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Strapped for Cash: Union Budget 2014 & the Sustainability Agenda
"India unhesitatingly desires to grow… the country is in no mood to suffer unemployment, inadequate basic amenities, lack of infrastructure and apathetic governance." These were some of the opening remarks to preface the first budget of the newly minted BJP government. There is no broad-brushed conception of "growth" in Arun Jaitley's budget - this Budget has focused on specific growth areas:
- The aspirational populations in India who are emerging from "difficult circumstances" and will form the "neo middle class”
- The rapid urbanisation of rural areas, termed 'Rurbans'
- Ensuring food supply, water, energy, mobility and digital assets move in-step with India's trajectory towards industrialization and urbanization
With a fiscal deficit projected to be 4.1% of lackluster GDP (corresponding to a revenue deficit of 2.9 per cent of GDP), most of the capital requirements will need to be met by the private sector and international investors - and fast!
Without these capital inflows, it will be extremely difficult to navigate out of the doldrums of stagflation in the immediate term.
With these capital inflows, it will be important to ensure that assets created are delivering value in the long run and will not strangle the potential of growth they are meant to deliver. For example, in the energy sector, one could easily create jobs and infrastructure for mining reserves of coal methane beds to deliver growth for 5-15 year. However, there is long term value destruction in the sense that less capital is made available for investments in sustainable energy assets (e.g. offshore wind, new polymer to fuel technologies, smart grids). In this case, such an action means not only missing an opportunity to hedge long term energy cost inflation but further, progressing to a resource scarce economic future, where even beneficial infrastructure may eventually become too cost prohibitive to create.
Here’s a review of the Union Budget 2014’s implications on sustainable growth in 4 main areas:
- Smart cities, mobility & manufacturing
- Water, agriculture & climate change
- Waste & consumption
SMART CITIES, MOBILITY & MANUFACTURING
Catering to the rising ‘neo middle class’ is the primary driver for shaping urban development (at last!) in addition to creating a manufacturing industry that can absorb the younger workforce. As India Urban Space Foundation CEO Swati Ramanathan points out, a pool of 468 cities account for 70% (264 million) of the urban population, and will see the bulk of the future growth in urban India as well in the next 10 years. The plan to modernize 100 of these cities is a bold move and Rs. 7,060 crore was granted, though some industry observers are desirous of a clear strategic master plan for urban development that moves beyond point solutions for water, sanitation, roads etc.
However, the ‘smart city’ approach may signal a more profound shift: the Modi government is deploying common, integrated infrastructure to roll out grid-connected energy, mobility, digital access, and municipal services. This is not only fiscally prudent but also a pragmatic way by which India can accommodate the rising neo-middle class without over-heating the cost of basic resources. The parallel push to light rail, metros (and dare we mention, electrified BRTs) will also help to change the concept of mobility from private transport to shared mobility, and bring in new players typically associated with energy storage, electric vehicles, green power and real-time analytics to further excite this space.
- National Clean Energy Fund: bolstered through the increase in cess on coal from Rs. 50 to Rs. 100/tonne. This lends credibility to stimulus government can provide on existing programs, as well as support to offshore wind, PAT Phase II, electric vehicles, fuel standard initiatives, Euro V and other ‘on the horizon’ initiatives.
- Green Energy Corridor Project: This is critical to the evacuation of renewable energy power, particularly in context of bring large scale injections of green power on the grid without affecting grid frequency and load factors. It is also the first step in ushering in rooftop solar, bi-direction flows where individual consumers can inject power to the grid, and the substitution of peak power generations and grid regulation by small scale energy storage/ EVs. This move is further supported by 10 year tax holiday for grid transmission and distribution projects.
Review of petroleum subsidies: While nothing was stated specifically in the budget, we strongly welcome the desire to target / re-think the use of subsidies. Here, rationalizing the deployment of subsidies for cooking fuels is ‘an easy win’.
WATER, AGRICULTURE AND CLIMATE CHANGE
Despite enforcing 'hard calls' in an unpredictable climate and monsoon year , the emphasis is still on pushing money into 'point solutions' in reaction to specific scarcities and pain-points, rather than creating long term water assets for urban and rural India.
There is no mention of easing the intensifying competition between corporate, irrigation and domestic water requirements, for example, through building water accounting systems or establishing water credits. Further, there is no mention of a national plan for promoting water efficiency (a Bureau of Water Efficiency was proposed in 2013) to push through water harvesting, efficient usage, treatment and recycling systems. Only Delhi has received Rs. 200 Cr for water sector reforms, and remains to be seen what this entails.
To illustrate, 125 textile units were shut down in Gujarat due to water scarcity issues last week. Yesterday, the Minister has allocated Rs. 200 Cr to build six more textile mega-clusters at Bareily, Lucknow, Surat, Kutch, Bhagalpur, Mysore and Tamil Nadu. However, the sustainability and performance of these clusters from water resource risk perspectives remain unaddressed.
In the agri-business sector, “Pradhan Mantri Krishi Sinchayee Yojana” irrigation scheme of Rs 1,000 crore acknowledges that without water security, the excessive investment in agricultural is moot. One would hope that the water assumes a central focus, in equal footing to energy, in the government's medium term plans.
Aside from water, there are some additional moves of interest in agriculture. In particular, while no particular reference has been made to the food processing, cold storage and warehousing hubs proposed by the previous government, Rs. 5,000 Cr have been allocated to food warehousing to help drive out wastage in the agri sector.
Further, there is a specific play on food processing by reducing excise duty on machinery and equipment. The food processing sector is poised for growth and had already attracted considerable private equity investment. The area of cold storage, efficient food supply chains, food processing and renewable energy have considerable overlap for the Modi government and a coordinated plan across the water-food-energy nexus could prove extremely beneficial.
While Rs. 100 Cr has been put for the National Adaptation Fund for climate change, it has been positioned uniquely as a fund to help farmers adapt to an unpredictable climate and there has been no specific mention of adaption interventions eligible for the fund. The fund might be in danger of becoming another channel of support in agri-business in general, without any specific climate mitigation actions taken.
WASTE & CONSUMPTION
There are some new developments worth highlighting:
- Reduction in basic customs duty on ships for breaking, batteries and battery waste: without enforcement of ship breaking / battery recycling processes and formal systems of iron ore and steel melting in the secondary steel sector, this policy could have significant energy use consequences, while also creating water and chemical pollution that could degrade natural capital
- Support for Polyester Stable Fiber and Polyester Filament Yarn manufactured from plastic waste and scrap including PET bottles: the extent to which plastic to fiber industry is supported needs to be weighed against other emerging technologies, such as plastic polymer to high-grade fuel oil, and the government should not stifle alternative paths to innovation.
- GST: a GST tax will be rolled out later this year and is expected to be a major positive driver for domestic trade.
Image credits: Flickr/ Matt Buck