The Indian Panorama

Tag: Subir Roy

  • Global supply chains make atmanirbharta take a back seat

    Global supply chains make atmanirbharta take a back seat

    Tariff is not the only element that has gone into the trade and investment deal with the EFTA.

    “Today, you cannot be self-reliant in the sense of growing and producing most of what you consume and still aspire to become a global manufacturing powerhouse. For example, India is the global leader in the production of off-patent pharmaceuticals, but it is a major importer from China of active pharmaceutical ingredients that go into the manufacture of the formulations. The sooner the country gives up old simplistic notions of being atmanirbhar, the better it will be for its economy and the income and welfare of its people.”

    The rapid economic growth that the country was able to enjoy from the 1990s resulted from the liberalization policies that did away with licensing and lowered import tariffs. The latest trends in official thinking will hopefully take that liberalization forward.

    By Subir Roy

    India signing free trade agreements with four countries that make up the European Free Trade Association (EFTA) — Norway, Switzerland, Iceland and Liechtenstein — is being seen around the world as an initial signal that it is willing to open up more on trade. As a quid pro quo, these four nations, which are not members of the European Union (EU), have made a commitment to invest $100 billion in India over the next 15 years.

    India had earlier signed an interim deal with Australia and key negotiations are going on with the EU and economically important countries like the UK and Israel. A deal with Oman is ready for signing. The perception is that the government is seeking to capitalize on increasing global interest in what is now the fastest-growing major economy in the world. There is also a perception that India may ease a little in negotiations with the UK, with which it has historical trade linkages. The new government that will come to power may give the deal a final push so as to see it through.

    The new interest in multilateral trade is a climbdown for the present government, which began by seeking to make the country atmanirbhar or self-reliant. Unless import tariffs come down, which has to go hand in hand with greater embracing of trade, the government’s attempt to raise manufacturing activity through the production-linked incentive (PLI) scheme will be negated. For example, high import tariffs on components for cellphones are hindering their local manufacturing, which is a key component of the PLI scheme.

    What the government needs to prioritize is becoming a major beneficiary of the ‘China plus one’ policy, which global companies are adopting in order to reduce their huge dependence on manufacturing in China. Right now, Vietnam and, to an extent, Malaysia are often winning at the expense of India as global firms find that these geographies deliver lower costs and score on the ease of doing business.

    Additionally, India cannot expect to be a global manufacturing hub unless it becomes a key link in global supply chains. No country manufactures all that goes into today’s complex electronic and engineering products. Raw material and components which make up the assemblies and sub-assemblies have to go in and out of the country across minimal tariff barriers so that the final products that cross the shores are competitive across the world.

    Today, you cannot be self-reliant in the sense of growing and producing most of what you consume and still aspire to become a global manufacturing powerhouse. For example, India is the global leader in the production of off-patent pharmaceuticals, but it is a major importer from China of active pharmaceutical ingredients that go into the manufacture of the formulations. The sooner the country gives up old simplistic notions of being atmanirbhar, the better it will be for its economy and the income and welfare of its people.

    The rapid economic growth that the country was able to enjoy from the 1990s resulted from the liberalization policies that did away with licensing and lowered import tariffs. The latest trends in official thinking will hopefully take that liberalization forward.

    Tariff is not the only element that has gone into the trade and investment deal with the EFTA. It also indicates that India is willing to live by the new norms that are seeking to drive developed countries in areas like labor, environment, sustainability and gender. To take the last element first, India must turn itself into a nation where women do not hit a glass ceiling in seeking to rise up to the level that their talents will take them.

    India will also have to live with the commitments it has made to cut down on emissions and participate in the efforts to reduce global warming. A key element in this is to stop setting up coal-fired power plants. India is not just a big miner of coal but also a heavy importer of crude oil. There needs to be in place an aggressive programme to tap solar and wind energy, as also the production of green hydrogen. The move to raise the domestic manufacturing of electrolysis, which produce hydrogen, is the right kind of policy to follow.

    There is also the key issue of adopting globally accepted labor standards. Workers need to be able to follow reasonable working hours — not having to work 12 hours a day, as do security guards in housing societies and gig workers. They also need to enjoy social security benefits that today only a job in the organized sector of the economy comes with.

    If new labor codes end up creating a higher proportion of temporary workers, the matter needs to be seriously looked into. Workers also need to be able to enjoy the benefits of medical insurance. The PM Jan Arogya Yojana seeks to deliver this to the poor, but it still has a long way to go in order to become fully operative for all those who need to be a part of it. India’s trade partners will not take kindly to competitively priced exports by Indian firms which engage workers without adhering to labor standards.

    A breakthrough in trade negotiations will be beneficial for a range of industries. The foremost is the textile sector, which employs 45 million people. Also waiting to catch strong tailwinds are sectors like marine products, auto and engineering components, chemicals, leather, and gems and jewelry.

    According to the government’s projections, 80 million new jobs can be created by 2030 by actively seeking to link India with global supply chains. Should even some of this were to happen, the wages that the new workers will earn will give a boost to private consumption expenditure, which will create demand for corporate sector FMCG (fast-moving consumer goods) biggies that continue to experience sluggish volume growth in rural areas.

    Rising consumption expenditure will lead to greater capacity utilization in factories and prompt businesses to create fresh capacity. This will lead to greater investment in plant and machinery, thus enabling the private sector to take over the mantle of capital investment from the government, as signaled in the Interim Budget.
    (The author is a Senior Economic Analyst)

  • Challenge for India to align policies with COP28 outcomes

    Challenge for India to align policies with COP28 outcomes

    • The key existential need is to move away from coal to renewables. To be able to do so, developing nations will need finance that must not add to their debt burden.

    “The final outcome, thrashed out during the conference which went into overtime, does, however, represent a small step forward that needs to be noted. The unanimous decision at the conference was to begin reducing the global consumption of fossil fuels and achieve net-zero by 2050, the first such binding decision ever taken. This signals the eventual demise of the age of fossil fuels — coal, oil and gas. It, thereby, sends a key signal to policymakers, including those in India, who have been somewhat brazenly continuing with policies to support investment in coal, to change tack. It also sends signals to coal investors to get out as quickly as they can and make no further commitments, irrespective of any contrary signals from policymakers.”

    By Subir Roy

    How useful has COP28, the Conference of the Parties held in Dubai, been in taking forward the initiative which began with the 2015 Paris Agreement to address climate change, its mitigation and adaptation and securing the finance needed for the whole process? Typically, a lot of the right kind of noises have been made, as also promises to deliver, while seeking to leave commitments as open-ended as possible so that short-term national imperatives can be addressed even while working on and swearing allegiance to the overall goals.

    The final outcome, thrashed out during the conference which went into overtime, does, however, represent a small step forward that needs to be noted. The unanimous decision at the conference was to begin reducing the global consumption of fossil fuels and achieve net-zero by 2050, the first such binding decision ever taken. This signals the eventual demise of the age of fossil fuels — coal, oil and gas. It, thereby, sends a key signal to policymakers, including those in India, who have been somewhat brazenly continuing with policies to support investment in coal, to change tack. It also sends signals to coal investors to get out as quickly as they can and make no further commitments, irrespective of any contrary signals from policymakers.

    The member countries also reached a historic agreement to triple renewable energy capacity globally by 2030, again a decision which has run counter to the Indian position. The timeline, barely seven years away, is important as India and China, the two large economies with rapidly rising emission levels, had decided early during the conference to stay out of such an agreement to mitigate present climate trends by tripling the world’s renewable energy output and doubling energy efficiency by that date. This is despite 118 countries agreeing to join the pact.

    The International Energy Agency says the tripling is needed to keep in sight the goal of driving down the demand for fossil fuels and keeping global warming to 1.5°C above pre-industrial levels by the end of the century. The focus of action will be on phasing out coal-fired power plants and curbing the use of oil and gas.

    Should Indian policymakers see these outcomes as somewhat excessively binding, they have reason to be happy about one key decision which emerged early during the two weeks over which the conference lasted. A ‘loss and damage’ fund to help vulnerable countries cope with the impact of climate change will be created. This is the right thing to do, but the giveaway is the size, albeit initial, of the fund — a mere $475 million, with the US commitment being just $17.5 million. This needs to be set against the $525 billion combined loss that the 55 most vulnerable countries have suffered from climate change in the last 20 years. The loss will reach $580 billion by 2030.

    Of course, further contributions will come as the work of the fund, to be initially overseen by the World Bank, progresses. It will help poor countries cope with the cascading effects of climate change, such as rising sea levels, floods, droughts and cyclones. The moral justification for asking for such a fund is that the rich countries, whose industrial growth since 1850 resulted in greenhouse gas accumulation, global warming and the climate crisis, should now help the poor countries, who are the most vulnerable victims, combat it.

    India’s approach so far has been that without making any fresh commitment, it wishes to abide by the nationally determined targets it has already announced. In journeying towards that, a sea change will come in sectors like steelmaking, vehicles design and manufacturing, building design and construction processes, not to speak of cookstoves used by households. The drive towards using more clean energy will affect businesses of all sizes, ranging from micro, small and medium enterprises to large corporates.

    What is critical is that the investment to enable this energy transition needs to be forthcoming. At present, investment in the fossil fuel sector continues to outstrip that directed towards promoting a clean economy. An advisory panel for COP28 has recommended that a two-pronged strategy be adopted — tax polluting activities and cut fossil fuel subsidies. One area where carbon taxes can be introduced relatively smoothly is transportation — maritime and aviation. But overall, cutting subsidies where they are deeply entrenched will be politically challenging. Farmers will not like fertilizer subsidy to be cut and it will need a brave state government to go back on supplying free a minimum load of electricity to every household.

    A particular culprit, a term the panel did not explicitly use, is large oil and gas companies which have made windfall profits from the quick rise in energy prices as a result of the Ukraine war. But it will be difficult to put a punitive tax on them as many of them are either state-owned (like Coal India, NTPC and West Asian giants) or have political clout, like those in the US.

    Overall, the key global existential need is to move away from coal to renewables. Rich countries that have moved away from coal to natural gas are balking at helping the rest of the world do so. Hence, coal is the whipping boy, but it is also the fuel used by countries which have not moved to gas, which is somewhat cleaner. To be able to do so, developing countries will need finance that must not add to their debt burden.

    What are the corrective measures that Indian policymakers will have to take in view of the conference’s outcomes? They will have to speed up the creation of greater capacity of renewable energy like solar and wind power. There is much talk about producing hydrogen of various hues, but it is worth remembering that the only hydrogen which passes muster is green hydrogen that is made from renewable energy itself. Besides, huge battery banks will have to be set up and transmission lines strengthened so that wind and solar power can be transmitted from areas where they can be produced to those which are deficient in the necessary climatic and geographical requirements.

    COP28 has forged a global consensus on the path the planet must take to save itself. This has posed a double challenge for a country like India, which has to both grow rapidly to overcome poverty as also do away with an abundant natural source of energy like coal. If India’s politicians do not rise to this challenge, they risk pulling both themselves and the country down.
    (The author is a Senior economic analyst)