A World Trade Organization (WTO) disputes panel held recently that India was wrong to include domestic content requirements (DCRs) as part of the bidding criteria for certain components of its procurement programme under the National Solar Mission (NSM).
This was expected. The panel held that these provisions were inconsistent with WTO requirements mandating equal legal treatment for domestically manufactured products with products imported from another WTO signatory, in this case the United States, which brought the case to the WTO.
What were these DCRs? In Phase I of the NSM, the Government of India requires that all modules for projects using crystalline silicon technology be sourced from India, while allowing solar project developers using thin-film technology to source modules from anywhere in the world.
India’s loss in this case was imminently predictable as a WTO disputes panel took exactly the same view in a case brought by Japan and the European Union (EU) against similar DCRs in the Ontario Power Authority’s feed-in tariff programme. Ontario lost that case, including on appeal, in May 2013.
The Geneva-based WTO is the world’s free trade policeperson, and rules on anything from vegetables to intellectual property to chocolates and mangoes. Unlike the United Nations (UN), which is largely a policy setting body, the WTO can impose far-reaching and biting trade sanctions on errant countries.
The recent ruling has met with predictable echoes in the media and the green community. To quote just two examples; “WTO Rains On India's Solar Power Plan, Sets Back Climate Action” said the Huffington Post, rather dramatically. “WTO swats down India’s massive solar initiative” was the over the top response in The Grist.
I’m afraid this is just analysis-free rubbish. Almost three years ago, when the United States(US) formally initiated this dispute against India, I had suggested it wouldn’t be a bad thing for India to lose this case..
As suggested in that article, India failed to win the case arguing the “government procurement” exception, which allows government agencies have DCRs to procure products purchased for “government purposes” and not for commercial resale. The WTO held that the products subject to the DCRs – solar panels and modules - were not what the government-owned NTPC or SECI werepurchasing and that they were actually purchasing electricity generated using those panels. Further, the solar power purchased by NTPC or Solar Energy Corporation of India(SECI) under the NSM is sold on to electricity distribution companies and finally private consumers, which arguably is commercial resale.
The main reason why it is good for India to have lost the case is to do with the fact that Indian panels and modules are significantly more expensive than many imported ones, particularly those from China. This means that the power produced using this equipment is more expensive as well.
Under the NSM, judging in part from governmental glee at the rapidly declining tariffs quoted in successive bidding rounds, the Government of India is keen not just to add solar capacity as soon as possible, but also to do so at the lowest possible price.This will not happen using Indian equipment unless Indian manufacturers become more competitive. Also, imported panels often come bundled with cheaper project finance loans from national export credit agencies keen to support sales by their own domestic manufacturers.
Phase II Batch I of the NSM provided an excellent control experiment to illustrate the uncompetitive nature of Indian equipment and the price that India pays for it. Here, instead of earmarking domestic and open categories on the basis of the technology used, the Government of India simply allocated 375 MW each to the open and domestic categories. In this round of bidding, potential solar project developers were required to bid on the basis of the extent of Viability Gap Funding (VGF), which is essentially a subsidy,that they were seeking over and above the tariff set by SECI in the bid. As this table shows, the VGF sought by bidders under the DCR category was significantly higher than under the open category. In the former, the lowest winning bid came in at Rs.13,500,000 per MW and the highest at Rs.24,560,000 per MW. The equivalent numbers under the open category were Rs.1,750,000 and Rs.13,500,000!
Could those lamenting this WTO decision please explain why it is a good thing for the Indian taxpayer to over-subsidize inefficient and expensive Indian manufacturers? Or, in the case of tariff-based bids, for Indian power purchasers and consumers to pay higher tariffs for power generated using Indian manufactured equipment?
When the NSM was conceived, it contained a bit of a mishmash of policy objectives, straying somewhat from the primary goal of building out massive solar capacity. Encouraging domestic manufacturing is a great idea but there are other tools available to support India-based solar panel and module production. That, for example, is what Make in India is about. Even without that specific scheme, more traditional tools such as tax exemptions, deemed export benefits and low cost finance from bodies like IREDA are and have been available to the Government of India. Using these instead of DCRs allow it to support domestic manufacturing without breaching its international treaty obligations such as those under the WTO.
In any event, absolutely nothing has “rained on” or “swatted down” India’s solar programme under the NSM. The Government of India is free to continue adding capacity as rapidly as it would like to, it just can’t have DCRs in its procurement programmes. And if I was a betting man, I would wager that this ruling will do absolutely nothing to slow down the projected trajectory of growth of solar power in India.
It was widely believed that many in the UPA government were not in favour of DCRs, being unconvinced both of the merits of India’s case at the WTO as well as the perceived benefits DCRs would bring to the Indian solar power sector. The current NDA government would do well to adopt this view and not bother with a challenge to the ruling, which they are likely to lose and not benefit from in the least.
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