Vijay Kumar Gaba

Continuing from yesterday (The great Indian carnival)

With the presentation of the union budget earlier this month, the incumbent government has entered the final phase of preparations for the 2024 general elections. The preparations would be tested in several state assembly elections to be held prior to the general elections. Amongst these Karnataka, Madhya Pradesh and Rajasthan shall be keen contests.

As per most of the recent surveys, the ruling National Democratic Alliance (NDA) led by Prime Minister Narendra Modi, is likely to return to power for a third successive term in 2024. The alliance is mostly riding on the popularity of PM Modi for its electoral success. Of course the lack of a strong national alternative is also working in favour of the incumbent government, to some extent. It is therefore pertinent to examine what PM Modi has done right to maintain its popularity for the past nine years.

I would not like to delve into the role of the political strategy of BJP in sustaining the popularity of PM Modi, as it could involve dealing with several controversial issues. Besides, the political strategy is too obvious for everyone to see. I would therefore focus on the economic strategy of the PM Modi led government.

Continuing the good work of previous governments

The first thing that PM Modi has ensured is that the key growth drivers of the Indian economy that have evolved over the past two decades are not only sustained but also provided additional impetus. His government has continued and even accelerated the infrastructure development program, especially connectivity & logistics (roads, ports, airports and telecom), self-reliance in defence and development and commercialization of space programs, initiated under the Vajpayee led NDA-1 government and sustained under UPA governments (2004-2014).

The incumbent government has materially enhanced the program to digitize the economy with Aadhar and UPI developed by NPCI at the core. The financial inclusion program started in early 2010s has gathered significant pace with wider acceptance of Aadhar and UPI, and evolution of digital payment technologies.

In a recent presentation Nandan Nilekani, succinctly summarized the key drivers of the economic development and growth of India in the next ten year. Speaking to a group of investors in Bengaluru, Mr. Nilekani said, he believes “the Digital Public Goods (DPG) used in India today will form the basis for India’s economic development because the three cornerstones of the modern economy are no longer roti, kapda, aur makaan; they are identification, financial inclusion, and mobile + internet connectivity. The creation of the ‘India stack’ – Aadhaar (universal identification), Jan Dhan (bank accounts for all), Unified Payments Interface (UPI: online transactions using mobile phones), and Open Network for Digital Commerce (ONDC: seamless & democratized eCommerce) – is helping India get closer to delivering on this critical trinity. These initiatives will impact three key sectors – credit, logistics, and eCommerce – which in turn could have positive spillover effects thus propelling India towards becoming a $10 trillion economy”.

The government adequately supported DRDO and ISRO to continue with their missile and space development programs; and added significant impetus to domestic defence production by opening some key areas to the private sector.

Supporting the bottom of the pyramid through food and social security

Like the previous governments, the incumbent government has also maintained a socialist character and continued to support the bottom of the pyramid through social security programs like MNREGA and National Food Security Act. It has in fact further enhanced the social security programs through introduction of basic universal income and health insurance for select segments of the society.

Widening the global trade

The incumbent government has not only continued the policy of deepening the trade ties with the traditional trade partners, but materially widened the global trade of India, by engaging with new trade partners and introducing many new lines of goods and services in India’s trade basket. The policy of bilateral free trade agreements has been continued and assigned high priority. This widening of trade engagements helped India in enhancing its strategic relevance to some extent.

Energy security with focus on green energy

A key area of achievement of the incumbent government is enhanced focus on energy security with high focus on green energy. Significant capacity has been added (is being added) in the areas of solar energy, wind energy and biofuel production. The green hydrogen mission has been initiated. Though it is still early days, the strategy is likely to yield material benefits in socio-economic terms in the coming years.

Fiscal discipline

Fiscal discipline has been a hallmark of the economic policy of the incumbent government. Despite several social and political challenges the government has successfully reigned fuel subsidy; and managed the food and fertilizer subsidies reasonably well to keep the overall fiscal deficit within the acceptable parameters.

These features of the economic policy have ensured that the Indian economy has weathered the pandemic & consequent global slowdown; and monetary tightening with minimum damage. Though the growth trajectory has stagnated at suboptimal level; employment generation has been poor, and performance in some key areas like disinvestment, farm sector reforms etc., has not been good, the popular sentiment continues to be in favor of PM Modi.

 ·         In a recently published paper International Renewable Energy Agency (IRENA) said that hydrogen could disrupt global trade and bilateral energy relations, reshaping the positioning of states with new hydrogen exporters and users emerging. IRENA sees hydrogen changing the geography of energy trade and regionalising energy relations, hinting at the emergence of new centres of geopolitical influence built on the production and use of hydrogen, as traditional oil and gas trade declines. IRENA estimates hydrogen to cover up to 12 per cent of global energy use by 2050.

“Hydrogen could prove to be a missing link to a climate-safe energy future”, Francesco La Camera, Director-General of IRENA said. “Hydrogen is clearly riding on the renewable energy revolution with green hydrogen emerging as a game changer for achieving climate neutrality without compromising industrial growth and social development. But hydrogen is not a new oil. And the transition is not a fuel replacement but a shift to a new system with political, technical, environmental, and economic disruptions.” (See here)

·         On 15 August 2021, Prime Minister announced the launch of National Hydrogen Mission (NHM) with an objective to cut down carbon emissions and increase the use of renewable sources of energy. NHM aims to leverage the country’s landmass and low solar and wind tariffs to produce low-cost green hydrogen and ammonia for export to Japan, South Korea and Europe. It also aims to exploit immense possibilities for India to collaborate with the Gulf Cooperation Council (GCC) countries that have also invested significantly in developing hydrogen as a future source of energy.

·         A couple of months ago, Adani Group announced a mega plan to invest US$70bn in developing renewable sources of energy. The group chairman Gautam Adani, reportedly said, "By 2030, we expect to be the world's largest renewable energy company without any caveat - and we have committed USD 70 billion over the next decade to make this happen. There is no other company that has yet made so large a bet on developing its sustainability infrastructure”. He also claimed that “we are strongly positioned to produce the world’s least expensive hydrogen, which is expected to be an energy source plus feedstock for various industries that we intend to play in”. Reportedly, the Adnai Group is already the world’s largest solar power developer. (see here)

·         Last month, the largest infrastructure developer in India, Larsen and Toubro (L&T) announced that it is partnering with ReNew Power to develop and operate green hydrogen projects across India. The company expects green hydrogen demand in India for applications such as refineries, fertilisers and city gas grids to grow up to 2 million tonne per annum by 2030 in line with the nation’s green hydrogen mission. This would call for investments upward of $60 billion. (see here)

·         Earlier this month, Reliance Industry announced that it plans to invest ₹60,000 crore, to build an integrated solar photovoltaic module factory, an advanced energy storage giga factory and an electrolyser giga factory to manufacture modular electrolyzers used for captive production of green hydrogen for domestic use as well as for global sale.

·         China has been investing massively in hydrogen capacities over past five years, as it aims to achieve peak carbon by 2030 and zero net carbon by 2060. China automative industry has advanced enough to establish a hydrogen energy value chain  strengthening production of core components and materials for fuel cells, and scaling production to lower costs.

Several cities across China have released ambitious hydrogen energy blueprints recently.. Under the Accelerating the Development and Commercialization of Fuel Cell Vehicles in China program, seven Chinese cities have reportedly invested US$365 million over the past five years, far exceeding the initial budget of US$61.73 million. Sinopec has started building the world’s largest green hydrogen plant in the far Western region of Xinjiang. As per recent reports, Shanghai expects to have 10,000 hydrogen-powered cars on its roads in 2023, and the value of the city’s hydrogen car industry is expected to hit 100 billion yuan by 2023. Chinese experts believe, “It is impossible to use lithium-powered cells for heavy trucks above 49 tonne, so hydrogen fuel cells are the best alternative, and logistics-intensive ports across China are especially suitable for establishing diesel-to-hydrogen demonstration areas”.

From the above cited instances it is clear that Hydrogen is emerging as a preferred source of clean energy world over, in addition to the other renewable sources of energy like Solar and Wind. Green hydrogen, the hydrogen produced through the electrolysis process, is apparently a more viable and preferred fuel for larger motor vehicles and air transport as compared to the lithium battery cells powered through solar or thermal energy.

As per IRENA, “The technical potential for hydrogen production significantly exceeds estimated global demand. Countries most able to generate cheap renewable electricity will be best placed to produce competitive green hydrogen. While countries such as Chile, Morocco, and Namibia are net energy importers today, they are set to emerge as green hydrogen exporters.” It is expected that by 2030 green hydrogen would cost-compete with fossil-fuel hydrogen globally.

Growth of the hydrogen economy will translate into exponential growth in key equipment, component and chemical suppliers. This will also result in some moderation in present estimates for battery cell powered vehicles.

Investors may therefore beware of investing in a technology or practice that is transient in nature. I would though continue to prefer “sustainable growth” as a whole, as an investment theme rather than focusing on one or two enablers like clean energy.

In 10 years, geopolitical and global trade reorganization would be a much bigger investment theme than solar power plants and lithium batteries, in my view.