Parties to the historic Paris Accord on climate change signed in 2015 meet in Bonn next week, and their discussions will inevitably veer toward the Donald Trump-led US administration’s decision to exit the Accord. US is the second-largest greenhouse gas emitter in the world, in per capita terms as well as in absolute volumes. The upcoming summit takes place amid growing concerns that the US move may encourage other countries to abdicate their responsibility to rein in greenhouse gas emissions.
With the US withdrawal, all eyes will turn toward the moves China and India make. Although both emerging economies have relatively lower per capita emissions compared to developed economies, they still rank among the top three emitters in absolute volumes.
Shortly after taking charge as prime minister, Narendra Modi signalled a pivot to renewables as a major way in which India will seek to fight climate change. He set an ambitious target of setting up 100 gigawatts (GW) of solar capacity by 2022, which stood at just 4.3GW in 2015, on the eve of the Paris Accord.
So far, progress has been impressive but at 13GW of installed solar capacity in mid-2017, India has only reached a tenth of the target. And it is uncertain whether solar capacity will continue to grow at the same pace in the years ahead.
Nonetheless, India’s installed capacity to produce electricity from renewable energy sources—mainly wind and solar—currently stands at around 58GW, which is among the top five in the world. This excludes hydro power capacity.
Over the past two years, India has stepped up the overall share of renewables in its energy mix. India committed to raise the share of renewables in installed capacity to 40% by 2030 compared to 18% currently. Under its “Intended Nationally Determined Contributions” (INDC) commitments, India will seek to reduce its emissions-to-GDP ratio by 33-35% by 2030 from 2005 levels.
However, India has continued to add coal capacity over the last two years. Contrast this with the US, where installed capacity in coal fell almost 23GW or 8% between December 2015 and August 2017.
It is also worth noting that coal-based thermal power plants in India have declined in importance over the past few years partly because of commercial considerations. The pile of bad debt and overcapacity in the sector has made investments in new thermal power plants relatively unattractive. As these problems recede, coal might start looking attractive once again, at least from a commercial point of view. And given that coal remains the cheapest source of power, it will continue to be a tempting option for an emerging economy with a large power deficit. According to the International Energy Agency, 18% of India’s population did not have access to electricity in 2016.
A lot will depend on whether the growth in the renewable sector is sustained. At the moment, things do not look very bright for solar. The reverse auction system, where solar power development projects are awarded to the lowest bidders, has raised concerns over the sustainability of solar power companies. Too few solar projects and too many solar companies have pushed companies to bid aggressively for low tariff rates, raising concerns about their balance sheets. SunEdison, a US solar giant with interests in India, filed for bankruptcy last year.
Solar tariff rates have fallen significantly in India, prompting states to try and renege on offtake commitments that had been negotiated at higher rates earlier. Capacity utilization in solar is also low (around 20%) as opposed to coal (about 60%) owing to the challenge of storage of energy and grid integration.
The uncertainties in the renewable space could prompt a rethink on India’s energy mix, and make India renegotiate the commitments made two years ago. It remains to be seen whether India signals that shift at Bonn, or chooses to stay the course for now.
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Steve Ovett, the famous British middle-distance athlete, won the 800-metres gold medal at the Moscow Olympics of 1980. Just a few days later, he was about to win a 5,000-metres race at London’s Crystal Palace. Known for his burst of acceleration on the home stretch, he had supreme confidence in his ability to out-sprint rivals. With the final 100 metres remaining,
[wptelegram-join-channel link=”https://t.me/s/upsctree” text=”Join @upsctree on Telegram”]Ovett waved to the crowd and raised a hand in triumph. But he had celebrated a bit too early. At the finishing line, Ireland’s John Treacy edged past Ovett. For those few moments, Ovett had lost his sense of reality and ignored the possibility of a negative event.
This analogy works well for the India story and our policy failures , including during the ongoing covid pandemic. While we have never been as well prepared or had significant successes in terms of growth stability as Ovett did in his illustrious running career, we tend to celebrate too early. Indeed, we have done so many times before.
It is as if we’re convinced that India is destined for greater heights, come what may, and so we never run through the finish line. Do we and our policymakers suffer from a collective optimism bias, which, as the Nobel Prize winner Daniel Kahneman once wrote, “may well be the most significant of the cognitive biases”? The optimism bias arises from mistaken beliefs which form expectations that are better than the reality. It makes us underestimate chances of a negative outcome and ignore warnings repeatedly.
The Indian economy had a dream run for five years from 2003-04 to 2007-08, with an average annual growth rate of around 9%. Many believed that India was on its way to clocking consistent double-digit growth and comparisons with China were rife. It was conveniently overlooked that this output expansion had come mainly came from a few sectors: automobiles, telecom and business services.
Indians were made to believe that we could sprint without high-quality education, healthcare, infrastructure or banking sectors, which form the backbone of any stable economy. The plan was to build them as we went along, but then in the euphoria of short-term success, it got lost.
India’s exports of goods grew from $20 billion in 1990-91 to over $310 billion in 2019-20. Looking at these absolute figures it would seem as if India has arrived on the world stage. However, India’s share of global trade has moved up only marginally. Even now, the country accounts for less than 2% of the world’s goods exports.
More importantly, hidden behind this performance was the role played by one sector that should have never made it to India’s list of exports—refined petroleum. The share of refined petroleum exports in India’s goods exports increased from 1.4% in 1996-97 to over 18% in 2011-12.
An import-intensive sector with low labour intensity, exports of refined petroleum zoomed because of the then policy regime of a retail price ceiling on petroleum products in the domestic market. While we have done well in the export of services, our share is still less than 4% of world exports.
India seemed to emerge from the 2008 global financial crisis relatively unscathed. But, a temporary demand push had played a role in the revival—the incomes of many households, both rural and urban, had shot up. Fiscal stimulus to the rural economy and implementation of the Sixth Pay Commission scales had led to the salaries of around 20% of organized-sector employees jumping up. We celebrated, but once again, neither did we resolve the crisis brewing elsewhere in India’s banking sector, nor did we improve our capacity for healthcare or quality education.
Employment saw little economy-wide growth in our boom years. Manufacturing jobs, if anything, shrank. But we continued to celebrate. Youth flocked to low-productivity service-sector jobs, such as those in hotels and restaurants, security and other services. The dependence on such jobs on one hand and high-skilled services on the other was bound to make Indian society more unequal.
And then, there is agriculture, an elephant in the room. If and when farm-sector reforms get implemented, celebrations would once again be premature. The vast majority of India’s farmers have small plots of land, and though these farms are at least as productive as larger ones, net absolute incomes from small plots can only be meagre.
A further rise in farm productivity and consequent increase in supply, if not matched by a demand rise, especially with access to export markets, would result in downward pressure on market prices for farm produce and a further decline in the net incomes of small farmers.
We should learn from what John Treacy did right. He didn’t give up, and pushed for the finish line like it was his only chance at winning. Treacy had years of long-distance practice. The same goes for our economy. A long grind is required to build up its base before we can win and celebrate. And Ovett did not blame anyone for his loss. We play the blame game. Everyone else, right from China and the US to ‘greedy corporates’, seems to be responsible for our failures.
We have lowered absolute poverty levels and had technology-based successes like Aadhaar and digital access to public services. But there are no short cuts to good quality and adequate healthcare and education services. We must remain optimistic but stay firmly away from the optimism bias.
In the end, it is not about how we start, but how we finish. The disastrous second wave of covid and our inability to manage it is a ghastly reminder of this fact.