Economic Development - 4 | Current Affairs & Hindu Analysis: Daily, Weekly & Monthly - UPSC PDF Download

Economics of Climate Change in India

Context

• Last week, the World Meteorological Organisation (WMO) announced that global temperatures are likely to surge to record levels in the next five years, fuelled by heat-trapping greenhouse gases (GHGs) and an El-Niño event.
• The WMO warned that the economic cost of extreme weather, climate and water-related events has been rising.

What is Climate Change?

• Climate change refers to long-term shifts in temperatures and weather patterns.
• Such shifts can be natural, due to changes in the sun’s activity or large volcanic eruptions.
• But since the 1800s, human activities have been the main driver of climate change, primarily due to the burning of fossil fuels like coal, oil and gas.
• As per current standing,close to 12,000 climate change induced disasters/extreme weather events have been reported between 1970 and 2021, resulting in over 2 million deaths and $4.3 trillion in economic losses.
• For perspective, the total losses are roughly 25% more than India’s annual GDP.

Some Visible Evidences of the Climate Change

• Temperature Anomalies
  • Annual average temperature in India has been increasing gradually.
  • RBI’s latest report on currency and finance states that the rise has been significantly sharper during the last 20 years than during any other 20-year time interval since 1901.
• Irregular Monsoon
  • The south west monsoon is more erratic.
  • While the average annual rainfall at the all-India level during 2000-2020 saw a rise over that during 1960-1999, annual average rainfall in India has gradually declined.
• Increased Dry and Wet Spells: RBI’s research suggests that while dry spells have become more frequent during the last several years, intense wet spells have also increased.
• Frequent Floods and Storms
  • Research about natural disasters since 1975 has shown that India is relatively more exposed to floods and storms (cyclonesand hailstorms) than droughts and heatwaves.
  • “Such incidences pose significant risks to agricultural production and food price volatility,” states the RBI.

 How Vulnerable is India?

• The Global Climate Risk Index 2021 had ranked India 7th in the list of most affected countries in terms of exposure and vulnerability to climate risk events.
• India’s diverse climate is not only exposed to different temperature and precipitation patterns, but is also vulnerable to extreme weather events, posing wide-ranging spatial and temporal implications for the economy.

 Economic Vulnerability

• The structure of Indian economy has evolved since independence.
• Bulk of economic activity now happens in the services sector as against the agriculture and alliedsectors.This has implications for carbon emissions.
• According to the RBI, ‘Services’ are globally considered to be emission-light with relatively lower energy intensity of output.
• A sectoral break-up shows that thehighest emission-intensive sectors — metal industries, electricity, andtransports (air, land, andwater)— together account for around just 9% of India’s total GVA (gross value added) in 2018-19.
• This implies that the sectoral composition of the Indian economy helps reduce its carbon emissions.

The Macroeconomic Impact

• Can affect supply and Demand: Climate change can adversely impact both the supply side as well as the demand side. It can stroke inflation, reduce economic output, trigger uncertainty and change consumer behaviour.
• Employment Loss: In 2020, the World Bank said that India could account for 34million of the projected 80 million global job losses from heatstress-associated productivity declineby2030.
• Coastal floods due to Sea Level Rise
  • In 2022, the Intergovernmental Panelon Climate Change (IPCC) stated that India isone of the most vulnerable countries globallyin terms of the population that would be affected by the sea level rise.
  • By the middle of the present century, around 35 million people in India could face annual coastal flooding, with 45-50million at risk by the end of the century.

Government's Policies to Fight Climate Change

• On 30th June 2008, the National Action Plan on Climate Change (NAPCC) was released.It is a national strategy of 8 sub-missions to help adapt and magnify ecological sustainability in India’s development path.
• These are:
  • National Solar Mission (NSM),
  • National Mission for Enhanced Energy Efficiency (NMEEE),
  • National Mission on Sustainable Habitat (NMSH),
  • National Water Mission (NWM),
  • National Mission for Sustaining the Himalayan Ecosystem (NMSHE),
  • National Mission on Strategic Knowledge for Climate Change (NMSKCC),
  • National Mission for a Green India (GIM),and
  • National Mission for Sustainable Agriculture (NMSA).
• On 3 August 2022, the Union Cabinet under the Chairmanship of the Prime Minister passed the updated Nationally Determined Contribution (NDC) for consideration by the UNFCCCunder the Paris Agreement, to reach India’s goal of net zero emissions by 2070.

Policy Actions' Impact on GDP Growth Rate and Inflation

• The Network of Central Banks and Supervisors for Greening the Financial System (NGFS) have created an analytical framework called the National Institute Global Econometric Model (NIGEM)“to produce policy insights”.
• In this model, the researchers looked at how GDP growth rate and inflation would be affected under different policy stances when compared to the baseline (which is the best-case scenario involving no impact of climate change).

Impact on GDP growth rate

• Policy actions have negative impact on India’s GDP no matter what.
• By 2050, India’s GDP is likelyto lower by anywhere between8.5% to almost 10% under current policy scenario, if India follows the NDCs) pathof achieving net zero by2070.
• However, if the globalCO2 emissions reach net zero by 2050,then the hit to India GDP will be the lowest.

Impact on Inflation

• The effect of stricter policy action will be opposite.
• No change policies will keep inflation low at present but higher later.
• Policies to achieve net zero by 2050 will result in higher inflation in the near-term.

Conclusion

• In 2020, India was the third biggest emitter of green house gases.
• As per climate analysts, India will not hit the peak of emissions by 2030, but instead, achieve the same between 2040-2045.
• This trend may create hindrance for India’s energy transition plans for the second half of this century and therefore a pragmatic and far-sighted approach is necessary.

RBI Becomes Net Seller of USD in FY23

Context

Recently, the Reserve Bank of India (RBI) witnessed a significant shift in its foreign exchange transactions during the fiscal year 2022-23. After being a net buyer of the US dollar for three consecutive years, the RBI turned into a net seller, selling 25.52 billion USD in the spot market.

• The spot exchange is where financial instruments, such as commodities, currencies, and securities, are traded for immediate delivery.

Why and How did the RBI Turn into a Net Seller in FY23?

• Stabilisation of the Rupee:
  • The RBI maintains that its intervention in the foreign exchange market is aimed at stabilising the rupee's movement.
  • The sale or purchase of dollars by the RBI impacts its profit and is reflected in dividend payouts to the government.
  • Without the RBI's dollar sales, experts suggest the rupee could have weakened further, potentially reaching 84-85 levels against the dollar.
• Depletion of Forex Reserves and Valuation Losses:
  • The country's foreign exchange reserves decreased from $606.475 billion to $578.449 billion during FY23. This was primarily due to valuation losses resulting from the appreciating US dollar and higher US bond yields.
• Selling of Dollar:
  • The RBI sold significant amounts of dollars in FY23 to counter the rupee's depreciation resulting from the Ukraine-Russia conflict and the US Federal Reserve's interest rate hikes.
  • The rupee depreciated by approximately 8% during FY23, with the RBI's intervention preventing further weakening.
    • The rupee declined from around 76 levels on April 1, 2022, to nearly 82 as of March 31, 2023.
• Impact:
  • The RBI's dollar sales in FY23 resulted in significant profits, leading to a higher dividend payout to the government.
  • The Central Board of the RBI approved a 188% increase in surplus transfer to the government for the accounting year 2022-23.

What Other Measures Can Help Curb Depreciation of Rupee?

• Increase capital flows into the country, such as promoting foreign investments and encouraging Non-resident Indian (NRI) deposits.
• Monitor and intervene in the foreign exchange markets to reduce excessive volatility in the rupee's value.
• Consider utilizing foreign exchange reserves selectively to counter excessive depreciation and maintain stability.
• Foster a favorable business environment and policies that support economic growth and exports.
• Strengthen monetary policy frameworks to effectively manage inflation and maintain stability.
• Enhance coordination with other relevant government agencies to implement comprehensive strategies for managing currency depreciation.
• Encourage trade in rupees and promote pricing of India's trade transactions in the domestic currency.
• Continuously monitor and assess the impact of policy measures on the rupee's depreciation and make adjustments as necessary.

Adoption of E20 Fuel and Green Hydrogen Production

Context

In a recent announcement, the Union Minister of Petroleum and Natural Gas, highlighted that petrol blended with 20% ethanol, known as E20, will soon be available at 1,000 outlets of oil marketing companies (OMCs) nationwide.

• The National Green Hydrogen Mission aim to achieve a production capacity of 5 Million Metric Tonnes (MMT) per annum by 2030, was also highlighted.

What is Ethanol Blending and E20 Fuel?

• About:
  • Ethanol is an agricultural by-product which is mainly obtained from the processing of sugar from sugarcane, but also from other sources such as rice husk or maize.
    • Blending ethanol with petrol to burn less fossil fuel while running vehicles is called Ethanol Blending.
    • E20 fuel is a blend of 20% ethanol and 80% petrol. The E20 was launched by the Prime Minister of India in February 2023 in Bengaluru. This pilot covers at least 15 cities and will be rolled out across the country in a phased manner.
  • India has been increasing its ethanol blending in petrol from 1.53% in 2013-14 to 10.17% in 2022.
    • The government has advanced its target to achieve 20% ethanol blending in petrol from 2030 to 2025.
    • During our G20 presidency, the government has also proposed to launch a global biofuel alliance with countries like Brazil to promote biofuels internationally.
• Advantages:
  • E20 fuel has several advantages over conventional petrol, such as:
    • It reduces vehicular tailpipe emissions by lowering the carbon monoxide, hydrocarbons and nitrogen oxides levels.
    • It improves engine performance and reduces maintenance costs by preventing corrosion and deposits.
    • It reduces the import bill for crude oil by substituting domestic ethanol production.
      • It is estimated that a 5% blending (105 crore litres) can result in replacement of around 1.8 million barrels of crude oil.
      • India imported 185 million tonnes of petroleum at a cost of USD 551 billion in 2020-21. A successful E20 programme can save the country USD 4 billion or Rs 30,000 crore per annum.
      • It supports the farmers and rural economy by creating demand for surplus crops.
• Challenges:
  • Shift Towards Sugarcane Production: In order to achieve a 20% blend rate, almost one-tenth of the existing net sown area will have to be diverted for sugarcane production.
    • Any such land requirement is likely to put a stress on other crops and has the potential to increase food prices.
  • Storage Constraint: Annual capacity of required bio-refineries is stipulated to be 300-400 million litres, which is still not enough to meet the 5% petrol-ethanol blending requirement.
    • Storage is going to be the main concern, for if E10 supply has to continue in tandem with E20 supply, storage would have to be separate which then raises costs.

What is Green Hydrogen?

• About:
  • Green hydrogen is hydrogen produced by electrolysis of water using renewable or green energy.
  • It is considered the cleanest form of energy, as it does not emit any greenhouse gases when used.
    • India has the potential to become a leader and a superpower in green hydrogen production, according to the International Energy Agency (IEA).
      • India has abundant renewable capacity, especially solar power, which can be used to produce green hydrogen at low cost.
    • India has also set a target of producing 5 million metric tonnes of green hydrogen per annum by 2025-26 under its National Hydrogen Mission.
    • The private sector is also actively engaged in pursuing green hydrogen production and has attracted significant investment from international sources.
• Applications:
  • Decarbonizing Energy Systems: Green hydrogen can be used as a clean energy carrier and stored for later use.
    • It can be utilised in sectors such as power generation, heating, and transportation to replace fossil fuels, thereby reducing carbon emissions.
  • Production of Green Ammonia: Green hydrogen has the potential to replace traditional fertilisers in agriculture through the production of ammonia using renewable energy sources.
    • Green ammonia produced with help of green hydrogen is carbon-free, it has other benefits over traditional fertilisers, including improved efficiency and reduced soil acidity.
  • Off-Grid and Remote Power Generation: Green hydrogen can provide reliable and clean power in off-grid or remote locations where access to electricity is limited.
    • It can be used in fuel cells or combustion engines to generate electricity for communities, industries, and infrastructure.
• Challenges:
  • Cost: Currently, the production of green hydrogen is more expensive compared to hydrogen produced from fossil fuels through steam methane reforming.
    • The high cost is primarily due to the capital investment required for renewable energy infrastructure.
  • Scale and Infrastructure: Establishing a comprehensive green hydrogen infrastructure, including production, storage, and transportation, is a significant challenge.
    • Scaling up production capacity and building a distribution network for hydrogen require substantial investments.
    • Additionally, retrofitting existing infrastructure or creating new pipelines, storage facilities, and refuelling stations adds to the complexity and cost.
    • Impact on Resources: About 9 kilograms (kg) of water is required per kg of hydrogen.
      • The production of green hydrogen requires vast amounts of resources: land, water, and renewable energy. This can fuel land-use and water conflicts, human rights violations, energy poverty, and the delay of the de-carbonisation of the electricity grid in producer countries
  • Energy Efficiency: The process of electrolysis requires large amounts of electricity to split water into hydrogen and oxygen.
    • While renewable energy sources can provide a clean electricity input, the overall energy efficiency of the process is relatively low.

Way Forward

• Policy and Regulatory Framework: India needs to formulate and implement supportive policies that provide incentives for ethanol production, blending, and use, as well as promote the development of green hydrogen.
  • This includes setting blending mandates, ensuring a favourable pricing framework, and establishing quality standards for both E20 and Green Hydrogen.
• Technological Advancements: In the case of E20, advanced blending technologies, such as flex-fuel engines and compatible fuel systems, need to be developed and made widely available.
  • For Green Hydrogen, the advancement of electrolyzer technologies, storage systems, and efficient conversion processes is crucial to drive down costs and improve efficiency.
• Public Awareness and Acceptance: Public awareness and acceptance play a significant role in the successful adoption of E20 and Green Hydrogen.
  • Raising awareness about the benefits of these alternatives, addressing concerns related to fuel efficiency, performance, and compatibility, and promoting the environmental advantages are essential.
  • Educating consumers, industry stakeholders, and policymakers about the potential of these solutions and their contribution to decarbonization can drive acceptance and demand.

Sovereign Gold Bond Scheme 2023-24

Context

The Government of India has announced the issuance of Sovereign Gold Bonds (SGBs) for the financial year 2023-24. These bonds are denominated in grams of gold and offer an attractive alternative to holding physical gold.

Details

SGBs offer several benefits to investors, such as:

• They provide exposure to the price movement of gold without the hassle of storing physical gold.
• They pay a fixed interest rate of 2.5% per annum on the initial investment, payable semi-annually.
• They have a maturity period of 8 years, with an option of premature redemption after 5 years.
• They are exempt from capital gains tax if held till maturity or transferred before maturity.
• They can be used as collateral for loans from banks and other financial institutions.
• They can be traded on stock exchanges and post offices, subject to market conditions and availability.

However, SGBs are not for everyone. They have some eligibility criteria and restrictions that you should be aware of before investing. For instance:

• The SGBs will be restricted for sale to resident individuals, HUFs, Trusts, Universities and Charitable Institutions.
• The minimum investment is one gram of gold and the maximum limit is 4 kg for individuals and HUFs and 20 kg for trusts and similar entities per fiscal year.
• The bonds will be issued in tranches by the RBI throughout the year, based on the demand and supply situation.
• The issue price of the bonds will be based on the simple average closing price of gold of 999 purity, published by the India Bullion and Jewellers Association Limited, for the last three working days of the week preceding the subscription period.
• The redemption price of the bonds will be based on the prevailing market price of gold on the date of maturity or premature redemption.

Sovereign Gold Bond Scheme (SGB)

• SGB is a government-backed scheme that allows you to buy gold in the form of bonds and earn interest on your investment. SGB also offers several benefits over physical gold, such as tax exemption, easy liquidity, and lower risk of theft or loss.

How to buy SGB?

• SGBs are sold through scheduled commercial banks (except small finance banks and payment banks), stock holding Corporation of India Limited (SHCIL), clearing corporation of India Limited (CCIL), designated post offices, and recognised stock exchanges such as the National Stock Exchange and Bombay Stock Exchange.
• Buyers need to submit their PAN number and KYC documents such as voter ID, Aadhaar card, passport, etc. to buy SGBs. They can pay for the bonds through cash (up to Rs. 20,000), demand draft, cheque, or electronic banking.
• The price of SGB is fixed in Indian rupees based on the simple average closing price of gold of 999 purity published by the India Bullion and Jewellers Association Limited (IBJA) for the last three working days of the week preceding the subscription period.

CBIC Releases National Time Release Study (NTRS) 2023 Report

Context

Central Board of Indirect Taxes and Customs (CBIC) released the National Time Release Study (NTRS) 2023 report.

 About National Time Release Study

• The Time Release Study (TRS) is a performance measurement tool that quantifies the time taken for cargo release at customs stations. It measures the duration from cargo arrival to its out-of-charge for domestic clearance in imports and from cargo arrival to carrier departure in exports.
• The study covers seaports, air cargo complexes (ACCs), inland container depots (ICDs), and integrated check posts (ICPs), which handle a significant proportion of entry and shipping bills in the country.

Key findings

• The findings highlight the importance of the “Path to Promptness” strategy, which includes advance filing of import documents, risk-based facilitation, and benefits for trusted clients. Cargoes that incorporate all three features achieve the National Trade Facilitation Action Plan release time target across all port categories.
• In line with the government’s focus on export promotion, NTRS 2023 places greater emphasis on measuring export release time.
• The report differentiates between regulatory clearance (customs release) and physical clearance (completion of logistics processes). The study indicates that the National Trade Facilitation Action Plan release time target has been achieved for most port categories when considering regulatory clearance.

Impact of US Federal Reserve’s Policy on Indian Markets

Context

The recent US Federal Reserve policy meeting, keeping the policy rate unchanged at 5.25% but signaling two rate hikes to reach 6% by end-2023, has sparked speculation on India's interest rates and markets.

• While the Fed chose to maintain the status quo, it hinted at the possibility of two more rate hikes this year to combat inflation.

What is the Impact of Fed’s Policy on the Indian Market?

• The Indian markets fell by 0.49% on June 29, 2023, following the Fed’s policy announcement.
• The Fed’s policy affects the Indian markets through various channels such as:
  • Exchange Rate Channel: The Fed’s rate hikes tend to strengthen the US dollar against other currencies, including the Indian rupee.
    • A weaker rupee also increases the debt servicing costs for Indian borrowers who have taken loans in foreign currency.
  • Capital Flow Channel: The Fed’s rate hikes also reduce the interest rate differential between the US and India, which makes India less attractive for foreign investors who seek higher returns.
    • This could lead to capital outflows from India’s equity and debt markets, which could lower asset prices and increase volatility.
    • Capital outflows could also reduce India’s foreign exchange reserves and create liquidity crunches in domestic markets.
  • Inflation Channel: The Fed’s rate hikes could also affect India’s inflation through two ways.
    • First, a weaker rupee could increase the imported inflation for India, as it raises the cost of imported goods such as oil, gold and electronics.
    • Second, higher global commodity prices due to strong US demand could also push up India’s domestic inflation, as it affects the input costs for various sectors such as agriculture, manufacturing and services.
  • Growth Channel: The Fed’s rate hikes could also have an impact on India’s economic growth through two ways.
    • First, a tighter US monetary policy could slow down the global economic recovery from the pandemic, which could hurt India’s export prospects and external demand.
    • Second, higher domestic interest rates due to capital outflows and inflation pressures could dampen India’s domestic demand and investment activity.

What are Some of the Possible Scenarios for Indian Markets?

• Best-case Scenario: The Fed’s rate hikes are gradual and moderate, and are accompanied by clear and credible communication.
  • The RBI maintains an accommodative stance and supports the liquidity and credit conditions in India.
  • India’s economic recovery is robust and resilient, supported by strong domestic and external demand. India’s inflation is contained and manageable, and its fiscal and current account deficits are under control.
  • Global risk appetite is high and foreign investors remain positive on India’s growth potential and reforms.

Note: An accommodative stance means the central bank is prepared to expand the money supply to boost economic growth. The central bank, during an accommodative policy period, is willing to cut the interest rates.

• Worst-case Scenario: The Fed’s rate hikes are sudden and aggressive, and are driven by unexpected inflation shocks.
  • The RBI is forced to tighten its policy to defend the rupee and curb inflation. India’s economic recovery is weak and uneven, hampered by pandemic-related uncertainties and structural bottlenecks.
  • India’s inflation is high and persistent, and its fiscal and current account deficits are unsustainable.
  • Global risk appetite is low and foreign investors flee from India’s markets due to geopolitical tensions, policy uncertainty and governance issues.