Prohibiting Chinese imports may not bring advantages

As the economy recovers, the power sector may have to fight yet another battle. Following the India-China border stand-off, a 2 July order from the Ministry of Power (MoP) imposed restrictions on the import of any equipment, parts or components from prior-reference countries, which include China and Pakistan. This order adds to the woes of the sector, which is already reeling under the pressure of outstanding liabilities of power distribution companies and covid-related disruptions.

The MoP order requires that all equipment and components imported from outside the country should be tested at certified laboratories for embedded malware, trojans and other cyber threats, and for adherence to Indian standards. The government will have to give permission for imports from prior-reference countries or from persons controlled by or subject to the jurisdiction of prior-reference countries. Protocols for testing equipment, components or parts from prior-reference countries have to be separately approved by the MoP. The restrictions are far-reaching as they apply not only to items imported for end use, but also to products to be used as components or as parts in the manufacture or assembly of any equipment used in power supply systems or in any activity directly or indirectly related to power supply systems.

The power sector depends heavily on its imports from China. Power generation utilities, both in the private sector and in state-run projects, have routinely entered into contracts with Chinese entities or with manufacturers that use Chinese components for the supply of transformers, conductors, cables, meters, motors, switchgear, boilers, turbines, generators, solar modules, solar cells, li-ion cells, among other items and materials. Even manufacturers depend on supplies from China for various parts and components. The MoP order therefore affects the entire supply chain.

Projects under construction may be the worst affected. Many developers that have already entered into contracts with Chinese entities for the supply of equipment may face the prospect of cancellation. Even manufacturers who have already been using Chinese components may face such a prospect. In many cases, part payments may have been made, and the additional costs of termination of such supply contracts may be significant for project developers and manufacturers. Many domestic manufacturers will have to review and change their supply lines, which may lead to increased project costs at least in the short term.

The government has ambitious plans to ramp up solar power generation capacity. Much of the solar power revolution in India in recent years has been driven on the back of cheap solar modules and cells imported from China. A great deal of solar module manufacturing capacity also depends on the import of cells and other material from China. The MoP order affects not only the developers who will not be able to procure Chinese modules at competitive rates, but also a number of manufacturers, who will now have to look for alternative sources of supply, thus increasing the cost of the modules. Similar situations may be faced in the power storage sector.

The implementation of emission control in thermal power projects, which under the revised timelines must be completed by 31 December 2020, is also likely to face further delays. Chinese manufacturers are the largest suppliers of the equipment and components required for emission control systems. The import of these components was already delayed due to covid-19. The MoP order only adds to the difficulties. Eventually, the government may have to extend the deadline.

With the emphasis on Aatma Nirbhar Bharat (Self-Reliant India Mission), import substitution and domestic manufacturing are the new buzzwords. However it is debatable how economically viable such actions can be. Solar module manufacturing is a case in point. Despite the imposition of protectionist duties in 2018, which were expected to boost domestic manufacturing, developers still depend on Chinese imports. Developing domestic manufacturing capacity may take some years even if pursued in full earnest.

These restrictions may however prove to be a silver lining for domestic manufacturers. Cheap imports from China over the years have threatened the viability of local manufacturing. Manufacturers now have the opportunity to go beyond merely setting up assembly facilities and to create component manufacturing capacity. Eventually, if companies take advantage of this opportunity, domestic manufacturing may become an engine for growth. However, traders should not hinder this opportunity by substituting suppliers in other low-cost countries for those in China, or worse by importing components from China through unapproved means but at a higher cost than at present.

Abhishek Tripathi is the managing partner and Anura Gupta is a principal associate at Sarthak Advocates & Solicitors.