WTO Verdict: A Roadblock to India’s National Solar Mission?

13 May, 2016    ·   5027

Ateetmani Brar asks whether the recent WTO ruling against India's Domestic Content Requirements is a setback for the country's NSM

In February 2013, the US filed a complaint at the World Trade Organization’s (WTO) challenging the Indian government’s Domestic Content Requirements (DCR) for solar cells and modules under the latter’s ongoing National Solar Mission (NSM). On 24 February 2016, the WTO ruled in the US’ favour.

Why did the US challenge India’s DCRs? Given that the verdict is not in its favour, does New Delhi have to worry?

India’s NSM and DCRs: A Brief Overview
India’s NSM was launched on 11 January 2010 by the then Prime Minister, Manmohan Singh. Its main target is to ramp up India’s solar power capacity to 100GW by the year 2022 and to generate green energy at lower costs in order to meet the country's growing demand.

The DCRs, which the US objected to, were introduced to serve a two-pronged objective:

a. To provide a boost to the domestic manufacturing sector
b. To guarantee the rate of purchase of electricity manufactured for a long term

To this end, New Delhi’s DCRs authorised solar power developers to use certain types of solar cells and modules that were manufactured in India during different phases of the project. As an incentive, in 2014, the Indian government offered a subsidy of USD 0.15 million (Rs 10,000,000) per megawatt installed, to those solar power developers who would use domestic components. In return those developers and the government would agree on a fixed rate at which the electricity thus generated would be sold to state agencies for a long term.

The Dispute and the Ruling
In February 2013, the US argued at the WTO that the Indian NSM’s DCRs denied global players a level playing field, and sought consultations with India on relevant matters. It also claimed that such DCRs nullify or impair the benefits the US could have otherwise gained – directly or indirectly – under the Agreement on Trade-related Investment Measures (TRIMs) and the 1994 General Agreement on Tariffs and Trade (GATT). In February 2014, the US raised expressed its concern again when India decided to include thin film technologies in Phase II of the NSM. The same year, First Solar, a US-based thin-film manufacturer that had previously dominated the market in India, missed out on projects during the second phase of the NSM, after thin-film modules were included in India’s DCR framework.

In its defence, India argued that the DCR measures were reasonable under Article XX(j) of the GATT. It stated that due to the low manufacturing capacity that exists in the solar-related components sector in the country, India will nonetheless be unable to supplant concerned US businesses with its own supply. New Delhi also argued that measures like the DCRs help secure India's compliance with “laws or regulations” requiring it to take steps to promote sustainable development. At the 2015 Paris Climate Conference, India had promised massive increases in the carbon efficiency of its economy.  A key portion of the commitment was the promise of large-scale investments in renewable technologies, including a considerable increase in solar power generation.

India negotiated with the US by agreeing to apply the DCRs only for solar panels purchased for government consumption. New Delhi even assured Washington that power generated from such subsidised panels would not be sold for commercial use.

The WTO panel ruled that India’s DCRs “are inconsistent with both Article III:4 of the GATT 1994 and Article 2.1 of the TRIMs Agreement” and that they “do accord “less favourable treatment” within the meaning of that provision.

This was not the first instance of such a ruling. In 2013, the Canadian province of Ontario too lost a similar case against the EU and Japan.

The Way Forward
While the key objectives of India’s NSMs include cost-effective energy efficiency along with environment protection, measures such as our DCRs are not entirely consumer friendly either.

Harnessing solar energy is expensive. The cost of producing and installing locally manufactured solar cells and modules is higher than the total cost incurred in producing solar energy through imported solar cells and modules. The use of imported equipment may benefit consumers by lowering rates.

Alternative ways – incentivising the production of solar cells and modules by pushing for traditional tools including tax breaks, low-interest long-term loans etc. – to encourage domestic production could be explored. These could help reducing manufacturing costs and thereby help make indigenous technology cheaper and provide for greater access to international markets.

New Delhi could also look at investing more in its research and development to improve domestic solar power technology and also collaborate on related efforts with international entities. Given how India launched an International Solar Alliance with over 120 countries to boost solar energy in developing countries in 2015, opportunities to do so are likely to present themselves. These measures will help India in its efforts towards meeting its NSM targets by 2022 while also being consistent with WTO terms.

The US’ key grievance at the WTO was regarding India’s DCRs and not the NSM itself. New Delhi should not feel disheartened with the recent ruling and continue to make efforts towards generating green energy with or without the DCRs.