Investment and Trade Environment

Home  /  Energy in India Spotlight  /  Investment and Trade Environment


As in most nations, the trade and investment environment in India is extraordinarily complex and intricate. A multitude of international, regional, and bilateral agreements create a web of rules and regulations that make the financial environment difficult to navigate. The purpose of this section is to provide a distilled description of the important factors that might affect an entrepreneur looking to enter the energy sector in India. This section will begin by discussing the trade environment by outlining relevant tariff structures and the other barriers that exist in terms of sourcing products or parts. Next, an overview of the various investment agreements that India has with other nations will be given followed by a discussion about the various subsidies that can both support or hinder new clean energy enterprises. Finally, some of the key financing organizations focused on energy will be presented.

Business Overview

Following its independence, India pursued a policy of import substitution industrialization, high tariffs, and restrictions on foreign direct investment. The purpose of these policies was to promote domestic growth and protect Indian businesses and industries from outside competition and exploitation. In some cases, tariffs were over 200% and only Indian citizens were allowed to own most industries and businesses. By 1990, the economy had extremely low growth and the restrictions put on investment had resulted in a bloated bureaucracy and a few large monopolies, particularly in the steel and electrical power sectors.In 1991, India instituted a number of liberalization reforms aimed at opening the economy and bringing in more foreign investment to help grow the economy. Although each state has different restrictions and limitations set in place, the country as a whole experienced a significant increase in foreign investment and economic growth following these new policies. In 1991, the net incoming FDI in India was around $73 million. Ten years later in 2001, this number had increased to $5.5 billion and in 2012, it was around $24 billion. Although this is an impressive increase, in 2012 FDI in China was around $253 billion, over ten times as large. Topping the list of foreign investors in India are Mauritius, Singapore, the United States, and the United Kingdom.

Trade and tariff structure

As a signatory of the World Trade Organization, India promises to limit its tariffs. Part of this agreement is that all nations must offer the same import tariff rate offered to any one nation to all other signatories of the WTO. This is known as the most favored nation rate (MFN). As mentioned before, however, India is also involved in many regional or bilateral agreements that allow it to give lower rates to the other members of that particular agreement.The table below provides information regarding imports for renewable energy products. The top three import origins/countries are shown for each product along with the tariff rates for the products. For the sake of brevity, only the MFN rates instituted by India are provided.

Product MFN Tariff Rate Total Imports by Unit (2011) #1 Supplier by Quantity [%] #2 Supplier by Quantity [%] #3 Supplier by Quantity [%]
PV Cells 0.00% 2295127000 China (65%) Singapore (4.4%) S. Korea (3.8%)
Solar Lanterns 8.00% 22468000 China (95%) USA (1.2%) UAE (0.6%)
Solar Batteries 10.00% 18379000 China (78%) Vietnam (12%) Indonesia (2%)
Wind Turbine Blades 7.50% 3291000 Brazil (20%) Germany (20%) USA (14%)
Inverters 5.83% 129217000 China (88%) Singapore (1.9%) Hong Kong (1.4%)
CFLs 10.00% 33250000 China (72%) S. Korea (17%) Malaysia (5.8%)
DC Generators & Motors (750+ W) 7.50% 8847000 China (47%) S. Korea (17%) Germany (11%)
Generating Sets (generators and engines) 7.50% 1,200 China (28%) Germany (20%) USA (15%)

The tariffs rates shown above apply to the cost, insurance, and freight value of whatever product is being imported. Even though India has a complex trade environment, renewable energy technologies are generally assigned lower tariff rates. In some cases, like that of PV panels, tariffs are lifted completely. These rates are consistent with government policies to encourage the creation of new clean energy projects.

Since its economic liberalization, India’s largest trade partner has become China, with bilateral trade revenues of over $65 billion. Although China and India do not have a formal bilateral free trade agreement, they both operate through other regional free trade agreements such as ASEAN in Southeast Asia. In terms of renewable energy products, India imports the majority of these components and technologies from China despite government incentives, which attempt to promote the use of Indian made products.

Non-Tariff Barriers

Although renewable energy products may have lower tariffs than other products, the Indian import regime has a variety of non-tariff barriers, which make it difficult to source products and materials from abroad. Logistically speaking, lengthy customs procedures, complex certification and registration requirements make importing large quantities of products challenging. Some products are subject to restrictions on packaging and sanitation, which slow the importation process and act as a disincentive for companies looking to import products.Solar products are a key example of clean energy products that are subject to additional regulations that make them difficult to procure. Although there is no tariff or sales tax on PV panels, India imposes landing charges, and multiple countervailing duties on solar panels that make the price of importing them higher than the price that the exporting country is selling them for. Countervailing duties and anti-dumping measures are imposed when an imported product is subsidized in its country of origin, making the price far lower than it would be otherwise and allowing the exporting nation to “dump” the product in foreign countries at a cheaper price, thus undercutting local industry. India has leveled charges against nations like China and the US for dumping, particularly in terms of solar panels.

In terms of policy and regulation, there is a lack of continuity between different state policies and the federal government’s mandates. As discussed in the Government Overview section, the lack of coordination between state and federal level agencies and policies can make moving between states incredibly difficult. Some states have different import policies for things such as solar panels, and regulations are often not enforced well, meaning that products that otherwise would move through customs easily do not. Therefore, an enterprise looking to expand operations to another state might have to completely rethink its business model to fit the regulatory environment in the new state. This is why so many distributed energy enterprises only operate in one state.

Investment Agreements

Another important factor to consider for any foreign enterprise attempting to set up operations in India is whether or not there is a bilateral investment agreement between India and the enterprise’s home nation. Establishing operations in a different country expose an enterprise to a completely different system of regulations. In order to mitigate these risks, two countries often engage in a bilateral investment and protection agreements.For instance, India’s investment agreement with the United Kingdom protects companies from either nation from being expropriated by the other. The agreement also ensures that a UK company must be given the same treatment as any Indian company and vice versa and that neither company is prevented from repatriating investments and returns. The agreement also establishes provisions to ensure companies are compensated for losses due to war or conflict and creates a system for settling disputes. Many other trade agreements look very similar to the UK agreement, but because every contract is signed independently, there are some nuances and different provisions within each.

India has investment agreements in effect with 72 nations, with 11 others that have yet to be implemented. Interestingly, despite being a major source of FDI, the US does not have an investment agreement with India, largely the result of India’s insistence that Indian courts have the final say in dispute settlements.  A list of these agreements along with short summaries of specifics within each agreement can be found by clicking here

Investment Agreements

The government of India has a variety of subsidies in place in the energy sector. Some of these subsidies are beneficial for renewable energy providers, while others can undermine operations. Petroleum and other fossil fuel subsidies are an example of a subsidy that can potentially undermine a renewable energy business.  On average in 2011, India subsidized petroleum at a rate of 30.86% of the cost and natural gas at a rate of 3.03%. The subsidization of fossil fuels may make the price of fuel for things like generators cheaper, but this can make it more difficult for a small solar company looking to provide businesses with energy to compete.There are, however, a variety of subsidies and programs intended to make life easier for renewable energy providers. All renewable energy projects are given some form of federal tax exemption. For projects that supply power to the grid, the government will purchase power at minimum price that makes it worth it for the provider. Distributed generation projects are eligible for financial aid from the MNRE, which can cover up to 90% of the costs and provide maintenance for up to 10 years. This program is crucial for rural electrification and off-grid projects. The government also offers a variety of interest rate subsidies for loans given to clean energy enterprises. Many of these subsidies, however, are only given through local banks.
Screen Shot 2014-03-18 at 5.54.36 PMWind power projects are perhaps the easiest renewable technology in terms of subsidies and exemptions. Wind projects are granted a variety of tax exemptions and are often tied to accelerate depreciation programs. Accelerated depreciation programs hasten the process that allows companies to pay fewer taxes due to the fact that their assets are worth less over time. Many wind projects also have many customs concessions and are easier targets for foreign investment.

Biomass projects also receive a variety of subsidies and accelerated depreciation programs. The MNRE also provides incentives of up to $30,000 per 100 kW of energy produced. These incentives apply to both on-grid and off-grid projects.Solar PV systems are a particularly interesting case in terms of government subsidization.  Solar systems can receive $75 per watt of energy used, although this has a cap of $1200 per system. One of the most important organizations in terms of solar energy is the Jawaharlal Nehru National Solar Mission (JNNSM).

The JNNSM is a program under the direction of the MNRE, which aims to promote the expansion of the solar energy sector in India. The program offers financial support and customs exemptions to new solar projects in both urban and rural areas. One of the key provisions of the JNNSM is to ensure India becomes a major manufacturer in solar products. Therefore, in order to receive the benefits of the mission, a project must use only Indian made PV cells and modules and at least 30% of the rest of the components must be sourced locally. The JNNSM also introduced a feed-in tariff that gave priority access to the grid for new solar projects, allowing them to sell surplus power to the grid. While this is beneficial for local manufacturers, there are some concerns surrounding the mission in that it may act as a barrier due to the higher price of Indian made products and force new projects to use inferior materials

Financing Organizations

Access to financing is one of the largest barriers for enterprises looking to enter the renewable energy sector in India. High capital costs difficulty achieving scale, and high costs of renewable energy relative to customers’ incomes are all major issues for renewable energy enterprises. Many energy entrepreneurs rely on private funding and/or bank loans to launch their businesses. Although these are important sources of funding, this section will look at some of the most important financing organizations and other methods that renewable energy entrepreneurs can receive funds from.The most important organization in terms of financing in India is the Ministry of Finance, which is responsible for allocating funds for various projects and government plans as well as determining who receives tax exemptions and subsidies. The majority of the programs discussed in other sections of this feature rely on the Ministry of Finance for the allocation of finds.

Outside of government institutions, there are a variety of international organizations that provide financing for clean energy projects in India and across the world. For instance, SELCO partnered with the Renewable Energy & Energy Efficiency Partnership (REEEP). REEEP focuses on scaling up renewable energy businesses and has provided over $25 million in funds in 58 countries for clean energy initiatives. During its 9th funding cycle, REEEP has provided funds to small projects by SELCO and Angaza Design.

Similar to REEEP is the Global Off-Grid Lighting Association (GOGLA), which was created by the IFC and World Bank and focuses on reducing barriers to entry faced by clean energy entrepreneurs. GOGLA has worked with enterprises around the world such as Nokero and d.light, and has acted as an industry advocate to support the proliferation of clean energy technologies that benefit society.

Ennovent is another organization that works to connect entrepreneurs, investors and industry experts who are working to promote sustainability for Base of the Pyramid markets. Ennovent connects enterprises with funders and mentors, gives its own funds to new enterprises, conducts market/problem analyses, and brings companies together to discuss strategies. Ennovent has successfully worked with Barefoot Power to provide lighting solutions in India.



The Ministry of Power oversees the Rural Electrification Corporation, which is a public agency that provides loans and financing to both state run and private electrification projects in rural areas. The agency was allocated about $5.5 billion for capital subsidization under the most recent five-year plan. The agency generally targets distributed generation and renewable energy projects.Another popular financing mechanism employed by many small-scale renewable energy producers is the sale of carbon credits. As a signatory of the Kyoto Protocol, India has pledged to reduce global emissions through practices such as carbon trading. Enterprises like SKG Sangha, Nishant Bioenergy, and AVANI sell carbon credits from their clean businesses to cover some of their costs. India has the second largest number of registered carbon trading system in the world after China and the market is expected to grow.

Overall ease of doing Business

The IFC has created an index for determining the ease of business in each country, which ranks nations out of 189 economies. There are a variety of indicators that help to illustrate the areas of difficulty for new businesses within that country.According to this index, India was ranked 134th overall for 2014. In terms of starting a business, India was ranked 179th and ranked 186th in terms of enforcing contracts. On the other hand, the country ranked 38th in terms of getting credit and 34th for protecting investors. A full analysis of these rankings with descriptions of each category can be found at the Doing Business webpage.

Next Section: Barriers to Entry and Scale

Previous Section: Indian Energy Providers