The Indian Cabinet has approved Production Linked Incentive (PLI) scheme worth INR 45 billion (USD 602 million) for domestic solar manufacturing. The scheme targets total cell-module manufacturing capacity addition of 10,000 MW. Prospective manufacturers need to bid for “production linked” incentive, expected by them over first five years of operations, in a competitive bidding process. The incentive amount is expected to be staggered based on total capacity, module efficiency and extent of vertical integration.
- Actual incentive level is expected to be around 4-6% of cost of production;
- The scheme is unlikely to have any beneficial impact besides improving profitability of domestic market-focused manufacturers;
- We revise upwards our estimate of module manufacturing capacity addition in the next three years to 10 GW;
The government has been providing PLI for other key sectors like electronics and pharmaceuticals without following any auction process. Incentive levels have varied typically around 4-6% of cost of production for granting PLI in these sectors.
MNRE is expected to announce scheme details shortly. Competitive bidding process is proposed to be completed in the next few months thereafter. It would be interesting to see scheme design and final auction process with regards to tiering of incentive structure with capacity, module efficiency and extent of vertical integration. As per ball-park calculations, assuming 100% capacity and funds utilisation, effective incentive amount would work out to 6.25% for average module price of USD 0.20/ W. Actual incentive may be much less depending on competitive bidding process and other variables. Such low levels would be unattractive for most bidders particularly if they have to comply with stringent tender requirements and provide performance guarantees.
The important question is how will PLI support domestic manufacturing? Cost disadvantage of Indian manufacturing in comparison to leading Chinese suppliers is widely believed to be about 20-25%. For domestic sales, the manufacturers would already enjoy a robust 40% BCD protection from April 2022 onwards besides a number of demand assurance measures (PSU, KUSUM and residential rooftop solar schemes). For exports, the proposed incentive is nowhere near adequate levels. The desired purpose of the scheme, coming on top of BCD, is therefore questionable – it would only serve to improve domestic market-focused manufacturing profitability, which should already be healthy with 40% BCD.
With both BCD and PLI implementation moving forward, we revise upwards our estimate of new manufacturing capacity addition in the next three years to 10 GW. Adani remains the biggest potential player with Waaree, Vikram, ReNew and Jakson also keen to set up capacities. But China’s stranglehold in solar manufacturing is now so strong, most of these players would be heavily dependent on Chinese technology and/ or raw materials. The following chart shows wide gulf in capacity of leading Indian and Chinese manufacturers.
Figure: Current solar module production capacity of leading Indian and Chinese players
Source: BRIDGE TO INDIA research
In conclusion, trade barriers and incentives would lead to more domestic manufacturing capacity but the goals of self-sufficiency and making India a “global manufacturing hub” are unrealistic.