23 May 2016 | BRIDGE TO INDIA
In our last weekly update, we discussed the state of domestic manufacturing and Indian government’s efforts to improve prospects of the sector after the domestic content requirement mechanism was challenged successfully by the USA at the World Trade Organization (WTO) (refer). Recent reports suggest that the government is planning to offer incentives directly to domestic manufacturers instead of compulsory domestic content requirement (refer). The Indian government seems totally committed to support local manufacturing with Mr Piyush Goyal, Minister for new and renewable energy, being emphatic that India needs a vibrant manufacturing sector to go hand-in-hand with boost in solar power generation.
- Existing manufacturers may not gain any direct benefit from the new policy, which is likely to focus on creating new, large scale and vertically integrated investments
- Financial incentives and/or assured market demand may be provided using a bidding based mechanism
- Long-term outlook for the sector will remain uncertain unless there is a genuine competitive advantage arising from lower costs, better infrastructure and/or access to superior technologies
No details of the new manufacturing policy are available at this stage but stock prices for existing manufacturers have already shot up in anticipation – see stock price charts of Websol Energy and Surana Solar. This rally may be unwarranted, however, as we believe that the incentives are likely to be available only for new, large scale manufacturing investments. Most of the existing manufacturers with small, uncompetitive capacities may not gain any direct benefit from the new policy. The prospects of market consolidation are also slim in our view because of obsolete and fragmented technologies being currently used.
We are curious to see how any incentive policy will be designed – apart from the usual questions of how much incentives will be provided to whom, the main challenge for the government will be to ensure that the new policy stays within the WTO framework. There have been unconfirmed reports that the incentives may be provided in the form of viability gap funding allocated through a bidding process. It is also possible that some business certainty in the form of assured market demand or project development preference is given to new manufacturers.
BRIDGE TO INDIA agrees that supporting investments into large scale, vertically integrated production lines is a better policy move than supporting existing manufacturers. But financial incentives and assured market demand can play only a limited role in creating a vibrant manufacturing sector. Long-term prospects for the sector will depend on ease of doing business in India, infrastructure availability and other business policies.