Impact of GST on Solar Energy Storage Manufacturers in India: Report

This report analyzes the economic implications of the Goods and Services Tax (GST) on solar energy storage manufacturers in India. The study examines the impact of a proposed reduction in GST from 28% to 5% on battery production costs, prices, and demand. It explores how this change would affect the demand for batteries, electric vehicles (as complementary goods), and petrol vehicles (as substitute goods). The report also assesses whether the proposed GST reduction would support the government's goal of 100% electric vehicle usage by 2030, considering potential price and demand shifts. The analysis uses economic principles like supply and demand curves to illustrate the effects of tax changes on market dynamics, emphasizing the relationships between complementary and substitute goods and their impact on consumer and producer surplus.

Running Head: Production cost in India
Decision Making for the Solar Energy Storage Manufacturers
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Production Cost in India 2
Decision Making for the Solar Energy Storage Manufacturers
Question 1
The current goods and service tax for batteries in India is very high at 28% (Mishra,
2017). This is an interpretation that the costs of battery production are very high. Tax is one of
the most important cost of production that cannot be avoided. This is the reason why most of the
times it distorts the level of production. The producing firms are requesting a reduction of this
GST to 5% so that they will be able to produce efficiently at a lower cost. If the proposal is
accepted and the GST is lowered to 5%, the price for batteries will fall; this is because, goods
produced at a lower cost are sold at a lower price (Autocarindia.com, 2017).
The lower price will lead to the demand for batteries rising to a higher level; there will be
an increase in quantity of batteries produced since the lower cost will stimulate the producing
companies to produce more output. On the other hand, the consumer’s increased demand will
create a need for increased production and since these companies have that potential, quantity
produced will rise. The consumer surplus will rise since they will be willing to pay more for the
batteries but the price offered will be cut. The producer surplus will fall since they will be willing
to sell at a higher price, but will be selling at a lower market price.

Production Cost in India 3
Fig: Demand for batteries after GST is lowered
At the GST of 28% on batteries, the price for the batteries was at level P and the quantity
for batteries demanded was Q. The lowering of the GST to 5% will result in the price falling
from P to P1. This price will stimulate additional demand; demand will increase from Q to Q1.
The arrows show the price and the quantity movement; the movement is on opposite direction
and thus the inverse demand curve.
Question 2
Rechargeable batteries are a compliment to the production of electric vehicles
(Economicpoint.com, 2016). Thus, the lowering of GST to 5% will increase the demand for
electric vehicles. In economics, if the price of a compliment good falls, the demand for the other
good goes up (Munson, 2014). Owing to the lower price of batteries which is an input to
Electronic Vehicle (EV), the price for EV will also be lower. At a lower price, the demand for

Production Cost in India 4
EV will rise. Since the input prices are lower, the short run profit will be higher (economic
profits). In the long run the battery storage manufactures will be making only normal profits
since competition will rise.
Fig: Demand for complement goods
At the GST of 28% on batteries, the price for the batteries was at level P and the quantity
for electronic vehicles demanded was Q. The lowering of the GST to 5% will result in the price
falling from P to P1. This will cause an increased demand for the complement good which is the
electronic vehicles. Complement goods have an inverse demand curve and that’s why the
movement is on opposite directions (Hill, 2017). The lowering of price for one good
consequently leads to a cut in the price for the other good making it more attractive to the
consumers. The demand thus goes up.

Production Cost in India 5
Question 3
As have been noted earlier, the lowering of GST to 5% will result in lower prices for
electronic vehicles and thus their demand will increase. Since batteries are substitutes to petrol, a
reduction in the price for batteries will increase demand for electronic vehicles but on the other
hand, it results in a decrease in the demand for petrol vehicles (Pettinger, 2012).
Fig: Demand for substitute goods
At the GST of 28% on batteries, the price for the batteries was at level P and the quantity
for petrol vehicles demanded was Q. The lowering of the GST to 5% will result in the price
falling from P to P1. This will cause a decrease in demand for the substitute good which is the
petrol vehicles. The demand curve for substitute goods is positively sloped and this is indicated
by movement of price and the demand in the same direction (Aggarwal, 2011). Economically,

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when the price for a specific good falls, its demand rises; the increased demand causes the
demand for the substitute good to be less attractive and thus demand for substitute’s falls.
Question 4
Yes. The proposal made by the solar energy storage manufactures to lower GST on
batteries to 5% will definitely help the government in achieving its goal of reaching 100% level
of electronic vehicle usage by 2030. We have seen that the cut in batteries GST will raise the
demand for electronic vehicles by reducing the demand for petrol oil. Indiatimes.com (2017)
noted that the price of batteries has been going up obstructing the government’s vision. The
Minister of state Power, Coal, New & Renewable Energy should therefore consider intervention
by lowering the GST on batteries for the solar energy storage manufactures. However, it is not
clear whether this will actually be the case because we know that the increased demand for
electronic vehicles will result in increased price. And also we know that the reduced demand for
petrol will results in a reduced petrol price due to oversupply. However irrespective of these
controversies, the minister should consider lowering the GST to 5% as it will in fact raise the
demand for electronic vehicles.

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References
Aggarwal, K. (2011). CPT General Economics. S.l.: S Chand & CO LTD.
Autocarindia.com. (2017). EV industry wants lowering of 28% GST on batteries. Autocar India.
Retrieved 28 August 2017, from http://www.autocarindia.com/car-news/ev-industry-
wants-lowering-of-28-gst-on-batteries-405298.
Economicpoint.com. (2016). Complementary Goods. Economicpoint.com. Retrieved 28 August
2017, from http://economicpoint.com/complementary-goods.
Hill, A. (2017). Complementary Goods in Economics: Definition & Examples. Study.com.
Retrieved 28 August 2017, from http://study.com/academy/lesson/complementary-goods-
in-economics-definition-examples.html.
Indiatimes.com. (2017). Battery makers Amara Raja and Exide Industries increase prices, gain
over 1%. The Economic Times. Retrieved 28 August 2017, from
http://economictimes.indiatimes.com/markets/stocks/news/battery-makers-amara-raja-
and-exide-industries-increase-prices-gain-over-1/articleshow/59440803.cms.
Mishra, T. (2017). Solar energy storage manufacturers want lower GST levy on batteries.
Econogist.com. Retrieved 28 August 2017, from
http://www.thehindubusinessline.com/economy/policy/solar-energy-battery-gst/
article9758357.ece.
Munson, I. (2014). Economics Explained: Complements, Substitutes, and Elasticity of Demand.
Retrieved 28 August 2017, from http://www.econogist.com/home/complements-and-
substitutes.
Pettinger, T. (2012). Complementary Goods. Economicshelp.org. Retrieved 28 August 2017,
from http://www.economicshelp.org/blog/glossary/complementary-goods/.