What is safeguard duty safeguarding?
In July 2018, the Government of India imposed a two-year safeguard duty on solar cells and modules, in an attempt to protect domestic manufacturing. This policy brief discusses the impact of that duty on the business prospects of manufacturers. It also analyses the implications of the duty on the rest of the solar sector, including facets such as project deployment, job creation, and investor sentiment.
Photovoltaic (PV) manufacturing in India has a competitive disadvantage relative to other countries, especially China. This disadvantage can be attributed to the superior policy support and favourable market conditions for Chinese PV manufacturers in comparison to those prevalent in India. The Government of India attempted to level this disparity by imposing a trade protection measure in the form of a safeguard duty. However, the duty alone has little effect. Given the falling prices of Chinese manufactured solar cells, wafers, and modules, the prices of imported modules with the safeguard duty are still competitive with or lower than those of domestically manufactured modules.
Manufacturing Solar Panels
- Safeguard duties only protect a section of Indian PV manufacturers. While cell manufacturers would benefit, a considerable chunk of module manufacturers are reliant on imported cells, which will result in an increase in input cost. Module manufacturing capacity far outstrips (~8.9 GW) cell manufacturing (~3.1 GW) in India.
- The duty does not address the causes of the competitive disadvantage associated with Indian PV manufacturing such as inferior terms of debt capital, higher electricity prices, lower-scale operations, the lack of vertical integration, the lack of investment in new technologies, and demand uncertainty. Hence, it is unlikely to encourage investments in new facilities.
- In the current form, the safeguard duty hinders the reduction in solar tariffs. Tariffs could be six to ten per cent lower in the absence of duties.
- The duty has a negative impact on potential employment generation in the solar energy sector. The bulk of employment in the sector is generated through project deployment, but the uncertainty created with the imposition of the duty has resulted in sluggishness in project awards.
- Investor confidence has taken a hit. Uncertainty regarding the applicability of pass-through provisions for projects awarded before the imposition of duties, challenges in claiming pass-through benefits from the relevant regulatory commissions, and the cancellation of projects awarded dampened investor sentiment.
- Systematic interventions, based on an understanding of global supply chains and PV factory economics, are necessary to address the competitive disadvantage of the Indian PV manufacturing industry.
- The benefits of targeted interventions need to be weighed up against their costs, including an assessment of the externalities of any measure to support PV manufacturing on other areas of the solar energy ecosystem.
- Measures aimed at stimulating the domestic PV manufacturing industry should provide credible long-term support to manufacturing in order to translate into investments at scale.
- Policymakers should expedite the processing of onerous pass-through claims for developers, especially at the state level, to bolster investor sentiment.
- The revenues realised from the imposition of safeguard duty should be ploughed back to support the PV ecosystem in India.
- The government should lower uncertainty pertaining to safeguard duties on two fronts: firstly, by providing clarity regarding the applicability of safeguard duties beyond July 2020. Secondly, clarifications are needed on whether imports from developing countries such as Vietnam and Thailand are still exempt from the applicability of duties.