The World Trade Organisation (WTO) has rejected India’s final appeal and upheld its previous ruling against Domestic Content Requirement (DCR) provision for solar projects in India (refer). But India has already built a pipeline of around 1,800 MW of DCR projects as against operational cell manufacturing capacity of only about 600 MW. Demand from these projects should provide breathing room to the existing manufacturers and avoid any immediate repercussions.
• The Indian government has unnecessarily wasted time and money pursuing a protectionist policy and its repeal may in fact be helpful in the long-term;
• India already offers extremely attractive subsidies under M-SIPS and other such schemes but all such measures have failed to produce desired results because of the formidable challenges faced by manufacturers in India;
• India has a competitive advantage in manufacturing of solar inverters and balance of system components, the country should focus on becoming a leader in those areas;
BRIDGE TO INDIA has always maintained that investment in manufacturing cannot and should not be based on short-term protectionist measures such as DCR. The Indian government has unnecessarily wasted time and money pursuing a flawed policy. The ruling should compel it to create a more sustainable roadmap for a viable domestic manufacturing sector.
It is worth noting the challenges faced by manufacturing in India – poor infrastructure, high financing and energy costs, inflexible labour laws and unrelenting bureaucratic obstruction. To offset these, India already offers extremely attractive subsidies to manufacturers under the Modified Special Incentive Package Scheme (M-SIPS) and the Special Economic Zone (SEZ) policy. But these policies are extremely rigid and their poor implementation has failed to produce desired results.
Domestic manufacturers have therefore been seeking additional relief by way of assured production offtake, anti-dumping duties and/or production subsidies. In our view, these are all short-term measures which will do little to create a genuinely competitive manufacturing sector. The new solar manufacturing policy is proposing to provide direct subsidies to integrated ingot-wafer-cell-module manufacturers. This could be a somewhat plausible short term option if limited performance based incentives are provided to more efficient manufacturers.
However, in light of the economies of scale achieved by Chinese companies and supply glut facing the international solar equipment market (refer), investment in greenfield integrated manufacturing capacity is extremely risky in our view. In effect, there is unfortunately no easy solution to attracting large scale investments in solar manufacturing in India.
In our opinion, the government can continue to try and strategically support a few large scale manufacturing facilities. However, protecting small and uncompetitive facilities forever is not the best use of public finances. It is also worth noting that there is significant manufacturing capacity being created in other parts of the sector in India – primarily solar inverters, mounting structures and transmission systems – without any specific support. Companies such as TMEIC and Hitachi are even planning to use their Indian manufacturing units for export of solar inverters. Would it not be a better idea to first strengthen the country’s manufacturing in areas where we have some competitive advantage rather than trying to promote investments in an oversupplied sector where most large global companies are constantly stressed?