By Ajay Sawhney
New Delhi: On March 9, 2021, the Ministry of Finance approved the introduction of a 25 percent basic tariff on solar cells and 40 percent on solar modules (BCD). The BCD, which will come into force on April 1, 2022, is part of a series of decisions by the Indian government (GoI) to provide impetus for domestic solar system manufacturers. Earlier this year, in February 2021, the Ministry of New and Renewable Energy discontinued the benefit of a reduced tariff on items imported for the construction of solar energy projects. These decisions seem to be motivated by the need to reduce reliance on imports and create a solar energy manufacturing industry that is not only self-sufficient but also actively participates in the global supply chain.
The introduction of BCD was received differently by different stakeholders in the industry. While the decision has been welcomed by domestic manufacturers, it has not caught on with solar power project developers (SPPDs) as they are skeptical of the ability of domestic manufacturers to meet current and future demand. While the current demand is 30 GW per year, domestic manufacturers can only supply 2.5 GW solar cells and 10 GW modules. The SPPDs believe that this gap between supply and demand will force them to rely on expensive imports to meet their contractual obligations to set up the projects at hand.
India's solar sector is currently dominated by Chinese suppliers as they offer competitive prices. The gap between supply and demand is because Indian manufacturers cannot compete with the prices offered by their Chinese counterparts, which is preventing Indian manufacturers from expanding their manufacturing capacity. The introduction of BCD eliminates the price advantage associated with imports from China and creates a level playing field for domestic manufacturers. However, this benefit can be negated if domestic manufacturers cannot use the introduction of BCD as an opportunity to expand their manufacturing capacity. Currently, India imports most of the raw materials needed to manufacture solar panels domestically. While the BCD will solve one half of the equation, the Indian government would need to provide additional incentives to boost domestic production of other commodities in order to achieve full self-sufficiency and a level of economy.
The announcement of the introduction of BCD has also led the industry to speculate about the tariff structure for the foreseeable future. India is currently imposing a protective tariff (SGD) on the import of solar cells from China, Thailand and Vietnam. This SGD is valid until July 2021, while the BCD is expected to come into force on April 1, 2022. This has led to uncertainties regarding the collection of the levy in the meantime, which starts from August this year to March next year. Clarification on this from the Government of India will be helpful in addressing the concerns of the relevant stakeholders and enabling them to plan their business decisions accordingly.
Although the current SGD applies to imports from China, Thailand and Vietnam, the BCD applies to all imports regardless of the country of origin. This has become an additional cause for concern, particularly for manufacturers of solar systems operating in special economic zones (SEZ). Goods and services from SEZ, if they are offered to companies in the domestic tariff area, are considered imports and are therefore subject to customs. Currently 63 percent of the Indian production units for solar cells and 43 percent of the production units for solar modules are located in special economic zones. The introduction of BCD will therefore make the products manufactured in SEZs expensive. This contradicts the basic principle of the BCD, since the intended price advantage for solar systems produced in the SEZ will no longer be available.
The introduction of BCD must also be seen in the light of India's international obligations. India is a signatory to the Information Technology Agreement (ITA) within the WTO. The ITA obliges its signatories to cut tariffs for IT products, which also include solar cells and modules. Therefore the BCD can be challenged before the WTO.
Under the Paris Climate Agreement, India has committed to achieving 100 GW of solar power capacity by 2022. The introduction of BCD has been predicted to slow the pace of growth in the solar space.
The decision to impose BCD, even though made with benevolent intentions, may have unintended consequences. India is on the way to promoting self-sufficiency in all sectors important to the economy. The need of the hour is to develop a skills enhancement roadmap to effectively capitalize on the benefits domestic manufacturers will gain from the introduction of the BCD. This would require further adjustments and optimizations by the Indian government in order to balance the interests of all parties involved.
[Ajay Sawhney is an ETEnergyworld columnist. His monthly column “Energy Insights” focusses on the conventional and the renewable energy sectors where he evaluates current issues, legislation and key trends. Kapoor is a partner with Cyril Amarchand Mangaldas and has been involved with the infrastructure sector for more than 17 years. He advises various business groups on construction and development of domestic and international projects, and advises financial institutions on lending to infrastructure projects throughout Asia Pacific region.]