The latest World Trade Organisation (WTO) ruling against Indian protection to its solar power industry calls for a policy response. The question is — how India can successfully overcome the double standards of the developed world without compromising on its development needs?

The short title of ‘India-Solar Cells’ dispute (DS456) at the WTO’s Dispute Settlements Mechanism fails to reveal the potential for damage that this ruling has on India’s energy security needs.

Energy not only plays a key role in powering the economy and thereby growth, it also has implications for both the fiscal and current account deficits.

The dispute stems from India’s attempt to promote ecologically sustainable growth, while at the same time addressing the energy security challenge through the ‘Solar India’ mission (Jawaharlal Nehru National Solar Mission), launched in 2010.

India as a solar hub India’s manufacturing capacity of solar power components at 15MW of ingots and wafers, 848 MW of solar cells and 1932 MW of solar modules in 2012, was woefully inadequate compared to the annual target set under the Mission, of 100 GW of manufacturing capacity by 2022.

The bone of contention lay in the government’s attempts to build India as a solar manufacturing hub through favourable regulatory and policy conditions.

This involved mandating Domestic Content Requirements (DCR) to the nascent domestic manufacturing sector. Thus, manufacturers of solar cells and solar modules in Phase I, and solar wafers and thin film modules in Phase II of the Solar India mission, could avail of Viability Gap Funding (VGF) under the scheme.

The scheme itself involved a complex process of open competitive reverse bidding on the VGF, wherein bidders would undertake to supply solar power to the Solar Energy Corporation of India at fixed tariffs of ₹5.45 per kWh for 25 years. This in turn would be supplied to discoms, State utilities and bulk consumers at ₹5.50 kWh for 25 years.

Under DCR, the solar cells and modules made in the power plant were required to be made in India. This provision attracted allegations of prohibited subsidies and violation of the national treatment principle under the General Agreement on Tariffs and Trade (GATT), Trade Related Investment Measures (TRIMS) and Agreement on Subsidies and Countervailing Measures (ASCM) of the WTO.

Two points are pertinent here:

One, only half of the total manufacturing capacity was available for bidding under DCR; the remaining half was under open bid categories. Thus, up to 375 MW of the total capacity of 750 MW under Phase II of the Solar mission was open to all, and hence provided opportunities to foreign suppliers.

Two, while the VGF was a financial support and comprised 30 per cent of the project’s financial cost (to be given in instalments), the government guidelines did not specifically deny such funding for project developers under open bid schemes. It remains a moot point whether such VGF may be treated as a subsidy to developers using local content.

Energy self-sufficiency Solar energy has the advantage of being available in plenty, with about 5,000 trillion kWh per year incident over India’s land area with most parts receiving 4-7 kWh per sq. m per day. It is environment-friendly and cost effective in the long run.However, with the current costs of generating solar power being exorbitant, the incentives for tapping the vast solar energy potential by private producers would be practically nil.

In this context, what is interesting is the US use of multiple incentives for its own consumers to encourage solar energy use, as also local content.

Thus, in addition to a 30 per cent federal tax credit, US consumers can avail of significant state and local incentives to reduce their costs of solar photovoltaic systems.

Can we then approach the problem differently?

There are limited ways in which the problem of national treatment obligation can be avoided. For instance, if the solar energy so produced is procured by the government for its own use, it may not fall within the purview of WTO norms, particularly ASCM.

However, as the Canadian Feed-In-Tariff programme case at the WTO demonstrated, such procurements may yet be challenged.

Given that scalability is important, the government can think of providing incentives to consumers to adopt solar-friendly products in the form of tax credits for all solar power packages for residential or commercial use.

States, additionally, can provide further tax credits.

This should help overcome the national treatment obligation, give a fillip to manufacturers of solar energy, as also inculcate green technology use.

Energy frameworks in India are too crucial to be left to fate and the WTO.

The writer teaches economics at the SP Jain Institute of Management and Research, Mumbai. The views are personal

Related Topics