Thursday, June 20, 2024

Import substitution can set climate action back

Import substitution under Atmanirbhar Bharat is India’s biggest policy flip since the Cold War ended in a victory for US-style market democracy and we gave up autarkic dreams in 1991 for an open economy in sync with globalization. As an energy transition now aims to reduce Indian dependence on oil imports, which doomed autarky in the old days, might self-reliance fare better this time? The field of renewable power could serve as a test case. With a target of 500GW of such carbon-free capacity by 2030 (we currently have about 122GW), the government is using public funds to spur the local production of solar panels by private players. As announced, the second round of this incentive scheme allotted some 14,000 crore to about a dozen companies that’ll make what it takes to convert sunshine into electricity, from polysilicon and wafers to solar cells and modules. Over half that sum will go to three firms: Hyderabad-based Indosol, Mumbai-based Reliance and the US-based new entrant First Solar. Since the idea is to dissuade imports, which accounted for over four-fifths of the panels set up in India until last year, Indian factories will operate behind a big tariff shield. Starting 2022-23, India has been charging a 40% import duty on photovoltaic modules and 25% on cells. By design, local stuff is expected to replace foreign shipments. Whether this lays out a sunny path to a cleaner economy, however, is far from certain.

So far, China has been the world’s big supplier of solar panels, thanks to cheap supplies on a cost base that others found too low to match. In 2018, New Delhi slapped a safeguard duty of 15% on Chinese and Malaysian imports that were allegedly being dumped—sold below their cost of manufacture, i.e.—in our market, but domestic panel-makers were still unable to compete with these. If local producers had to get into the act, state intervention had to push them forth; this explains India’s policy of out-put-linked cash subsidies. What has defied a cogent explanation, though, is why imports need to be fended off. A common argument made is that we want factory jobs created at home. Another is that as globalization falters under the strains of Cold War II, it’s risky to rely on anything Beijing has a handle on. And if making our own products also swells national pride, why not? Even the US, argue the policy’s advocates, has taken a self-reliant turn for clean-tech. Yet, all this comes up short against the logic of letting global market forces relieve us of fossil fuels to meet our energy needs.

The incentive scheme’s job gains are modest, a Chinese choke is unlikely so long as China is export-happy, and Indian pride should stem from how well we optimize climate action. If our overall aim is to reduce our carbon exhaust, then it should be done at the lowest possible cost. Import barriers, however, allow our local market for these items to function at policy-elevated price levels. While budget handouts and domestic rivalry might mean solar projects don’t have to bear module prices exactly 40% higher than in a duty-free scenario, the profit motive of private producers could still enlarge project set-up expenses almost as much. Of the 280GW of solar capacity aimed for by 2030, we have only a little above 64GW right now. Large credit-backed installations are afoot, no doubt, but smaller ones have reportedly slowed. The best way out would be to drop duties over the years ahead. Let’s cap local prices by exposing our industry to global competition—soon. Else, self-reliance is likely to end up as a let-down.

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