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AUGUST 19, 2017


Getting charged up

  • Piyush Goyal, Union Minister of State with Independent Charge for Power, Coal, New & Renewable Energy and Mines, recently announced that only electric vehicles (EVs) will be sold in India from 2030.
  • The current National Electric Mobility Mission Plan (NEMMP) has set a sales target of only 5-7 million EVs and hybrid electric vehicles annually by 2020.
  • On the other hand, the Indian automobile market, which includes two-, three- and four-wheelers, is expected to clock an annual sales figure of around 23 million by 2030. Replacing these with EVs would require a significant push as far as vehicle-charging infrastructure and batteries are concerned.
  • India has missed many opportunities to be integrated in the global value chain for solar cells and wafers and electronics manufacturing due to a lack of suitable policy support. This has led to an ever-increasing import bill for electronics products, currently the highest after oil and gold. The annual EV battery market is expected to be around $30-55 billion and India cannot afford to fulfil the demand solely through imports.
  • The resource endowment is limited to only nine countries and 95% of global lithium production comes from Argentina, Australia, Chile and China. The recent demand surge in the electric mobility market has already resulted in a twofold increase in lithium prices. It is estimated that India would require about 40,000 tonnes of lithium to manufacture EV batteries in 2030, considerably higher than the current annual global lithium production of 32,000 tonnes. To meet India’s demands amid a global surge in electric vehicle demand, the entire mineral supply chain needs to be overhauled and expanded.

China and U.S. in the lead

  • China and the U.S., which have ambitious electric mobility targets, are way ahead in the race to secure lithium supplies. China, with the second largest reserves of lithium, is making strategic moves to control the majority of international lithium mining assets.
  • India has long-term trade relations with lithium-producing countries in Latin America through preferential trade agreements (PTAs). A recent extension of the PTA with Chile provides India some tariff concessions for lithium carbonate imports. India needs to further diversify the supply risk by including lithium in existing PTAs or establishing new PTAs with other lithium-producing countries. However, the move will only enable and not ensure risk-free mineral supplies to India.

Trade links, R&D, recycling

  • There is a need to formulate policies incentivising domestic public and private mining companies to invest in overseas lithium mining assets.
  • Simultaneously, India must focus on creating a vibrant battery research and development ecosystem domestically. Currently, the domestic battery market is largely dominated by lead-acid battery technologies. Research should focus on developing alternative technologies containing minerals with low supply risks and battery recycling techniques to recover associated minerals and materials. Recycling lithium batteries present in the waste stream will significantly reduce the burden in procuring fresh resources.
  • Mr. Goyal has repeatedly highlighted ‘fuel security’ as a key driver in the push for electric vehicles. However, given India’s limited hold on critical lithium reserves and concentration of production in the hands of a few, fuel security concerns could still be the same with ‘white gold’ lithium, replacing ‘black gold’. Policies that incentivise domestic manufacturing, address the need for virgin resources and recycling of used batteries, while constantly pushing R&D for substitutes and alternatives are vital to secure electric mobility.

Cause for caution, not gloom

Some key conclusions – from Economic Survey II

  • One, on the growth rate, while adhering to the forecast in Volume 1 for real GDP growth of 6.75%-7.5% this year, it suggests that the balance of risk has shifted to the downward side of the range. In plain language, this means a sub-7% rate of growth.
    • Just one day prior to the Economic Survey, the Finance Minister presented to Parliament the Medium-Term Expenditure Framework statement in pursuance of the Fiscal Responsibility and Budget Management Act, 2003.
      • In this statement, some of the subsequent developments both on the revenue and expenditure side like the Goods and Services Tax (GST) and the Seventh Pay Commission have also been factored. This framework assumes that nominal GDP growth for the current (2017-18) and subsequent two years would be 11.75%, 12.3% and 12.3%, respectively. Assuming inflation to be in the acceptable range of about 4%, the expected growth would be 7% plus.
    • No doubt, the savings and investment ratio has declined in recent years. To sustain the projected rates of growth, the savings-investment ratio would need to be increased, which is contingent on continuation of structural reforms, reducing public dissavings through privatisations such as Air India and other measures to boost savings to earlier high figures in the mid-thirties. The demand boost inevitably comes from domestic consumption which accounted for about 96% of GDP growth in FY 2017. This is likely to continue.
  • The projections also implicitly accept the fiscal deficit of 3.2% in the current year and 3% for the subsequent two years.

Inflation targets

  • Two, on inflation, the Economic Survey seeks to demonstrate that for sustained 14 quarters the actual inflation (WPI-CPI) has undershot the projections made by the Reserve Bank (RBI). It argues that India has moved to a low inflation trajectory, given supply-side elasticity in agriculture and long-term softening of global oil prices due to alternatives such as shale and increasing competitiveness of renewable fuels, particularly solar. It concludes that in the Indian context real neutral interest rates hover around 1.25-1.75% and that the present rate is about 25-75 basis points above the neutral rate. In short, a deeper cut in the interest rates would be warranted, given that current inflation at 1.5% is running well below the 4% target.
    • On monetary policy, the central bankers have all over made calculations (based on conservative assumptions) and undershot inflation targets. It is equally ironic that the data in the last two days suggest that both the consumer price index (CPI) and the whole-sale price index (WPI) have risen quickly in July primarily led by food inflation and the housing index reflecting the 7th Pay Commission recommendations, and so did the core index. Analysts now expect the underlying inflation to rest at the 4% ballpark figure, which also happens to be the RBI target.
    • It is said that in politics a week is too long a time. This could be equally said in economics, for events in the last one week have questioned the inflationary projections made in the Survey. At any rate, monetary policy cannot be on a roller-coaster ride. Prudence would prompt adherence to the analysis of the Monetary Policy Committee and judgment on interest rate calibration. Besides, multiplier benefits from low interest rate regimes are contingent on deeper structural reforms.
  • Three, regarding the exchange rate, real effective interest rates have appreciated significantly. The RBI has the unenviable challenge of managing significant inward capital flows with exchange rates which do not penalise domestic industry through a premium on cheaper imports. However, export competitiveness needs interventions which go beyond dependence on the exchange rate by way of improved logistics, infrastructure and altering the mix of commodities and destinations to meet new demand preferences.
  • Four, fiscal tightening by States due to Ujwal DISCOM Assurance Yojana (UDAY), farm loan waivers, declining profitability of some key sectors like power and telecom, the shadow of unresolved twin balance sheet problems and transitional issues of the GST are contributory to deflationary pressures. Normally understood, farm loan waivers, by reducing the indebtedness of farmers, enhance their income with a positive impact on consumption and demand. The constriction of capital expenditure for adherence to fiscal limits is somewhat mitigated by past experience. The quantum of actual farm loan waivers inevitably turns out to be somewhat smaller than the initial estimate; but more importantly, their impact on State finances is spread over a typical three-year cycle.
  • Equally, UDAY is designed to clean up the balance sheets of electricity boards in the short run and is expected to improve management of electricity boards. Appropriate action on tariff fixation, regular billing cycles, monitoring timely collection by distribution companies is an integral part of the UDAY package. This would also benefit States’ finances. In a complex federal polity, States in financial distress may need hand-holding.
  • Cooperative federalism entails amelioration of the transient financial distress experienced by States. While these issues would need to be holistically addressed by the 15th Finance Commission, their recommendations are two years away. Short-term State-specific measures would need to be innovatively conceived.
  • The recent initiatives to improve the fertilizer mix through extensive soil-testing along with the Pradhan Mantri Fasal Bima Yojana will prove beneficial to stabilise farm incomes. Nonetheless, the prescriptions contained in the chapter on agriculture by way of extending assured irrigation benefits, better market linkages for producers to prolong the shelf life of perishable commodities, improving the sale of commodities deserve priority action.

Rekindling investment

  • The Economic Survey II cautions policymakers of a possible deflationary cycle. Faster resolution of the twin balance sheets is critical to rekindling private investment. Equally, accelerating the pace of agricultural reforms, targeted capital expenditure, improving ease of doing business and the multiple infrastructure initiatives, particularly in roads and power, are integral to any coherent action. Similarly, stressed sectors like telecom and power need speedier resolution.
  • Macroeconomic stability has been a hard-won battle. The centrepiece lies in continued fiscal rectitude and inflation targeting. No doubt, macroeconomic stability must also spur growth and the two objectives need constant recalibration. It has been famously said, “the basic prescription of preventing deflation is not to get into it in the first place.” These lurking dangers and the cautionary note of the Economic Survey II are a valuable contribution.