11 July 2016 | BRIDGE TO INDIA
Last week, a news report suggested that India will shortly announce new tenders with modified Domestic Content Requirement (DCR) where modules used will need to be assembled in India but the cells may be imported (refer). This is a departure from the existing DCR rules where both cells and modules are required to be manufactured in India. The policy shift would benefit module assembling companies such as Vikram Solar and Waaree.
- India is sticking to DCR to showcase policy stability but the policy’s impact is being negated by the continuous US pressure on the subject
- A policy to provide direct incentives to new manufacturers is in the works but its legality is also questionable
- It is difficult to promote local without solving the macro issues such as ease of doing business, infrastructure, cost of power, cost of finance and local ecosystem for raw materials
The Indian government is emphatic that India needs to support domestic manufacturing. In addition to modifying the DCR rules, it is believed to be in the process of releasing a new solar manufacturing policy, which will provide companies setting up domestic integrated manufacturers with Viability Gap Funding (VGF), a financial subsidy, to compete with their global counterparts (refer). The amount of VGF would be determined through a competitive bidding process. Companies such as Adani and Trina, that are already in the process of setting up manufacturing facilities, are likely to benefit from this policy.
The Indian argument is that state support is provided to manufacturers to partly compensate them for the high cost of credit in the country and that this policy does not distort trade. This policy extends to other sectors, for example, textiles where India offers interest rate subsidy to the sector but the US is not convinced. It has been asking India to withdraw this incentive and has already raised the issue at World Trade Organization (WTO) (refer).
The US has similarly challenged the DCR through WTO which has already termed it as illegal. India has appealed against the judgement and continues to allocate projects under DCR. It is most likely that the US will again take India to WTO for providing subsidies and/or DCR benefits to domestic manufacturers. But India may be simply banking on the fact that that by the time any conclusive ruling is made by the WTO, the policy would have already achieved its objectives.
It is clearly very difficult to promote domestic manufacturing in India without solving the macro issues such as ease of doing business, infrastructure, cost of power, cost of finance and local ecosystem for raw materials. The government has been attempting various initiatives including DCR and now incentives to support domestic manufacturing. BRIDGE TO INDIA has consistently opposed the use of protectionist measures as we believe that simply paying higher tariffs or subsidies does not help in creating globally competitive manufacturing in the country.