makes sense to manufacture in India. From such a position of strength (demand), it is much easier to ask international manufacturers to manufacture in India, transfer know-how and technology to India and even to develop in India. Equally, Indian companies can grow based on strong domestic demand. There is no reason why Indian manufacturers should be less able to withstand competition than international ones. China is pursuing a very smart strategy in building a domestic industry through demand. It is also very important to understand that in solar, there are around 10 jobs in installation and maintenance for every 1 job in manufacturing. Thus, also from this perspective, creating demand is more important than enforcing domestic manufacturing.

  • Demand should precede everything else. That’s pure economic logic. But more importantly India as a country, needs to invest in her ‘energy security’ or call it ‘energy independence’. If she simply resorts to replacing oil/coal/gas with imported solar panels, the picture does not really change from where we are (http://businesstoday.intoday.in/story/falling-rupee-syria-crisis-india-iran-ties/1/198407.html). For this manufacturing in India is crucial. Of course there are other aspects to energy security (energy efficiency), but solar potential manufacturing appears to be an important one!
    So if it is accepted that manufacturing is needed, what can be the ways to achieve that? I don’t know. Anti dumping duties appear like a quick fix, but they can have their own issues, just today WTO has ruled against US in the case of Chinese solar duties it had imposed. Can India incentivize the flow of foreign investment in domestic solar manufacturing? Maybe. But these are simply ‘symptom’ based remedies. The budget is mute on the ‘real causes’ like power theft, grid improvement, net metering etc. These are the major challenges to be addressed. And if this is done, measures like ADD may not really be required (barring China).

  • Thank you – well put. Just one point on energy security. Your comparison is not correct. Coal, gas or oil are fuels. They need to be imported every month and every year at fluctuating prices to run power plants with a life-cycle of 30 years or more. The solar equivalent or the fuel is sunlight. Sunlight is plentiful in India. Importing a solar panel is like importing a boiler or a turbine for a thermal power plant. It is a one-off transaction. The price is that of today. Once it is bought, it will produce solar power for free for its entire lifetime. Ne need for fuel imports. Buying a solar panel from China creates very little dependency, while buying e.g. gas from Iran creates a strong dependency. In addition, there is very little technology differentiation in solar modules. It is actually a slow moving and conservative market (like all infrastructure markets that depend strongly on debt financing). There is no early-mover advantage and hence no need for India to get into the action now. Why not wait, focus on demand and then take a call in five years? It would be much cheaper for India’s power consumers and tax payers and the chances of building a successful industry would be higher.

  • Hi,
    Since India needs electricity, solar power is best solution. Demand is there and can be increased further by executing the announced policies more effectively. Anti Dumping duty should be given only for initial protection for say 5 years in which we should target to install 2-3 GW or more per year kind of capacities across value chain. Once we have scaled up, withdraw protection. Modi as prime minister must also think why India is not able to compete with China in manufacturing ? I do not want to believe that we are not capable.