The Paris Agreement of COP 21

The Paris Agreement of the COP21 has the following salient features:

1. Urging all parties to ratify and implement the Doha Amendment to the Kyoto Protocol.
Present ratification status of the Doha Amendment can be seen here: Link

The Doha Amendment to Kyoto Protocol: At a glance (This is roughly 20% emission reductions over the 1990 levels.)

2. Setup a fund by 2020 that provides 100 billion USD annually for mitigation and adoption.

3. Notes that 55 Gigatonnes of emissions reductions are necessary by 2030 to keep the temperature rise less than 2 degrees celsius in the worst case. The intended nationally determined contributions aggregated over all countries should fall in this range.

Link to the full document:

Link to the full document.

Where are the bottlenecks to growth in India right now?

So this is the question on my mind - given the situation that India is in right now, where should we be investing the limited funds available to us? The situation being that government budget is constrained by the fact that the fiscal deficit should not be more than 5% of GDP. With the Goods and Services Tax coming up next year, there will be revenue sharing between center and states and the budget of the Central Government will be constrained even further. At present the government is finding it hard to implement the recommendations of the 7th pay commission. The manufacturing sector is lagging as government is not undertaking major projects (such as new dams, nuclear reactors, smart grids, etc.) at this stage and this is showing in corporate earnings of the industrial companies. The economy is in a dismal state right now.

The Goods and Services tax is expected to be a friendlier tax regime than the present VAT which suffers from 2 important drawbacks: 1. Cascading taxation and 2. Inability to tax imports on par with the domestic production. With the states sharing the revenue from the single GST tax regime, the Center will have to delegate increasing responsibilities to states than done previously. This would also open up the opportunities for state level debt and state government bonds similar to the central government bonds. A constitutional amendment will be required to enable the states to collect the GST.

The Congress had brought the GST bill in Parliament in UPA2 regime but were not able to bring the states on consensus on a common tax rate and so the bill was stalled. Now the BJP has been able to bring the states to consensus on the GST tax rate and the Congress is blocking the GST bill in Rajya Sabha.

The second factor that can boost the economy is Foreign Direct Investment in critical sectors such as power (nuclear reactors, smart grids, etc.) and transportation (high speed rail). These are very attractive sectors commercially and corporations in Japan and USA provide debt financing at low interest rates for such environmentally friendly projects. For example, Japan has offered to finance the the first bullet train in India, having a cost of $15 billion, at a 1% interest rate.  There are a lot of opportunities in the nuclear power sector after the India and USA reached a joint agreement on development of civilian nuclear power (Link to September 2015 story).  GE-Hitachi had started discussions on building nuclear power plants in India (Link to February 2015 story).  These deals are stalled right now.

Generating more nuclear power will help reduce our dependence on coal imports for generation of electricity. This could potentially solve the persistent power deficit problem in this country and make power production immune to supply side shocks from high price of coal and natural gas when the Rupee depreciates.

The FDI regime in India can be changed from limited FDI (49-50% in most sectors) to 100% FDI with a caveat that the business has to support local jobs. This has been implemented in multi brand retail where we have seen Walmart set up stores in India and source large amounts of their merchandise locally. USA has similar FDI norms where car manufacturers have to manufacture at least half of their cars in USA. I believe this would make the FDI route more attractive for businesses and multi national corporations.

I think these factors can significantly improve the growth prospects of the Indian economy at this point of time.

Is further depreciation of the Rupee exchange rate going to be sustainable?

This blog post is a repeat from a blog I made around one year ago, on an older blog which can be found here: http://niravdesai1209.wordpress.com/ The blog was titled "Can the Rupee drop below 60 to a US Dollar in a sustainable manner?"

Firstly, the Rupee is slipping due to the widening Current Account Deficit (CAD). Foreign fund inflows into financial markets and goods and services exports are the 2 main factors contributing to a stronger Rupee and import of oil, gas and coal is the main factor contributing to the weakening of Rupee.

As  the Rupee weakens, the imports of oil, gas and coal become more expensive and alternative energy sources such as wind, solar and nuclear power become more economically attractively. Moreover, wind and solar power have 0 operating costs and are not affected by inflation at all.

Back in 2013, TATA Power was able to sell coal power from its Mundra Plant at 2.5 rupees per unit. Solar power was priced at 7 Rupees per unit, subsidies brought it down to 5.5 Rupees per unit. Wind power was priced at 4 Rupees per unit or less on average.

Reference: The Hindu story on Power Prices in 2013

Rapidly increasing solar cell efficiencies and system design improvements have brought the price of solar power to Rs. 5 per unit in March 2014.

Reference: The Economic Times story on Cost of Solar Power

Now if we factor in a 5% inflation and a rising price of imported coal (which is about 60% of total coal consumed in India), in another 1 year with the Rupee at 61-62 to a US Dollar, solar and wind power will be cheaper than coal and natural gas in India.  This will reduce the demand for imported coal and the Rupee may stabilize at around 61-62 to a US Dollar.

Reference: Generation costs of imported coal based power are going up

In a free market economy, where the most cost effective power source is used, it is hard to drive the Rupee below 61-62 to a US Dollar in a sustainable manner. I don't see that happening.

What are your thoughts?

Here is the chart from the IEEFA document corroborating my claims:

IEEFA Briefing on cost of solar, wind and coal power in India

Presentation prepared on SAP LUMIRA with data from Government report on the Energy Industry in India which can be found here: Energy Statistics 2013

Trends in the Energy Industry in India from Nirav Desai