Citation: Dutt, Arjun, Manu Aggarwal, and Kanika Chawla. 2019. What is the Safeguard Duty Safeguarding? Analysing Impact on Solar Manufacturing and Deployment in India. New Delhi: Council on Energy, Environment and Water.
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.
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. The measure, which majorly impacts imports from China, Malaysia, and Taiwan, resulted in a 25 per cent duty on solar cell and module imports for a year starting from July 2018. The duty rates will decline to 20 per cent for six months starting July 2019, and will further be reduced to 15 per cent for another six months. In addition to the impact on the business prospects of manufacturers, the move has wide-ranging implications for the entire solar sector, including aspects like project deployment, job creation, and investor sentiment. This policy brief analyses the potential impact of the safeguard duty on these facets of the industry, as well as the associated effects it has on the solar sector as a whole.
At present, India’s solar cell and module manufacturing capacity is 3.1 and 8.9 GW per annum, respectively. A sizeable proportion of this capacity is located in special economic zones (SEZ). Indian manufacturers situated in SEZs will also be subject to the duty, reducing their competitiveness. However, while the sales of modules cleared from SEZs to the domestic tariff area (DTA) are subject to safeguard duty, the duty is applicable only on the value of imported inputs and not on the value added inside the SEZ. Cells manufactured in SEZs and then sold in the DTA are exempt from safeguard duty (imported wafers-the raw material used in cell manufacturing-are not subject to safeguard duties). Stand-alone module manufacturers located in the domestic tariff area (DTA) will face increased costs as a result of the safeguard duty as they often import cells for their modules. However, cells manufactured in the DTA would benefit from the safeguard duty.
The relatively underdeveloped state of Indian PV manufacturing can be attributed to the competitive disadvantages of PV manufacturing in India vis-à-vis other countries, particularly China. China accounts for close to 88 per cent of India’s PV imports and dominates global PV manufacturing. Upon assessment, the policy support received by Chinese solar PV manufacturers presents a stark contrast to the conditions in which manufacturers in India operate. While the safeguard duty aims to correct this disparity, it alone has little effect. This is better understood when we consider the supply glut in the PV manufacturing market, created as a result of a reduction in solar deployment targets (with subsidy support) in China. This has caused the prices of solar cells, wafers, and modules manufactured in China to fall further. As per estimates from active industry players in India, the prices of imported modules have crashed to as low as USD 0.21/Watt. Thus, in the current market, the prices of imported modules with the safeguard duty are competitive with or lower than those of domestically manufactured modules.
Further, the revision of commissioning timelines for solar projects in India from 13-15 months to 21-24 months (from June to early January 2019) and 15-18 months (from January 2019 onwards) allows developers to delay the procurement of modules and pay lower safeguard duties or bypass the duty all together. Thus, the safeguard duty offers only a limited competitive edge to domestic manufacturing, but it also has significant adverse effects. It has created uncertainty in the market, which has marred investor confidence and industry appetite significantly. In its current form, the safeguard duty will hinder the decline of solar tariffs; it will also increase regulators’ administrative burden as they adjudicate pass through of the cost of the duty as per the change in law clause in the power purchase agreement to the discoms.
Globally, trade protection measures have historically been ineffective in reviving domestic solar PV manufacturing. The Chinese industry avails numerous benefits spanning fiscal support schemes, access to affordable capital, integrated value chains, and affordable input variable costs; thus, a declining short-term safeguard duty will not be adequate to balance the scales. Systemic 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. Measures such as capital subsidies, domestic procurement, investment in the R&D of frontier technologies, interest rate subvention, and the provision of concessional electricity could help the resurgence and growth of the domestic PV industry. The imposition of the safeguard duty has resulted in additional flows into the Indian exchequer. The duty amount collected, approximately INR 1,500 crore for the period of August to December 2018, could be used to implement a combination of the proposed marketmaking incentives to strategically advance the domestic solar PV manufacturing market without creating uncertainty for solar developers or causing setbacks to the tariff advances made by the solar sector.
Ineffectiveness of safeguard duties in reviving Indian PV manufacturing
Hindering decline in tariffs
Negative impact on employment generation in the solar energy sector
Dampening of investor sentiment