Safeguarding the solar sector

In an endeavour to protect the domestic solar cell and module manufacturing industry, the Government of India imposed a safeguard duty on the import of solar cells and modules for a two-year period starting 30th July, 2018. Over the seven-month period between the announcement of the preliminary ruling by the Indian Directorate General of Trade Remedies (DGTR) and the final imposition of duty, uncertainty over the applicable timelines for the duty and pass-through provisions dampened investor participation at PV auctions and led to an increase in tariffs discovered. Moreover, the increase in tariffs discovered led to the cancellation of nearly 5 GW of awarded project capacity by various tendering agencies in 2018.[1] In addition, the process of claiming pass-through benefits for eligible projects has been quite onerous, adversely affecting investor sentiment.

With one year out of the original two-year period having now elapsed, the sector could experience turmoil again. Discoms and solar developers now have to second-guess any potential extension of duties beyond July 29, 2020 and plan their projects accordingly. Based on stakeholder consultations, we understand that only a review petition filed before the DGTR can lead to a potential review and extension of safeguard duty beyond 2020, which would be informed by developments since the application date. Further, whether or not a review investigation is conducted itself could have different implications for solar PV sector. This note examines these issues in detail.

Impact of safeguard duty on sources of imports

A safeguard duty is levied by a country to restrict a surge in imports threatening the domestic industry. It is imposed on a particular product and extends to imports of the product from all countries, except developing countries with some restrictions.[2] On similar lines, the DGTR had exempted imports from developing countries from paying safeguard duty. However, duty was applicable on imports from China, Taiwan and Malaysia, as these countries did not meet the exemption criteria.[3]

For the purpose of recording international trade data, India classifies solar cells and modules under the same Harmonised System (HS) code – 85414011. The implications of such a classification of cell and module trade data is that the quantum of cell and module imports separately cannot be determined. However, a comparison of the import value of solar cells and modules with project installation data (considering a three-month time lag between import and deployment to account for project installation) reveals interesting insights. While imports have declined in absolute terms (23% year-over-year for the period August 2018 to July 2019), these have continued to follow the trend for project deployment (Figure 1). It can be inferred that implementation of safeguard duty has had little to no effect on increasing the market share of domestically produced modules.

Trade data[4] for the period after the imposition of safeguard duty also reveals evidence of increased diversification of procurement of solar cell and modules (Table 1). China’s share in imports has declined by around ten percentage points. A reduction in module prices (around 25% between June 2018 and July 2019) due to changes in the domestic Chinese solar policy perhaps precluded a more drastic decline in China’s share of imports.[5][6]

However, there have been considerable changes in the shares of imports from other countries – Thailand, Vietnam and Singapore. The exemptions for Thailand and Vietnam have increased the competitiveness of imports sourced from them. In the event of a review investigation and the extension of safeguard duty, it is likely that these exemptions could be reversed. In this scenario, all sources of safeguard duty – exempt imports would be eliminated, inhibiting further tariff reduction.

Understanding limitations of safeguard duty

In the absence of a review investigation, the safeguard duty would lapse on 29 July, 2020. A review investigation would determine whether the imposition of safeguard duty should be extended. The filing of a review petition depends upon whether domestic manufacturers have benefitted from the safeguard duty.

The purpose of imposing safeguard duty is to provide the domestic industry protection from a surge in imports from a like or competing product and facilitate structural improvements in the competitiveness of the domestic industry.[7] However, standalone module manufacturers, which rely on imported cells and account for a large share of domestic PV manufacturing[8], have witnessed an increase in input costs. Moreover, with the underlying sources of competitive disadvantage relative to foreign manufacturers unaddressed, investors have been reluctant to make new investments in manufacturing capacity in the one year since the imposition of safeguard duty. These sources of competitive disadvantage include[9]

•  Inferior terms of debt capital
•  Higher electricity prices
•  Lower scale of operations
• Lack of vertical integration,
•  Absence of a guaranteed market
•  Limited investment in new technologies

Recently, the government has indicated its intention to increase import tariff on ancillary solar equipment. Hiking import tariff may not be the solution and many targeted systemic interventions are required to address the sources of competitive disadvantage relative to imports for domestic manufacturers.

The Central Public Sector Undertaking (CPSU) scheme Phase – II, which provides a guaranteed market for 12 GW worth of domestically produced modules, is one such intervention that could enable the scaling up of existing capacity and spur investments in new capacity.[10]

Safeguard duty collections could support policy interventions in solar PV sector

The imposition of safeguard duty on solar cell and module imports has translated into significant inflows into the Indian exchequer. These inflows would be a part of the indirect tax receipts of the government, without being earmarked for any specific end uses. Based on trade data sourced from the Ministry of Commerce and Industry, safeguard duty collections between August 2018 and July 2019 have totalled approximately INR 3,500 crore. The government could consider ploughing back these collections into the solar PV sector, in order to support policy interventions for advancing domestic PV manufacturing or deployment. Additionally, to design better policy interventions, the methodology to collect and monitor trade data needs to improve. Recording of solar cells and modules separately in both MW and import value terms will help the government design targeted support for individual products.

Clarity on extension of duty

One year down the line, the imposition of safeguard duty appears to have benefitted neither developers nor encouraged new investments in manufacturing. For any new investments in manufacturing, longer term market and regulatory support and clarity in implementation is essential. In the more immediate term, clarity on the applicability, timelines and quantum of duties beyond July 2020 is required. In the absence of a review petition, the government could consider a suo moto review of the safeguard duty or otherwise signal to the industry the likely course of action going forward. Otherwise, the attendant uncertainty could translate into a repeat of 2018 in 2020 - with investors second-guessing government actions, potentially translating into higher tariffs and reduced participation in solar auctions. This would cast further doubt on the achievability of the 2022 RE deployment targets.

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