Hitting the US Customs Wall: Indian Solar Industry Enmeshed by China

In August this year, reports emerged that the United States of America’s Customs and Border Protection Agency (CBP) had detained nearly US $43 billion worth shipments of electronics equipment – more specifically solar panels – from India since October 2023. The actions by the CBP were in line with the Uyghur Forced Labour Prevention Act (UFLPA), enacted by the Biden Administration in December 2021, to prohibit the importation of goods into the United States manufactured wholly or in part with forced labor in the People's Republic of China, especially from the Xinjiang Uyghur Autonomous Region (XUAR). In this case, CBP worked on the assumption that polycrystalline silicon, the raw material for batteries/cells for Solar Photovoltaic (PV) modules (and also for the manufacturing of integrated circuits and other semiconductor devices) had come from XUAR. 

China’s Supply Chain Dominance 

Over the last decade, China has dominated the global solar PV supply chain, with its share in all the manufacturing stages of solar panels (such as polysilicon, ingots, wafers, cells and modules) exceeding 80 per cent. But the increased scrutiny of Chinese companies in the USA in the last few years – through the UFLPA and otherwise – has been seen as an opportunity by policymakers and industry – including the solar industry – in India to pitch the country as a viable alternative to China. The Ministry of New and Renewable Energy, in response to a question in Rajya Sabha, claimed that India had achieved self-sufficiency in production of solar modules, with panels worth US $1.03 billion exported from India in 2022-23. However, in the same response, the ministry also admitted that the country was yet to reach substantial capacity in the production of solar cells. 

The CBP’s action shows the extent of enforcement of the UFLPA, where even components within the final products are subject to scrutiny. Given their dominance in the import of critical components to various products in some of the earmarked manufacturing sectors, the spotlight – yet again – falls on how Chinese companies along with their manufacturing capabilities are intrinsically linked to India’s manufacturing ambitions. As per data put out by the Delhi-based think-tank, Global Trade Research Initiative, with specific reference to solar panels in fiscal year 2024, imports of assembled photovoltaic cells amounted to US $2.9 billion (constituting 65.5 per cent of such imports), while non-assembled cells imports were worth US $1.0 billion (accounting for 55.9 per cent of the imports). 

The Indian government had accelerated efforts towards achieving self-sufficiency in the renewable energy sector in the context of supply chain disruptions due to the Covid-19 pandemic. Taking on from the Production Linked Incentive (PLI) scheme for large-sector electronics manufacturing in 2020, a similar scheme was also introduced for high efficiency solar PV modules in 2021, to achieve manufacturing capacity of Gigawatt scale with outlay of ₹24,000 crore – the scheme being implemented in two tranches of ₹4,500 crore and ₹19,500 crore respectively, with 13 companies successfully winning bids; many of them being indigenous ones. However, interestingly, a majority of these companies have listed Chinese vendors as suppliers, thereby underscoring the lack of viable alternatives on the one hand, and the tightly intertwined nature of production networks on the other. There is an outlay of ₹250 crore allocated in the union budget 2024-25 for the National Programme on Advanced Chemistry Cell Battery Storage under the Ministry of Heavy Industries. At the same time, there is no specific allocation for any PLI scheme for solar PV modules under the Ministry of New and Renewable Energy.

Pay More Attention to Chinese Internal Dynamics 

The efforts to reduce dependence on China by scaling up and incentivizing domestic production might be a good strategy in the long-term. However, in the short-term, it is inevitable for companies in the Indian solar industry, constrained by prevailing economic realities and lack of profitable alternate avenues, to ‘plug into China’s supply chain’, to quote from the Economic Survey presented before the Budget. Possibly, with the USA, India may also think of working out some sector-wise exemptions from the ULFPA, taking inspiration from the past such as in the case of the 123 Nuclear Agreement. 

Another crucial takeaway from this incident is how Indian companies are not keenly plugged into the nitty-gritties and dynamics of Chinese domestic politics. Their inability to keep track of locations within China from where raw materials and components are sourced, illustrate the need for more focus and depth in assessments of China by India Inc. In fact, India Inc.’s reliance on consultancies, especially foreign ones, rather than funding homegrown research on China is creating a new set of longer-term problems. Though this might feel like a tall order, the increased emphasis on export-led manufacturing coupled with growing geopolitical headwinds require companies to be far more aware of happenings within China and tread appropriately.

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This is a modified version of the article originally published as Anand P Krishnan, 2024. Why Indian Exporters Need to be Cued into US Curbs on China. Indian Express. 22 October.