30 MARCH 2016
Answer questions in NOT MORE than 200 words each. Content of the answer is more important than its length.
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1. India’s import dependence in defence procurement stands at 65 per cent of the total. Is the Defence Procurement Policy 2016 a step forward in increasing the participation of India’s private sector in military manufacturing? Elucidate.
2. What is India’s National Solar Mission? Why has it turned controversial recently? What is the way out?
Jawaharlal Nehru National Solar Mission
· The Mission is one of the several initiatives that are part of National Action Plan on Climate Change.
· The program was inaugurated in 2010 with a target of 20GW by 2022 which was later increased to 100 GW in 2015 Union budget of India.
· The objective of the National Solar Mission is to establish India as a global leader in solar energy, by creating the policy conditions for its diffusion across the country as quickly as possible.
· The immediate aim of the Mission is to focus on setting up an enabling environment for solar technology penetration in the country both at a centralized and decentralized level.
Phase I & Phase II:
· The first phase (up to 2013) will focus on capturing of the low hanging options in solar thermal; on promoting off-grid systems to serve populations without access to commercial energy and modest capacity addition in grid-based systems.
· The first phase of this mission aims to commission 1000 MW of grid-connected solar power projects by 2013. The implementation of this phase is in hands of a subsidiary of National Thermal Power Corporation, the largest power producer in India. The subsidiary, NTPC Vidyut Vyapar Nigam Ltd (NVVN), laid out guidelines for selection of developers for commissioning grid connected solar power projects in India.
· NVVN will sign power purchase agreements with the developers. Since NVVN is not a utility, it will sell purchased power to different state utilities via separate agreements.
· In the second phase, after taking into account the experience of the initial years, capacity will be aggressively ramped up to create conditions for up scaled and competitive solar energy penetration in the country.
Solar PV and Solar thermal
· For Phase 1 projects, NVVN started with a proposal for 50:50 allocation towards solar PV and solar thermal. The latter is quite ambitious given India has no operational solar thermal projects and less than 10MW of solar PV projects. While growing at a rapid pace lately, solar thermal technologies are still evolving globally.
· A growing solar PV industry in India is hoping to take off by supplying equipment to power project developers. Well known equipment manufacturers started increasing their presence in India and may give competition to local Indian manufacturers. Due to generally high temperatures in India, crystalline silicon-based products are not the most ideal ones. Thin film technologies like amorphous silicon, CIGS and CdTe could be more suitable for higher temperature situations.
· Solar thermal technology providers barely have a foothold in India. A few technology providers like Abengoa have some Indian presence in anticipation of demand from this mission.
· To avoid allocating entire capacity to a select few corporate, guidelines required no two projects to have the same parent company or common shareholders. In case of over subscription, a reverse bidding process was to be used to select the final IPPs based on lowest tariff they offer.
Domestic content controversy
· Guidelines for the solar mission mandated solar power producers to compulsorily use certain domestically sourced inputs, namely solar cells and modules for solar PV projects based on crystalline silicon, to be eligible to participate under the programme. That accounts to over 60% of total system costs.
· A vigorous controversy emerged between power project developers and solar PV equipment manufacturers. The former camp prefers to source modules by accessing highly competitive global market to attain flexible pricing, better quality, predictable delivery and use of latest technologies. The latter camp prefers a controlled/planned environment to force developers to purchase modules from a small, albeit growing, group of module manufacturers in India. Manufacturers want to avoid competition with global players and are lobbying the government to incentivise growth of local industry.
· US Trade Representative has filed a complaint at World Trade Organization challenging India’s domestic content requirements in Phase II of this Mission, citing discrimination against US exports and that industry in US which has invested hugely will be at loss. US insists that such restrictions are prohibited by WTO. India however claims that it is only an attempt to grow local potential and to ensure self sustenance and reduce dependence
· Specifically, USA said, India has violated its “national treatment” obligation by unfavourably discriminating against imported solar cells and modules.
· India principally relied on the ‘government procurement’ justification, which permitted countries to derogate from their national treatment obligation provided that the measure was related to “the procurement by governmental agencies of products purchased for governmental purposes and not with a view to commercial resale or use in production of goods for commercial sale”. India also argued that the measure was justified under the general exceptions since it was necessary to secure compliance with its domestic and international law obligations relating to ecologically sustainable development and climate change.
· In a significant ruling, a World Trade Organisation (WTO) panel found that the domestic content requirement imposed under India’s national solar programme is inconsistent with its treaty obligations under the global trading regime. The ruling has been described as yet another instance of archaic trade rules trumping important climate imperatives. However, this criticism is not entirely justified.
· These are inconsistent with both Article III:4 of the GATT [General Agreement on Tariffs and Trade] 1994 and Article 2.1 of the TRIMS [Trade-Related Investment Measures].
· The panel, in its 140-page report, stated that the product being subject to the domestic content requirement was solar cells and modules, but the product that was ultimately procured or purchased by the government was electricity. The domestic content requirement was therefore not an instance of “government procurement”.
· Finally, the panel found that since India failed to point out any specific obligation having “direct effect in India” or “forming part of its domestic legal system”, which “obligated” India to impose the particular domestic content requirement, the general exception was not available to the Indian government in the instant case.
Not for clean energy
· The ruling has come under intense criticism, particularly from environmentalists, as undermining India’s efforts towards promoting the use of clean energy. However, there appears to be no rational basis for how mandatory local content requirements contribute towards promoting the use of clean energy.
· If the objective is to produce more clean energy, then solar power producers should be free to choose energy-generation equipment on the basis of price and quality, irrespective of whether they are manufactured locally or not. In fact, by mandatorily requiring solar power producers to buy locally, the government is imposing an additional cost, usually passed on to the ultimate consumer, for the production of clean energy. The decision may therefore stand to benefit the interest of the ultimate consumer.
· It is entirely possible to give preferential treatment to clean energies (in the form of tax rebates for solar power producers and so on) without requiring mandatory local content.
· Perhaps, what is even more instructive is the fact that India during its submissions before the WTO did not invoke the general exceptions under article XX(b) or (g) of the General Agreement on Tariffs and Trade typically relied upon in trade disputes by parties seeking to protect their domestic regulations on ‘environmental’ or ‘health’ grounds. India therefore did not itself believe that the local content requirement under the programme was imposed for the ‘conservation’ of ‘clean air’.
· The panel ruling, however, is not final and reports indicate that India will prefer an appeal to the appellate body.
· Simultaneously, India may be exploring the option of filing a counter complaint against the U.S., with several states in the U.S. such as Michigan, Texas and California having also reportedly been accused of employing mandatory local content requirements in the renewable energies sector.
· Nevertheless, amidst the cacophony of the Prime Minister’s ‘Make in India’ campaign, India must resist the temptation of adopting protectionist measures such as domestic content requirements which are inconsistent with its international obligations. Domestic content measures, despite their immediate political gains, have a tendency to skew competition.
· Manufacturers must remain free to select inputs based solely on quality and price, irrespective of the origin. The Modi government must continue working towards building a business and regulatory environment which is conducive to manufacturing. This would require systemic changes in the form of simpler, transparent and consistent laws and effective dispute resolution mechanisms.