The domestic manufacturers have had a long history of conflict against the imported solar components as foreign (Chinese) suppliers continued dumping solar components in India at a much lower rate than the existing market price. Therefore, the domestic manufacturers requesting the Government of India to safeguard the domestic industry growth was quite a valid appeal.
In 2017, India touched 20 GW of installed solar capacity and it is noteworthy that the country is marching fast towards its 100 GW goal. However, there are certain speed bumps that need attention so that the industry can maintain its pace. In 2017, low tariffs and Goods and Service Tax (GST) roll out were the main concerns. Now the industry is facing the implementation of 25 per cent safeguard duty, amidst the talks of anti-dumping duty, which is making the market rather slow.
Pricing is another touchpoint that demands rectification for project returns. The developers continue to make aggressive bidding on the presumption that module costs will drive down further, while the government lauds the low tariffs. This may not be the case in going forward and of course, the modelling of the bids need a strategic overhaul.
India is a member of the World Trade Organisation. Therefore, the country can impose safeguard duty of foreign imports, once they have curbed or damaged the demand of the domestic industry. The foreign solar suppliers like China and Malaysia have claimed nearly about 80 per cent market share (in solar panels) within the domestic industry; it would be fair for India to impose the safeguard duty on them. However, besides covering the imports from the foreign suppliers, this new duty is also targeting domestic solar manufacturing units in the Special Economic Zone (SEZ) in India. As, the SEZs are kept out of the Indian customs territories (to exempt custom duties when sold within India), the safeguard duty on imported solar components unwittingly falls on the SEZ units.
Gyanesh Chaudhary, Managing Director and Chief Executive Officer, Vikram Solar fears that the safeguard duty does not provide exemption to the projects which have already been auctioned out (approximately 20-25 GW). This will completely derail the solar industry. To add on to that, Chaudhary says, 'The notification does not provide any relief to solar cells and modules manufactured in the SEZ and cleared to the DTA (Domestic Tariff Area). Currently, 40 per cent of solar module manufacturing units and 60 per cent of solar cells manufacturing units are located in the SEZs."
In the light of the SEZ issue, the notification defeats the very purpose of the safeguard duty, which is to protect and promote the domestic industry. While it may seem logical that the SEZs should be exempted, considering that the whole purpose of applying the safeguard duty is to protect domestic industry against imports, so why should they pay these duties? ...unfortunately the policymakers seem to be in a dilemma," observes a solar manufacturer, who wishes to remain anonymous.
A recent report by the Parliamentary Standing Committee indicated that in recent years, the solar imports have led to massive job losses. If the SEZ units are not exempted from SGD, it will lead to further job losses and harm the manufacturing ecosystem in India. The SEZs enjoy certain benefits, primarily to promote exports but also to cater to the DTA. If the safeguard duty is applied without exemption as per the notification, the domestic manufacturers in the SEZ will also be liable to pay the safeguard duty whenever they sell modules in India. This is because the SEZs are considered to be outside the Indian customs territory and this would, therefore, be counterproductive for the domestic industry. This move will, in fact, jeopardise the Prime Minister's solar mission targets.
Increase in capital cost
In 2017, around 4 GW of solar projects were auctioned and these would be under implementation now. Assuming 1 GW of excess inventory to be in transit, about 3 GW of capacities would be yet to tie up their module requirements. These projects were auctioned at low tariffs, so any rise in equipment cost after the safeguard duty would crimp the cushion that developers have to service debt.
Imposition of the safeguard duty is hampering the stable graph of the industry. Not to mention, any trade barrier is bound to slow the pace of solar installations. The fact is that such duty will increase the project costs which in turn will impact the end consumers for future bids. Though, most of the developers would have a pass through the clause for the current Power Purchase Agreements (PPAs).
According to the rating agency ICRA, the imposition of safeguard duty at 25 per cent will increase the capital cost for a solar power project by 15 per cent. ICRA recommends the government that the tariff must be increased by about 30-35 paise per unit to maintain a similar level of returns for the project developers. Earlier, the solar bid tariffs largely remained below Rs 3 per unit in CY2018 varying between Rs 2.44 per unit and Rs 2.75 per unit, with expectation of favourable price movement in PV modules following the policy changes in China. However, Sabyasachi Majumdar, Group Head-Corporate ratings, ICRA says, ôWith the imposition of the safeguard duty, the upcoming bids are expected to witness an increase in bids to Rs 2.9-3.1 per unit."
Meanwhile, for the projects that are already bid out, the amendment to the bidding norms approved in April 2018 allowing a pass through of changes in taxation, duties and cess, would allow the developers to pass through the tariff increase to the off-takers. However, the timely approval by the regulators and pass through of the tariff increase to the off-takers is critical from the cash flow perspective of the project developers. While the imposition of the safeguard duty on the imported solar cells and modules would improve the competitiveness of the domestic module manufacturers, the extent of benefit is likely to be constrained by the recent fall in the imported PV module prices, owing to the policy changes in China. Moreover, the imposition of the safeguard duty for a short period of two years is unlikely to lead to any significant increase in the domestic solar module or cell manufacturing capacity in the near term.
To conclude, India's intension towards solar growth and domestic manufacturer's part in it has always been highlighted by constant support. Now, the country needs to just re-evaluate its duty structures and the solutions will surely facilitate its growth.
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