India said on Tuesday it was investigating US policies supporting solar panel makers, the latest move in an escalating row over renewable energy that has worsened already strained ties between the two countries.
The Obama administration said on Monday it was filing a second case at the World Trade Organization over the domestic content requirements in India's solar programme, which aims to ease chronic energy shortages in Asia's third-largest economy.
US Trade Representative Michael Froman said making Indian solar developers use locally made equipment discriminated against US producers and could hinder the spread of solar power.
Indian Trade Secretary Rajeev Kher said his country, too, had raised complaints about the United States at the WTO.
"We have clear evidence of 13 odd (U.S.) states which follow equally restrictive policies as they challenge against us," Kher told reporters. "So, we are examining those policies."
Kher said India was also probing possible dumping of solar equipment as well as China and a few other countries.
The trade spat between India and the United States follows the recent arrest and strip search of a female Indian diplomat in New York in connection with visa fraud charges.
The arrest prompted retaliatory measures against U.S. diplomats in India and plunged U.S.-India relations to their lowest point since India tested a nuclear device in 1998. With general elections due by May, politicians are under pressure to show that they do not pander to U.S. interests.
As coal and gas shortages and populist tariff regimes hobble the performance of thermal power stations, Indian solar equipment manufacturers such as Moser Baer India Ltd and Welspun Energy want to expand their capacity.
India has argued its solar policies are legal under WTO government procurement rules and last year imposed anti-dumping duties on Chinese and Indonesian solar equipment firms.
In addition to the United States, China and Indonesia, Indian solar power producers import equipment from Malaysia and Germany, industry officials said.
The United States has twice in the past year sought a consultation at the WTO - the first stage in a dispute process that can lead to sanctions - over India's Jawaharlal Nehru National Solar Mission, which aims to double the country's renewable energy capacity by 2017.
New Delhi last year invited bids from firms to set up projects with a capacity of 750 megawatts to further expand the solar programme. The government, however, said locally made content had to be used to generate half of this new capacity.
The US International Trade Commission is scheduled to hold a hearing into complaints of trade barriers erected by India on Wednesday and Thursday.
US environmental groups have urged the Obama administration to back off from any WTO action, arguing that building up India's solar power industry will help it cut high greenhouse gas emissions.
But the administration has come under growing pressure from lawmakers and business groups to take a tougher stance on perceived Indian protectionist measures and intellectual property rights abuses by Indian drug companies.
There are 14 past or current WTO cases between India and the United States, whose bilateral trade in goods measured $63.7 billion last year, not including the latest case.
"This action is a reflection of the growing stress in the India-U.S. trade relations and both sides are expected to take a tough stance," said D.H. Pai Panandiker, president of New Delhi-based think tank RPG Foundation.
"The two nations have large markets and I hope they will be able to sort out these irritants."
(Additional reporting by Krista Hughes in Washington; Frank Jack Daniel In New Delhi And Prashant Mehra In Mumbai; Writing By Sumeet Chatterjee)