The Ministry of Power (MoP) has announced import restrictions and compulsory testing of power supply equipment from a few countries, including China. Permission is mandatory for the import of such equipment from “prior reference” countries. Testing of all equipment, components and parts imported for the power supply system and network has also been made mandatory to check for any embedded malware, trojans, cyberthreats, etc. Industry experts comment on the impact of the proposed curbs and the sector’s likely response to deal with procurement challenges. Excerpts…
Will the proposed restrictions on power equipment and component imports from prior reference countries impact the sector significantly?
The Indian electrical equipment industry has the capacity, ability and cost competitiveness to effectively service and meet the needs of the Indian industry as well as enhance its exports. For the past six to seven years, the Indian industry has been sitting on 30-40 per cent of overcapacity. The Indian Electrical and Electronics Manufacturers’ Association (IEEMA) has consistently endeavoured to find new markets for its members through ELECRAMA, RBSM and overseas missions, which have made export of Indian electrical equipment grow not only in the developing countries but also in the developed world. The top five exporting destinations from India are the US, Nigeria, Bangladesh, Germany and the UAE.
The industry has also shown leadership in innovation, particularly when challenged. A case in point is the 1,200 kV transmission line in Bina, Madhya Pradesh. There is a high quantum of electrical equipment imports from China. First, this is because China offers artificially low prices, exploiting the public procurement system, which is based on L1, in the process giving low quality material. Second, Indian businesses, finding these low prices an easy option, tend to ignore the locally available capacity. The Chinese equipment is also able to offer inordinately low prices because the state continues to be a major economic player and offers huge subsidies and concessions to enable them gain a global market share at the cost of local capacities in other countries.
Rhetoric and shortcuts are simply not going to work. If we, as a nation, are to be serious about taking on China in our own home market, then all of us – manufacturers, importers, retailers, consumers and the government – need to commit to this. More important, we need to be prepared for both the consequences and costs of such a move, at least in the short run. In the medium term, we will start seeing enormous benefits of complete Make in India efforts.
In a conference held on July 3, 2020, the power minister, R.K. Singh, asked the state power ministers not to use Chinese power equipment but purchase all the power equipment and technology available in the country with the domestic manufacturers. This move followed the MoP directive issued on July 2, 2020, which called for testing of all parts, components and equipment imported and to be used in the power supply system and network in the country for embedded malware, trojans, etc., as well as adherence to Indian standards. Further, any imports of power equipment from “prior reference” countries (including China and Pakistan,) will require prior permission from the Government of India. As per the power minister, India imported Rs 710 billion worth of power equipment, including Rs 210 billion worth from China, in financial year 2019.
However, given the substantial dependence of Indian developers on Chinese equipment, such non-tariff import restrictions are likely to affect power companies significantly. The impact shall be both immediate as well as long term in nature. On a short- to medium-term basis, the “under construction” projects using Chinese equipment will have a direct impact as stringent conditions such as prior permission and compulsory testing of equipment are likely to elongate projects’ commissioning schedule, leading to cost and time overruns. In the longer term, the import restriction will further delay the implementation of the environment ministry timelines with respect to the installation of flue gas desulphurisation (FGD) equipment to cut emissions by thermal power projects. Also, the restriction on cost-efficient power equipment is likely to drive up the price of electricity as most of the additional cost, whether it is costlier imports from other countries or increased “interest during construction”, would be passed on to the end customers. These import restrictions are likely to further impact the thermal power sector, which is already reeling under stress, given the multitude of problems including low demand, stalled projects, excessive leverage and huge accumulation of receivables from distribution companies. Given the slow ramp-up of domestic FGD capacity, the emission control deadlines are likely to be further extended, imposing a heavy burden on the economy environmentally.
For power plants, the two critical components are boilers and turbines. There is currently more domestic capacity than what is needed for serving coal-based power plant requirements, for the next two decades or so. For accessories like coal handling plant, ash handling plant and electricals, there is enough domestic manufacturing capacity available. However, there are a couple of components that Indian companies import from China. That said, these components have other global suppliers as well in Europe, Japan and Korea.
In the power transmission industry, as we increase our transmission voltage levels from 440 kV to 765 kV and 1,200 kV, for the specialised equipment to cater to these voltages, dependence on imports from China is limited. Hence, the Indian industry is not going to be impacted significantly.
In the renewable energy segment, we have to create 175 GW of capacity. The Indian market has seen an influx of solar panels, which have been predominantly coming at very cheap prices from China. There could be a temporary transition for the industry as prices go up, with curbs on imports and safeguard duties. This could increase the costs adversely. Also, while India has module making capacity, we do not have cell making capacity. Having said that, given India’s huge solar potential and solar market, global players will come and set up capacity in the country. India, per se, will not suffer in this area. In a nutshell, it is possible for domestic capacity to be created; what we need is transition time.
What should be the sector’s response in the short and long term to address the procurement challenges owing to these curbs?
The initiatives of the government such as Make in India and AtmaNirbhar Bharat are commendable and very welcome. The IEEMA and its members have to respond to the clarion call given by the prime minister to shun easy options and accept the challenge. The solution will not be easy and will not happen overnight. It will only emerge with the commitment and resolve of the Indian industry.
The Indian electrical industry in the past has demonstrated entrepreneurship, innovation and brilliance in manufacturing and the IEEMA is sure that the present challenge will be accepted with resolve and commitment. The IEEMA is committed to further the interest of our industry and the nation. As an immediate measure, we need to switch over from imports to the available local capacity and for the medium term, take up in the right earnest development/manufacturing of those items that are not being made locally at present, so as to totally abolish their imports too.
In terms of the sector’s response in the short term, thermal power generators are likely to seek further extension in FGD implementation timelines. It should, however, be noted that given the stress in the sector and weak finances, most of the IPPs were anyway not in a position to meet the implementation timelines. The proposed import ban is likely to bolster their case for timeline extension. The other subsectors in the power value chain (networking equipment) where orders are in place or equipment is in transit may require some respite from the government on a case-to-case basis.
Before we dwell on the long-term response to this issue, we should first appreciate the reason for the Chinese success in the power equipment domain in India. While we are not questioning the decision as there may be all the right reasons for the same, Chinese equipment has generally been more cost effective and efficient. Besides, it also conforms to strict delivery schedules, much to the disadvantage of largest domestic manufacturers such as BHEL, which had both cost and supply-side issues until recently. In this backdrop, the long-term solution to this issue would lie in making the domestic power industrial base more robust and cost competitive to meet this challenge. Reportedly, the government is also coming forward to incentivise developers opting for domestically produced power equipment by way of concessional loans from Power Finance Corporation Limited/REC Limited.
India’s import from China during 2019-20 was $5.3 billion per month, which has come down progressively. In March 2020, it was down to $2.8 billion. In 2017-18, the import bill was $75 billion, in 2018-19 it came down to $71 billion and in 2019-20, it was $65 billion. It is already showing a negative trend, which means we are already importing from other countries. Trade with other trading partners such as Taiwan has gone up.
The first question is whether we will be able to survive without Chinese imports, and the second question is whether we can produce everything and be self-sufficient. I believe that the strategy to make everything internally may not be the best. If citizens want the best in the world prices as well, then they need to be willing to import. Hence, a more balanced approach is needed in the current situation.
There are other countries from where India can afford to buy right now, but it may not be as cheap as importing from China. In the short term, there will be some problems, but in the medium term, as capacity gets created, it will be beneficial.