The Pulse | Economy | Environment | South Asia

Can India’s Carrot and Stick Strategy Decouple its Solar Revolution from China?

All else being equal, decoupling with China could affect India’s solar energy commitments.

Can India’s Carrot and Stick Strategy Decouple its Solar Revolution from China?

A new solar power plant in Gujarat, India, 2015.

Credit: UN Photo/Mark Garten

Prime Minister Narendra Modi’s India is facing a difficult situation in which two of his core goals – clean and green energy, and the Atmanirbhar Bharat (Self-reliant India) – are at odds. The country cannot seem to meet one goal without compromising on the other. India’s shift toward renewable energy, driven by the strategy of merging domestic needs and global norms, has not only led to what some call a solar revolution but also made the revolution import-dependent and China-dependent. It seems an uphill task for India to fulfill its 2019 Paris commitment of producing 100 GW of solar energy by 2022 and 280 GW of solar energy by 2030-31 without importing a major percentage of the needed solar components from China. As of 2020, India produced 36 GW of solar energy out of 90 GW of renewables for which it imported nearly 85 percent of solar equipment from China. India’s current annual capacity of component manufacturing stands at 3 GW for solar cells and 10 GW for solar modules.

India’s 2020 initiatives to decouple its solar revolution from China dependency essentially reflect a blend of carrot and stick approaches. Its initial steps came in the form of stick approach through which the country sought to disincentivize cheap imports of solar components by imposing import duties. New Delhi imposed a 15 percent duty on the imports of solar components in July 2020 for the first six months that was extended to July 2021. India launched the second spate of stick strategy in the 2021-22 budget that would levy basic customs duty since April 2022 at the rate of 40 percent on solar modules and 25 percent on solar cells. In order to disincentivize imports and provide more security to the MSME (Micro, Small and Medium Enterprises) solar businesses, the 2021 budget increased the duty on the import of solar inverters from 5 percent to 20 percent and on solar lanterns from 5 percent to 15 percent. These duties aim at making imports more expensive than domestic manufacturing. In addition, New Delhi has also mandated that all solar power projects under the government-sponsored schemes, such as KUSUM or New Roof-top Scheme, will have domestically manufactured solar modules and cells.

In addition to disincentivizing imports, the Indian government has also offered incentives to promote domestic manufacturing as a part of the Production Linked Incentives (PLIs) that aims to promote local manufacturing by both domestic and foreign businesses and increase India’s share in the global supply chain. As a part of the PLI scheme, the manufacturing solar firms will receive benefits, such as tax cuts or guaranteed returns on some percentages of the products. Similarly, India’s 2021-22 budget has allocated approximately $620 million to bolster domestic production of high-efficiency solar components. Nearly half of the allocation has gone to two of India’s public sector companies – Solar Energy Corporation of India (SECI) and Indian Renewable Energy Development Agency (IREDA) — that are spearheading the solar energy production program in the country. These measures aim at attracting private investment, both domestic and foreign, in the solar manufacturing sector.

Have these decoupling measures worked? The answer is partly, given the limited domestic capacity, and somewhat short-term and incipient nature of these measures. These measures have succeeded in drastically reducing the imports of solar components from China as it went down from $3.42 billion in 2018 to $1.7 billion in 2019 and to $1.2 billion in 2020. However, as imports went down, output of solar energy also decreased. As a result, India was able to produce, by 2020, less than 40 percent of its target of 100 GW solar energy output to be achieved by 2022.

India’s carrot and stick strategy has also paid off in introducing greater liquidity in the solar industry and attracting private players, both domestic and foreign. India’s Minister of State for Power and New and Renewable Energy R. K. Singh claimed in October 2020 that the government had received interests from private businesses to set up 20 GW of module and cell manufacturing. India’s Adani Green Energy Limited (AGEL) has won contracts to produce 8 GW solar energy over five years and to set up a solar cell and module manufacturing capacity of 2 GW by 2022 as a part of the contract from the SECI. Other domestic solar component manufacturing firms, such as RenewSys and Azure Power, are also expanding their manufacturing operations in the country.

Beside domestic private players, various global energy firms, driven by the sheer size of India’s solar market and solar reserves, have begun to enter into the Indian solar market either to set up solo solar component manufacturing units in India or forge joint ventures with the local players. For example, France’s Total has bought 50 percent stake in one of solar operations of the Adani group at the cost of $500 million. It is noteworthy that private participation is yet to augment India’s solar manufacturing capacity in a big way.

India’s solar industry with 246 patents builds on a limited technological base as opposed to China’s with 39,784 patents. For an effective decoupling, India needs to, in addition to this policy of carrot and stick, work towards developing a long-term solar energy approach that aims at building domestic high-end technological base and an integrated value-chain system. This would require India to make large-scale investment and forge collaborations with its international partners such as Australia, Japan and the U.S. either bilaterally or through the Quad Climate Working Group to make the technological transition possible. Only then India’s “Solar Revolution” will be sustainable and its truly own.