Undimmed

In January 2010, the Indian government launched the National Solar Mission, or NSM, a phased plan to promote solar power aimed at achieving a generation capacity of 20 gigawatts of solar electricity by 2022. Last year, it revised that number upwards, to 100 gigawatts, while keeping the deadline the same—meaning that solar power now accounts for more than half of the 175 gigawatts of generation capacity from renewable resources that the government plans to create by that year. Even though solar power forms less than 2 percent of India’s total generation capacity at present, the revision signalled a growing confidence in the country’s solar-power sector on the back of promising early results. In its first phase, the NSM aimed to create a generation capacity of 1.1 gigawatts by 2013; in March 2013, that capacity was already 1.7 gigawatts. Since then, the figure has trebled in less than three years, and this February it stood at 5.5 gigawatts. By March 2017, it is projected to grow to 20 gigawatts.

As India’s solar-power generation capacity has risen, so too have the fortunes of the country’s manufacturers of solar-power technology. According to government data, as of 2014 this manufacturing sector was growing at an annual rate of over 60 percent, and Indian manufacturers had an annual production capacity of 1,386 megawatts’ worth of photovoltaic cells and 2,756 megawatts’ worth of solar modules—that is, assemblies of cells. Promoting such manufacturing is an explicit NSM goal, and by 2017 the mission aims to create a domestic capacity to produce solar modules capable of generating 4 gigawatts’ worth of power. In keeping with this project, the government has been signing agreements to purchase solar electricity from power companies on the condition that certain shares of the cells and panels they use be of Indian provenance—a stipulation called a “domestic content requirement,” or DCR.

These DCRs have angered foreign firms looking to sell solar-power technology in India. In early 2013, the United States complained against India’s use of them to the World Trade Organisation, which arbitrates in international business disputes and works to reduce obstacles to global trade. This February, after considering arguments from both sides, a WTO dispute panel adjudged the NSM’s DCR measures to be illegal. In its ruling, the panel cited provisions in the General Agreement on Trade and Tarriffs, or GATT, to which India is signatory, prohibiting member countries from giving preference to domestic products over imported ones.

This leaves the Indian government in a difficult position. Currently, indigenous solar modules are roughly a third more expensive than imported ones of comparable quality—and without DCRs power companies will naturally opt for these cheaper alternatives. Looking solely at the NSM’s targets for generation capacity, this is not a problem, as power companies can continue to increase capacity using only imported modules. But for domestic solar-technology manufacturers it could mean a massive decline, which in turn could rob India of many of the spin-off benefits—factory jobs, industrial investment, technological advancement, and potential future exports—that the burgeoning solar-power sector can offer. It is in the country’s interest to continue supporting the development of domestic solar technology, yet it cannot simply ignore the WTO ruling. Fortunately, there are ways to continue nurturing this sector within the confines of India’s WTO obligations.

There are plenty of historical examples to illustrate the efficacy of targeted protectionism. Numerous countries have used such policies to establish strong manufacturing bases. Famous examples of this include the automobile sectors in Japan and South Korea. Both countries enforced protectionist measures to create secure markets for local manufacturers over long periods when they were not yet globally competitive. This allowed these industries to gradually adopt improved technologies and start producing at greater scale, helping them become the giants they are today. China has emulated such tactics to improve domestic manufactuing of cars and much else—including solar-power technology. In 2013, the International Centre for Trade and Sustainable Development, a Geneva-based non-profit, released a report on the use of DCRs in the renewable-energy sector, which listed success stories from across Asia, Europe, South America, and also the United States. If India wants its solar-power technology manufacturers to eventually compete in the global market, the need to support demand for their products at this stage is clear.

Clues to a way forward exist in a line of reasoning laid out in the text of the WTO ruling itself. The 210-page document shows that India, in defending the methods of the NSM, used three primary arguments to seek exemptions from the GATT. In one of these, it held that the incentive to domestic manufacturers was necessary because the country faced a general shortage of equipment for generating renewable energy; this reasoning was predictably countered by pointing out that there is no shortage of foreign firms willing and able to fill that gap. In another, it asserted that the DCRs were necessary to secure compliance with certain domestic legal requirements. The dispute panel found that the requirements India cited related to broad, non-binding policy objectives rather than specific, binding laws, and hence that there were no grounds for overriding WTO provisions. Both these arguments are weak, and do not offer much promise. The implications of the third argument, however, are worth understanding in some detail.

India’s most astute contention was that the procurement of goods by its government falls outside the remit of the GATT. Under WTO rules, government procurements only come under the GATT in countries that have signed the Agreement on Government Procurement, or GPA—which India has not. So, India held, the power companies’ enforced preference for indigenous equipment is legal, as the good produced by them—electricity—is bought by government agencies.

On this front, the panel’s ruling went against India for two reasons. The first hinged on the fact that, at present, the government agencies that purchase solar electricity subsequently sell it to power distribution companies, which in turn sell it to retail customers. Under WTO norms, the exceptions for government procurement apply only when the government is both the purchaser and the end consumer of a good, and hence such commercial resale places these transactions under the jurisdiction of the GATT. India held that the procurement was made not with commercial motives, but rather to “ensure availability of affordable solar power to consumers.” The dispute panel ruled that this could not be grounds for exception, since if admitted the argument would allow any country to circumscribe WTO authority simply by requiring that commercial products be distributed through government agencies. (There was already a precedent against India’s position. The Canadian province of Ontario recently lost a case where, under similar circumstances, it used much the same argument to defend incentives for solar-power technology manufacturers to use indigenous raw materials.)

The second factor compromising the Indian argument was the difference between the goods being subsidised—solar modules—and the goods being procured—electricity. WTO norms stipulate that for the exceptions to government procurement to apply, the goods being subsidised and bought must either be the same, or be in a competitive relationship with each other—as, for instance, with diesel and biodiesel. Here, they were not.

All of this reasoning, however, leaves open the possibility of the Indian government applying DCRs in solar-power generation projects where it procures not electricity, but solar modules themselves. This does, of course, limit the government’s hand, but the opportunities available are still immense. The government can still stipulate that indigenous equipment be given preference in projects designed to generate solar electricity for its own direct use. This could be applied, for instance, to generating electricity for government facilities, including hospitals, administrative offices and educational institutes. Under the 2014 revision of the NSM’s goals, the government mandated that 8 gigawatts of the target capacity of 100 gigawatts be created using only indigenous cells. Making a back-of-the-envelope estimate of the cumulative rooftop area of all Indian government facilities, it is clear that installing indigenous arrays on them could easily surpass the 8-gigawatt target, meeting the desired demand for India’s solar-power technology manufacturers despite the strictures of the WTO. An independent study from 2013 calculated that in Delhi alone the rooftops of government buildings and government-owned public and semi-public facilities could be used to generate close to 0.6 gigawatts, estimating that between 35 and 40 percent of their area is suitable for installing solar modules. Beyond that, the government could also create solar-power projects with DCR requirements to drive parts of the country’s giant railway system. If such policies are applied, there should be no shortage of sustained demand for domestic solar-power technology.

But while DCRs are crucial, the government should remember that these are not the only instruments for improving the prospects of domestic manufacturers. In addition to them, the government can arrange beneficial financial provisions—including tax breaks, and low-interest, long-term loans—to help reduce manufacturing costs and so make indigenous technology cheaper and more competitive on the open market. And, it can invest in research and development to improve domestic solar-power technology.

It is vital to pursue such steps to improve overall competitiveness, as there have been signs that the demand created by DCRs alone is not absorbing the full production capacity of the Indian solar-technology sector. The latest government data shows that domestic cell manufactures are producing at a mere one-fifth of their maximum capacity, and domestic module manufacturers at just under half. Such a situation is far from ideal, since it creates disincentives for manufacturers to further improve their production capabilities. This should also be a reminder that, for all the benefits that DCRs can offer, in the long run it is the open market that offers the greatest demand and opportunity, and the goal should be to eventually compete in it.

Which is why any preferential rules for domestic manufacturers should not be allowed to become permanent. DCRs in particular—as the examples of Japan and South Korea show—are best used as short-term measures, allowing infant manufacturing sectors the time to gain expertise before eventually exposing them to international competition. Any DCRs the Indian government implements should come with clear expiry dates, to remind domestic manufacturers that the end goal is always to improve competitiveness by improving scale, quality and productivity—not to foster complacency.

For now, India has two years to adjust its policies in light of the WTO ruling—and perhaps more, if it chooses to pursue an appeal against it. That should mean plenty of time to implement new ways of sustaining the domestic solar-technology sector.