A Solar PLI Scheme Disregarding MSME Sector Could Lead To Cartel Like Situation In Solar Too

The announcement of the PLI scheme expansion from Rs 4500 crore till now by a further Rs 19,500 crores was the most notable one for the solar sector in the Budget for 2022. While widely welcomed, the move does raise an existential question for the hundreds of SME and MSME firms involved in the module making business in India. How will they survive in the face of the new cohort of large firms that will appear soon? In this conversation with Prasanna Singh, Group Editor, Manish Gupta, Founder and Managing Director Of Jaipur based module manufacturer Insolation Energy , who is also the President of NIMMA (North India Solar Manufacturers Association) spoke to us on the issue.

Q1. With the new PLI scheme announcement, how do you see it impacting small manufacturers, considering how the scale has shifted exclusively to gigawatt scale now?

Looking at the existing scenario in the Indian market, we can see that the industry has a capacity of 16 GW for solar modules,  and solar cell manufacturing capacity is about 3 GW. In the next 2 years, module capacity is likely to double, while cell capacity will rise to around 10 GW.

There is no MSME in the solar cell business. On the other hand, in solar modules, about 55 per cent of the 16 GW is being manufactured by SME’s and MSME’s. This proportion is not going to change drastically anytime soon, despite all the hype we hear.

Q2. So where does that leave the MSME sector involved with module manufacturing now?

Coming to the PLI scheme, there is no doubt that it can change this manufacturing ratio in the coming days. In fact, when the scheme was first made by the MNRE, we were also asked to give our inputs for the scheme. At the time, the minimum entry level was kept at 1 GW for cell, 1 GW for module and so on. You had to come in with least both of cell and module manufacturing to be eligible at all. We submitted a formal proposal that the entry level should be kept at 200 MW for cells or modules for the benefit of MSMEs in this scheme. A minimum of 15-20 per cent of this scheme should have been reserved for the MSME sector. At a scheme size of Rs 4,500 crores we had requested the government to keep at least Rs 1000 crores reserved for the MSME, which unfortunately did not happen.

Now Finance Minister Nirmala Sitharaman has increased the allocation under PLI by Rs 19,500 crores because actual demand discovered by the PLI scheme was for 54 GW. This can potentially lead to further investments of Rs 25,000 crores. That is why both Power and MNRE ministries had requested for expansion last year itself as you have also highlighted.

We see two issues with the expansion right now. The first problem is whether it is those players who had bid, and missed making the cut in the earlier PLI offer, who will receive the benefits of this expanded PLI scheme. Or will the bidding process be done afresh for the new lot.  Logically, the bids under the previous scheme were made keeping a certain price and capacity target in mind. Now the scale is completely different, so the case is stronger for a fresh bids.

Secondly, if the same approach as earlier PLI  is persisted with, then the future of SME’s and MSMEs linked to the sector certainly looks bleak. I fear that we will see a repeat of what has happened in the cement sector in the 90’s and beyond, when the government watched and incentivized the thriving sector to consolidate among a few big players, leading to a level of cartelisation in the market today.

Q3. But isn’t consolidation a natural outcome, as we see in China? And perhaps the opportunity or space for MSME’s is in the Balance of System manufacturing ecosystem?

Two things are relevant here. One is raw material for manufacturing solar modules. A solar module is created with 23 to 24 components. The Solar cell is one part of the module which accounts for 50 percent of the component cost. The rest 50 per cent are other items like glass, EVA sheet, wiring etc whose eco-system in India is not that developed. But if manufacturing expands at the scale predicted, even that ecosystem will develop for sure, as it did in China too. There is not much need for the government to be involved in the development of these supportive industries. We believe that in a year or two, this particular supply chain will come up.

Now, let us look at the generation side of things. The solar panel or module is only 50 percent of project cost. The other half, which comprises things like the structures, wiring, manpower, discom coordination etc, we are fairly self sufficient.  What is not available in India is raw material for solar panels, be it cells, and wafers or polysilicon. Now that is set to change too due to the PLI scheme. But for the SME and MSME ecosystem to survive this new direction the industry is taking, government support is a must. Hence, some level of reservations are necessary in the PLI scheme.

Unfortunately, the indication we see is a focus on size of application, or linking PLI to sales turnover and not any capex benefit. That creates a further moral hazard where a large player will even compromise on margins to sell more and get the PLI benefit, further making the battle unfair for competing MSMEs. On your China example, they do have a thriving MSME sector for module manufacturing, you don’t see or hear about them as much here as they don’t always export like the large players do.

Q4. But isn’t it a matter of scale efficiencies? Wouldn’t SME’s simply not be able to compete without large scale?

Look, If one’s purchasing power is comparatively lesser then the raw material cost will impact you. The rate of raw material will be higher. But MSME’ overheads in comparison to big companies is lesser. So things get balanced here and there. The kind of support and flexibility an SME or MSME can provide to customers, even the big players are not able to match at times. It is such localized focus that keeps an SME running despite odds.

Q5. What are the key employment numbers according to you in the sector today?

Today, more than two lakh persons are employed in solar panel and solar cell manufacturing directly and 10 lakh are associated indirectly, overall. When the manufacturing expands in future, we assume that about 8-10 lakhs will be employed directly in this sector and 25 lakhs will be associated indirectly. This will also be permanent employment. Remember, the solar power generating sector doesn’t offer permanent work but temporary work based on the project erection.

Our studies indicate that for every 1 MW solar panel that is built in India, then manpower worth Rs 35 lakhs is utilised. This has a great positive impact on the whole ecosystem. If this is imported, then the importer may get a little benefit in terms of price, but the ecosystem is deprived of this manpower benefit. If one counts the manufacturing of cell, wafers, polysilicon etc. in India, then the employment potential is immense.

Q6. So just what kind of support can the government offer?

Currently, the government support in the form of ALMM and BCD is adequate, which was announced yesterday. We were engaging with the government for this support for many years. The notification of BCD is out that it will be in effect from April 1. For this we are thankful to the finance minister and the Union Government. For now, this support is sufficient.

In the long term, the PLI scheme will certainly give an advantage to the big sized players. However, government policies will still make a huge impact. If the government says that it will have an expansion policy of 35-40 GW each year, then there will be space for all players. The solar market is policy driven. If the government squeezes solar growth or withdraws backing, then we will have an issue.

Q7. Don’t you think a thriving rooftop segment could have changed the picture for domestic manufacturers?

The reason for the failure of  rooftop segment to take off is due to two reasons. First, the government had completely linked rooftop solar to subsidy. Only Gujarat has worked well on the subsidy model and not other states. Gujarat stands alone in terms of performance here. They digitized the processes, registered vendors on high scale, net metering happened online and vendors’ subsidy is disbursed in time which ensured faster adoption and progress. Compare that with a high potential state like Rajasthan where a small 45 MW tender from 2019 is still struggling to end, with vendors ( including Insolation energy) have not seen their full dues cleared even after a year.

Q8. But isn’t rooftop where price sensitivity matters less, and employment potential is more?

The best way to perform in the residential rooftop segment is to delink it from subsidy and states’ nodal agencies should bring in digital implementation. Domestic rooftop should be treated like consumer finance or where funding is provided based on borrowers CIBIL score etc by any finance firm.  Doing that will ensure  the sort of  boom we have seen in consumer durables sector.

Just think about how a resident who wants a 5KW solar rooftop system which costs around Rs 2,50,000, can make a small cash down payment and pay the rest in installments. With the actual monthly savings solar delivers, the person will be more than happy to repay the loan quickly in 24 to 36 months. Discoms need to be incentivized, as currently they are the biggest bottlenecks, seeing as they do that their best customers want solar, and it leads to revenue loss for them, since these are the high end customers.