HomeASIA – PACIFICOPINION: Foreign Direct Investment in India’s solar power sector – A perspective...

OPINION: Foreign Direct Investment in India’s solar power sector – A perspective | JP Simon International

RSM | 16 April 2021 | 9:30am RSM | 16 April 2021 | 9:30am

Measures taken by the Government on the FDI policy reforms, investment facilitation and ease of doing business have resulted in increased FDI inflows into the country.

New Delhi: Foreign Direct Investment (FDI) is a sort of investment that allows an entity to have controlling ownership in a business located in another country which is a key driver of economic growth of the country. FDI institutes an essential source of non-debt finance for the economic expansion of India.

The Government of India has continuously striven to put in place an enabling and investor-friendly FDI policy from time-to-time. The underlying impulsion has constantly been to make the FDI policy more conducive for investment and eliminate the policy bottlenecks that have been thwarting the investment inflows into the country. Consequently the steps undertaken in this course have borne fruit, as is apparent from the accrescent volumes of FDI inflows being received into the country.

Measures taken by the Government on the FDI policy reforms, investment facilitation and ease of doing business have resulted in increased FDI inflows into the country. These developing reforms in India’s Foreign Direct Investment are an endorsement of its status as a preferred investment destination amongst global investors. FDI in India is permissible via automatic route and approval routes only excluding some areas in which FDI is absolutely prohibited i.e. lottery business, gambling and betting, chit funds, Nidhi company, real estate business, and manufacturing of cigars, cheroots, cigarillos and cigarettes using tobacco.

The Ministry of Commerce and Industry revised its FDI policy vide press note no. 3 (2020 series) [1] dated April 18, 2020 by amending para 3.1.1 of extant FDI policy, intending to curb takeovers or acquisitions of Indian companies during the ongoing coronavirus pandemic. Pursuant to the amendment in FDI policy any investment by an entity of a country that shares a land border with India or where the beneficial owner of investment is a citizen of any of those countries will need government approval. Earlier, only Bangladesh and Pakistan were under this category, which has now been expanded to all neighboring countries sharing the border with India including China and Macau.

How FDI is appealed towards Solar Power Sector in India

Majority of the renewable expansion in the country has been possible with the help of attractive FDI opportunities and India’s vast scope in renewable energy sector and established achievable targets which has led to gradual increase of foreign investments in India over the previous financial years. The Government of India has set a massive target of achieving 175 GW in renewable energy capacity by end of 2022 [2], which has further been projected to achieve the target to 450 GW renewable energy capacity by 2030 [3] which makes it the world’s largest expansion plan in renewable energy. India’s present renewable energy capacity particularly concerning to solar energy is approximately 38.79 GW [4] (as of 31 January 2021).

The Finance Minister in Annual Budget 2021 made favorable announcements emphasizing on the solar energy sector as part of the government’s larger focus on renewable energy, by announcing custom duty hike on solar invertors from 5 per cent to 20 per cent and solar lanterns from 5 per cent to 15 per cent, which would promote the indigenous manufacturing of solar invertors and attract the foreign players to invest in India. In Addition, the government would also notify a phased manufacturing plan for solar cells and solar panels which would pragmatically build the domestic capacity.

Key takeaways from Union Budget 2021 in relation to Solar Energy Sector [5]

a. To give boost to the country’s non-conventional energy sector, government announced infusion of funds of Rs 1,000 crore to Solar Energy Corporation of India (SECI) and Rs 1,500 crore to Indian Renewable Energy Development Agency (IREDA), this would address the key challenge of availability of funds for setting up solar plants.

b. Government has allocated around Rs 3.5 lakh crore to support the DISCOMs, which should be complimented by end-user norms, and stricter rules to revamp the existing infrastructure.

c. Privatization is also a welcome step and competition would help improve the power generation and transmission infrastructure by leaps and bounds. This would in turn necessitate low-cost power, thus boosting demand for solar parks.

d. Lowering compliance norms for small companies would help startups in the solar space. A boost in the adoption of Electric vehicles (EVs) would also compliment the need for green energy.

e. Increase in duty on imported solar inverters and lanterns would amplify India’s latest motto of “Atmanirbhar Bharat”.

These advancing steps of government of India to achieve its targets relating to renewable energy capacity would eventually attract the big foreign players to make most of the available opportunities. With the increased support of government and improved economics, the solar energy sector has become attractive from investors perspective. As India eyes to meet its energy demand on its own, which is expected to reach 15,820 TWh by 2040 [6], renewable energy is set to play an important role. No doubt, FDI is going to play a crucial role in bringing in resources such as capital and advanced technology with easy norms and FDI opportunities in Indian Renewable Energy sector. The free flow of capital would highly favor this sector and would also lead to the exploration of its growth potential.

Presently, FDI up to 100 per cent is permitted in the renewable energy sector under the automatic route, and no prior government approval is required in India subject to the provisions of The Electricity Act, 2003. The cumulative FDI equity inflow in the Non-Conventional Energy industry has been USD 9,686.09 million during the period April 2000 to September 2020. This constitutes 1.94 per cent of the total equity inflow received in all the sectors during the same period.

Reasons why solar power projects may attract foreign Investments

The exponential economic growth, increasing prosperity, a growing rate of urbanization and rising per capita energy consumption is contributing to increasing demand for energy in the country.

The objective of the National Solar Mission (launched in 2010) is to establish India as a global leader in solar energy. The target of National Solar Mission has been up-scaled to 100 GW from 20 GW of grid connected solar power by 2022.

The target set by Government of India in the Paris Accord on Climate Change of achieving 175 GW of renewable power capacity by 2022, which includes 100 GW from solar, 60 GW from wind, 10 GW from biomass and 5 GW from small hydro power. This will offer massive investment opportunities across the value chain. The target has further been expanded to 450 GW by 2030.

It is aimed to achieve 40 per cent of installed power generation capacity from non-fossil fuel sources and reduce emission intensity of GDP by 33-35 per cent from 2005 level by 2030. With the accomplishment of these ambitious targets, India will become one of the largest Green Energy producers in the world, surpassing several developed countries.

The Government of India has provided approval to introduce the Production-Linked Incentive (PLI) Scheme in High Efficiency Solar PV Modules for Enhancing India’s Manufacturing Capabilities and Enhancing Exports under “Atmanirbhar Bharat Scheme”.

Regulatory reforms and efforts of the government are aligned with the set targets. Thus, In order to keep a closed eye on the investment made by foreign players, the Ministry of New & Renewable Energy (MNRE) has set up a new cell in the ministry for taking care of the foreign direct investment (FDI) into the sector.


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