The Implications of the Safeguard duty

Current scenario:
Safeguard duty is a duty that is payable on import of goods which are already being manufactured in India but cost higher than the import. It is imposed by the Central Government on imported goods so that the Indian manufacturers do not suffer from the low-cost goods that are imported from countries like China and Malaysia. This is being done by the government bodies in order to create a level playing field for Indian manufacturers and importers.

Safeguard duty (different from anti-dumping duty or countervailing duty) is a temporary relief provided when imports of a product increase unexpectedly and threaten domestic manufacturers of similar products.

It is no news that the Indian solar market has been suffering from low-cost solar cells and modules that are being imported (read: dumped) in the country. Thus, the news of 25% safeguard duty on these imports seemed like a fair decision for the local manufacturers. Although this decision seems supportive of the “Make in India” initiative, it brings along a lot of bottlenecks that are going to affect the National Solar Mission and the 2022 target in the long term.

How the case progressed:

The case of safeguard duty began with the Indian Solar Manufacturers Association (ISMA), a forum of local manufacturers filing a complaint to the Director General of Safeguards against the rapidly growing imports of solar equipment, claiming it was destroying their businesses. To recover the domestic solar manufacturing industry from the ‘serious injury’ it was facing, the Directorate General of Safeguards filed a petition for safeguards duty in December 2017.

This was a fair remark as almost 90% of the total inbound shipments of solar have been coming from countries like China and Malaysia and destroying the business for local manufacturers of the country. To overcome this, the Ministry of Finance announced the levy of 25% of safeguard duty based on the final recommendations proposed by the DGTR. The duty came into effect from July 30th, 2018.

However, the China Chamber of Commerce for Imports and Exports of Machinery and Electronic Products in its representations to the DGTR had noted that the burgeoning imports had nothing to do with the injury that domestic industry suffered. “Real cause of injury to the domestic industry is aggressive pricing practices of other Indian producers and not imports. Backward integration in this manner will only lead to higher cost in the next few years,” it had added.

The DGTR (Directorate General of Trade Remedies) in mid-July 2018, recommended imposing safeguard duty of 25% on solar panels and modules imported from China and Malaysia for a year, followed by 20% for the next six months, and 15% for another six. The DGTR in its report said the duty was necessary to protect the domestic solar manufacturing industry.

This recommendation of DGTR was challenged by solar developer ACME solar in the Orissa High Court and received a stay order from the court. The court had then directed the government to not issue any notification regarding the safeguard duty till August 20, 2018. Many solar power generators also expressed their reservations about the duties. Avaada Ltd told DGTR, ‘A safeguard duty would put solar projects worth more than Rs 1 lakh crore ($14.59 billion) in jeopardy.’

After the Orissa High court ordered a stay on safeguard duty, the Ministry of Finance announced that the government will, for the time being, not insist on the payment of safeguard duty on solar imports.

Repercussions:

We believe that the growing solar capacity of the country has largely been the result of the imported goods that are of high quality and are available at a cheaper cost as compared to low-quality but expensive local goods. Crisil had said in a note that the project costs of solar projects based on imported modules could increase by nearly 15–20 per cent (at current prices) if the safeguard duty is imposed.

This is going to stagnate the ongoing growth of solar in the country, affecting the National Solar Mission.

It is common knowledge that the safeguard duty does not encourage local manufacturing, but it simply protects it. And protecting against predatory pricing makes sense only if the domestic industry is otherwise a worthy contender. The Indian solar manufacturing has been plagued, firstly by a lack of silicon in the country- the most basic raw material required in solar panels and secondly, by the lack of infrastructure to establish huge manufacturing plants and third, outdated machinery.

The safeguard duty, although levied with great intent is highly flawed. It makes no sense to impose it just for two years as this period is too small for the domestic industry to recover. In a further blow to most ‘domestic manufacturers,’ SEZ units have not been covered under the benefit. But it is the project developers, reliant on imported modules, that stand to lose the most.

Another flaw with the safeguard duty is that even if the Indian industry manufactures these goods at 100% of their capacity, the current demand for solar panels is much higher than what the domestic industry can produce.

We will anyway have to import goods to meet the leftover requirements which will easily be over 5GW annually at the most conservative estimates for the next couple of years.

Conclusion:

A lot of sector analysts and industry players have stated that not only the period of two years is too little

to provide any real benefit, but also that the safeguard duty will adversely impact ongoing solar projects dependent on imported cells.

We are also of the similar opinion that the imposition of safeguard duty and that too just for two years is not going to be fruitful and won’t end up achieving its purpose. Letting the Indian solar producers import solar goods from Chinese and Malaysian companies should be allowed as it will not only help increase the solar capacity of the country and meet the 100 GW target but also provide cost-effective and high-quality material to do so.

Most of the new auctions and PPA’s have a clause which states that the tariffs will be renegotiated upwards if there is an imposition of duties and taxes that are introduced post the date of the PPA.

Moreover, such negotiations will involve the process of the PPA going through bureaucratic channels and requiring approvals from multiple agencies. This will result in further delays in the projects.

This post was originally published on Medium in Artha Energy Resources on 11 October 2018 by the author as part of her work at the company.

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