The recent World Trade Organisation (WTO) panel decision that certain domestic content requirements (DCRs) in the Jawaharlal Nehru National Solar Mission (JNNSM) violate India’s WTO obligations has kicked up a storm on whether the WTO unduly encroaches upon India’s sovereign policy choices, such as pertaining to the environment? One major reason for the debate is that this is the second blow to the country’s regulatory measures at the WTO in less than a year. In June 2015, the WTO decided that India’s ban on import of US poultry violated its WTO obligations.

Before we look at the policy issues involved in the solar case, it is necessary to provide a quick background.

Under the JNNSM, the government enters into long-term electricity purchase contracts with eligible ‘solar power developers’, assuring them guaranteed prices for a period of 25 years. The government then sells the electricity to distribution companies who, in turn, sell it to consumers. The key stated objective of the programme is “to promote ecologically-sustainable growth while addressing India’s energy security challenge.” Only those solar power developers who source certain types of solar cells and modules domestically are eligible. It was this DCR in the JNNSM, and not the JNNSM itself, that was challenged as WTO-inconsistent by the US, and ruled to be so by the WTO panel.

WTO members have undertaken legally-binding international commitments to refrain from discriminating against goods based on origin or destination. Among the several legal provisions that give effect to this non-discrimination commitment is the one that outlaws those domestic laws which make it necessary for an enterprise to purchase or use products of domestic origin, to obtain an advantage. The panel found that the DCR violated this rule, and then there was the general prohibition against discrimination between imported and domestic products.

The thrust of India’s defence focuses on three exceptions.

* One, a provision that renders the rule against discrimination inapplicable to government procurement.

* Two, an exception that applies to measures which are “essential to the acquisition or distribution of products in general or local short supply.”

* Three, another exception in favour of measures “necessary to secure compliance with laws or regulations which are not inconsistent with the provisions of the General Agreement on Tariffs and Trade (GATT).”

The first was rejected, because the discrimination was against solar panels, while the ‘good’ that the government procured was ‘electricity’. On the second exception, the WTO panel found that there was no shortage of supply of solar panels in India, even though there may be a shortage of production capacity. On the third defence, the WTO panel found that India failed to show a domestic law or an international legal norm with direct application in the country, the compliance with which necessitated the DCR.

Now, let us focus on the policy implications of this ruling. Is the WTO putting free trade ahead of environment? No, because nothing in the WTO treaty prevents countries from setting their own policy choices, including those relating to the environment. However, they limit policy choices available to WTO members as to how to achieve these goals.

Here, two cardinal principles are recurring themes. First, the measures, irrespective of their objective, should not result in arbitrary or unjustified discrimination, or, in disguise, restrictions on trade. Second, where there are multiple options as to how to achieve a legitimate objective—like an environmental one—the one which is least trade-restrictive must be chosen. The idea underpinning these disciplines is that countries cannot unilaterally pass on an unfair share of the costs of their own policy choices to their trading partners. In addition, while countries are free to derogate from WTO obligations in favour of certain policy choices (including the environment), they are not allowed to pursue trade and economic objectives in the guise of environmental objectives.

Now, will this decision compromise India’s energy security goals? No, because the ruling is not against the JNNSM. As the WTO panel noted: “Our analysis of the DCR measures proceeds on the understanding that it is the WTO consistency of those measures, and not the legitimacy of the policy objectives pursued through the National Solar Mission, that is in dispute in this case.” India can continue with the JNNSM without the DCR even if it loses in appeal. In fact, by making it mandatory for solar power developers to buy solar cells and modules locally irrespective of the costs involved, the policy might make the generation of solar power economically unfeasible. If solar power is produced at a higher cost, it might deter final consumers from buying it. Therefore, cutting down the cost of generating solar power is key to promoting the usage of solar power and achieving India’s energy security goals.

Finally, is this ruling a blow to Make-in-India? No again, because Make-in-India does not and should not become a new name for the pre-1991 import substitution policy. The success of Make-in-India rests on the ability of manufacturers to produce goods at competitive prices. Therefore, generators of solar energy should have the freedom to import inputs, such as solar cells and modules, if importing is cost-efficient. In addition, removing barriers to trade could actually help India attract more foreign and domestic investment in solar power generation, which, in turn, will boost investment in manufacturing solar cells and modules. Once there is more investment in this sector, free play of market forces might lead solar power developers to buy domestically-manufactured solar cells and modules without any policy making it compulsory for them do so.

Prabhash Ranjan is assistant professor of law at South Asian University, New Delhi.Deepak Raju is associate, Sidley Austin LLP. Views are personal