India Short Circuits Power Sector Imports, As China Shadow Looms

With material from China practically stuck at ports, ever since last week, when a border skirmish went out of control leading to fatalities on a hitherto ‘peaceful’ border, Power Minister R.K. Singh formally outlined a series of steps today, to combat the ‘risks’ of imports in the ‘strategic’ power sector. The measures, while stopping short of mentioning China include plans for tariff barriers, financing support from government owned institutions to encourage domestic equipment usage, more testing ‘safeguards’ against foreign equipment and a slew of fresh prior permissions that will be required for  imports from ‘adversary’ countries, as the minister described it.

Considering every single government intervention since the Covid pandemic, and now, the confrontation with China, it is clear that the moves risk damaging a lot more than just prospects of Chinese exports to India’s power sector, especially the renewable energy sector. As the current set of planned moves could prove to be a very crude weapon indeed.

With a fresh duty structure all but confirmed at the end of the expiry of the existing 15 percent safeguard duty, one wonders if these fresh moves will all but kill whatever momentum the sector had, on the back of a series of supporting moves pushed by the MNRE ministry earlier this year. The current moves simply add a sharp, hard edge to measures being contemplated earlier.

The Power Minister pointed out that from the data on item-wise quantum of imports in power sector given by DGCI (Directorate General of Commercial Intelligence), it was  seen that  equipment like transmission line towers, conductors, industrial electronics, capacitors, transformers, cables and insulators and fittings etc. in respect of which domestic manufacturing capacity exists, are still being imported. It was emphasised that for promoting Make in India and reducing import dependency, it is essential that developers in the Transmission, Thermal, Hydro, Distribution, Renewables need to join the national campaign of ‘Aatmanirbhar Bharat’ and wholeheartedly adopt the ‘Make in India’ policy of Government of India.

With the power sectors strategic  importance to communications, manufacturing, data management and all essential services, Mr Singh sought to highlight the risk of any malware that may bring down the system.

Confirming the plans to impose the  Basic Custom Duty (BCD) beginning August, 2020 on solar modules, solar cells and solar inverters, he said that a clear trajectory of BCD would be declared so that there is no uncertainty about government policy. Further, the approved list of models and manufacturers in respect of Renewable Energy will be made effective from October 1, 2020 as declared earlier. This will ensure that all solar power projects which are bid out as per the standard bidding guidelines will be required to procure solar cells and solar modules and other equipment from manufacturers figuring in the approved list. In addition, financing from Power Finance Corporation (PFC), Rural Electrification Corporation (REC) and  Indian Renewable Energy Development Agency (IREDA) will be structured in such a manner that lower rates of interest will be charged on the developers who will use domestically manufactured equipments.

He  also highlighted the FDI Cell and Project Development Cells  in the Ministries of Power & NRE that will support investment. The practice of issuing concessional custom certificates for certain import items in the RE sector will be discontinued from a date that will be specified separately.

On existing projects in the pipeline, there was an assurance to consider ‘grandfathering’such projects, to prevent any issues now.

We believe that while the backlash was inevitable, considering the situation on the country’s borders, India risks hurting its own prospects by pushing for restrictions that can be too wide ranging. For starters, there is the issue of power costs escalating by upto 20 paise, as we have seen whenever DCR has been imposed. The minister was quick to declare that people will happily pay for it, on behalf of the people.

Broader power sector reforms that had been in the pipeline, like the Electricity Amendment Bill 2020, risk getting sidelined in the headline making moves of further layers of permissions, restrictions and concessions. Considering the results over the past three years, when Make in India became a buzzword in the renewable sector, the results have not been encouraging. Even the much celebrated DISCOM ‘relief package‘ seems to be struggling to find takers. Even existing manufacturers who have attained global quality benchmarks, have struggled to expand operations, thanks to uncertain demand environment due to policy uncertainty, as well as access to financing.

Interestingly, Chinese firms remain one of the substantial investors in domestic manufacturing in India too especially in inverters , with their status left open for now. On top of that is the clear capabilities Chinese firms have built up in cell and module manufacturing, two areas that are clearly a focus, where competing with them will require a massive effort. The current state of domestic industry, which has a substantial sub par quality issue, besides the high price challenge, is reason enough to demand, and hope far a far more concerted and transparent policy environment than previous efforts.

For now, the only certainty is that India’s 100 GW solar target is all but over, and the days of sub Rs 2.50 per unit bids might be over.  Whether it will lead to a more vibrant and globally competitive manufacturing sector in renewable energy, only time will tell. But like our eye watering fuel taxes, originally sold as a ‘green tax’, where the money has gone into everything but a greener economy so far,  the wait could be much longer than anyone bargained for.