15 July 2014 | Jasmeet Khurana
In the budget, presented last week, the new government took further measures to support solar manufacturing by eliminating the ‘inverted duty’ structure. ‘Inverted duty’ meant that while there was an import duty exemption on finished solar modules, there was no similar exemption on raw materials and components used in module assembly, thus putting Indian manufacturers at a disadvantage vs. exporters to India. This includes, for example, EVA sheets, back sheets and ribbons. Removing this bias is sound.
- A sound business strategy for creating a healthy domestic manufacturing industry in India is missing
- BRIDGE TO INDIA believes that India does not need to have its own solar cell and module manufacturing industry, if it is much cheaper to buy from abroad
- If India needs to have a domestic solar cell and module manufacturing industry, then two key pieces need to be kept in mind: Strong solar demand and a long-term vision
We welcome the elimination also because it supports manufacturing in India in a way that helps solar as a whole to grow, by reducing the end consumer cost of solar power. However, while there are fragments of policy support – some positive and some negative, a larger strategy for creating a healthy domestic manufacturing industry in India is still absent. Other fragments are: domestic content requirements, a potential anti-dumping duty and the SIPA manufacturing policy.
A closer look shows that they are not in tune – some help manufacturers, but throttle the market by imposing higher solar costs. They grow the fish by shrinking the pond – a very short-sighted approach. Also, as a whole, they do not come together in a comprehensive strategy for India. There is too much short-termism in the industry and in politics. The government reacts to industry demands for protection and industry bets on being protected by the government, rather than on a sound business strategy.
The anti-dumping duties are a case in point. The Prime Minister’s Office (PMO) is thought to believe that this will help establish domestic manufacturing. However, this would only be true, if two conditions are met: firstly, that it is a useful intermediate step to making Indian manufacturing globally competitive without government help at some point in the future. Secondly, that the short term hurt to the market as a whole will not derail the entire Indian solar story. We have strong doubts on both accounts.
At BRIDGE TO INDIA, we do not see why India needs to have its own solar cell and module manufacturing industry, if it is much cheaper to buy from abroad. Over the last 20 years, India has grown its economy significantly by dropping the long-held notion that it needs to achieve autarky for all products and services. India has warmed to the idea of international trade and benefitted from it. Cells and modules are fairly low margin, highly commodified components of the value chain. China, the US and Taiwan have already built a significant manufacturing base in these – and at some subsidy expense. India can benefit from these efforts by buying cheap and instead focus on other components of the smart, distributed, clean energy future, such as meters, transmission and distribution solutions, inverters or storage solutions. In other industries, India does not mind importing from abroad. What makes solar cells and modules so special?
However, let us put this assessment aside and, for the sake of the argument, assume that it is necessary for India to have a domestic solar cell and module manufacturing industry. How could that best be achieved? We think, it needs two key pieces: Strong solar demand and a long-term vision. Without these, it will be difficult to entice investors and banks to place their bets on India. On the first point: India’s solar demand is stable at a low level, compared to the country’s potential. Unlocking its potential depends crucially on a low and falling cost of solar power. India is on the cusp of achieving significant solar parity with grid electricity on the consumer side, followed soon by parity on the generation side (for example, with new coal-fired power plants). Once this is achieved, India is bound to become one of the largest solar markets globally (in this prediction, we are not alone: the IEA thinks India will overtake China as the largest market by 2025). Once India is a thriving market, manufacturing in India will be easy to encourage. A look at the car market is instructive. Most global players as well as leading Indian companies have set up large factories in the country. However, measures such as duties or domestic content requirements raise the cost of solar and weaken demand.
On the second point: If India wants to have a competitive manufacturing industry, it needs both scale and vertical integration. Manufacturing sites need to be larger by a factor of 5 to 10. For that, they again need a market. This can be done in India (if demand is not throttled) or abroad (if other countries don’t place the same trade restrictions on Indian manufacturers as India places on them). It is also important to be vertically integrated all the way through to the silicon, ingots and wafers. Here, the cost of electricity – which is high for industry in India – plays a key role. If the government wants domestic manufacturing to thrive, it needs a strategy to achieve both scale and integration. This would require a significant, long-term commitment by the government with very large subsidies. Success would by no means be guaranteed. Other countries have lost too much money in supporting solar companies.
Jasmeet Khurana is a consultant at BRIDGE TO INDIA.