Vijay Kumar Gaba

While the equity markets have generally welcomed the Union Budget for FY23, the bond market seems to be majorly disappointed. It may be pertinent to note that the government bond yields had started rising in December 2021 itself, even though the April-October 2021 deficit numbers were very encouraging; and the RBI had categorically assured that the policy stance will continue to be “growth supportive” irrespective of the rising price pressures.

YTD 2022, the benchmark 10yr yield has seen a sharp surge, rising over 55bps. With this the benchmark yields are higher by 100bps from 2020 lows. The higher yields have however not transmitted to the lending rates.

Perfect storm in the bond street

A perfect storm seems to be developing in the Indian bond market.

·         The net government market borrowings are most likely to stay elevated in the midterm as fiscal consolidation is expected to take longer than previously estimated.

·         The inflation is persistently hitting the upper bound of the RBI tolerance range. The Monetary Policy Committee (MPC) of the RBI is widely expected to yield to the pressure of staying close to the curve and begin hiking the rates.

·         The US Fed has already announced the pathway to normalize the near zero interest rates. Besides, the US fed has also announced termination of Covid related quantitative easing (QE) program by March 2022. This could impact the global demand for emerging market bonds

·         The domestic household savings are continuing to slow down, forcing the government to reduce its reliance on small savings funds for deficit financing.

·         The banks are anticipating acceleration in credit growth, shrinking the pool available for bond buying.

·         The RBI has already started unwinding the excess liquidity infused in the system to complement the government’s Covid relief measures.

The ambitious capital expenditure plan of the government would need to be evaluated against a rising rate environment; especially when it largely hinges on the private sector participation in capacity building.

Historically, bond yields had a good negative correlation with the equity returns. The correlation has been much stronger in case of broader markets. It would be interesting to see how things unfold in the coming months.

After struggling to understand the economic survey and budget documents for more than 36hours, I have concluded that at least in matters of government, ignorance is actually bliss.

In my view, a presentation that makes overwhelming use of technical jargon, complicated arguments, and statistical manipulation, usually implies lack of conviction in the presenter. Moreover, a presentation which does not take into consideration the comprehension level and linguistic abilities of its audience is a futile exercise. Usually such presentations are the outcome of either poor communication skills of the presenter; or mala fide intent of the presenter. Presenters tactically overuse technical jargon and complicated arguments to overwhelm the audience so that they could be distracted from noticing the shortcomings.

In my view, the latest budget and economic survey are clear cases of poor communication. They follow the principle of “Form over Substance”, as these conceal more than what they reveal. I would not go to the extent of terming it a case of mala fide intent, but there is definitely incongruence and lack of conviction on many counts.

In her speech, the finance minister used a lot of jargon like “digital economy”, “Fintech”, “Technology enabled development”, “energy transition”, “Unified Logistics Interface Platform”, “Chemical-free Natural Farming” “G2C, B2C and B2B services”, “Drone as a service (DaaS), “Battery as a Service (BaaS), “Design Linked Manufacturing (DLM)”, “Blockchain”, “Digital Banking Units”, “Deep-Tech”, etc., The audience for her budget speech is supposed to be the members of parliament and 140crore Indians. I am sure a large majority of this audience (including many of her cabinet colleagues) does not understand this jargon. Obviously, the economic survey and budget presentation has been prepared by “professional type” managers engaged by the government, who may be totally disconnected from the ground realities.

Goal incongruence

There are some glaring examples of goal incongruence in the budget. For example, climate change, energy transition, clean energy etc. have been cited as core tenets of new development paradigm. However, using ethanol produced from sugarcane, running electric vehicles on batteries charged with thermal power, and burning biomass pellets with coal in thermal plants do not concur with this tenet. It is widely acknowledged that sugarcane is one of the most water intensive crops. Admittedly, water in India is highly energy intensive. Ethanol extracted from sugarcane produced using water pumped through diesel pump sets is not exactly clean fuel and it certainly does not help in climate change efforts.

The finance minister said that “five to seven per cent biomass pellets will be co-fired in thermal power plants resulting in CO2 savings of 38 MMT annually.” The research however shows that biomass burning in power plants emits 150% the CO2 of coal, and 300 – 400% the CO2 of natural gas, per unit energy produced. (see here)

The finance minister stated that “The animation, visual effects, gaming, and comic (AVGC) sector offers immense potential to employ youth”. Only a few years ago the government had banned some AVGC Apps arguing that these are misleading the youth of the country. Many organs of the government and the Political party of FM vehemently argue that social media is distracting the youth of the country from the right path. How does she reconcile these two? If there is recognition within the government that social media is now integral to the economy, then the first step should have been to lift the ban from TikTok.

Bothering about Sunday feast

This is Tuesday afternoon and Children of the household are uncertain about getting the evening meal. The finance minister is asking the children to make merry because she will be hosting a gala dinner on Sunday.

Millions of Indian youth who are looking for employment cannot wait through the Amrutkaal to get jobs. They needed it yesterday. The government managers need to understand that if an engineering graduate does not get a job within 6months of his passing out, the chances of his getting a suitable job for the rest of his life reduce materially, because he has to then compete with the fresher graduates.

The finance minister emphasised that “Our government constantly strives to provide the necessary ecosystem for the middle classes – a vast and wide section which is populated across various middle-income brackets – to make use of the opportunities they so desire.” A plain reading of this phrase would mean the government has done enough for the middle classes. Now they are on their own.

RBI and most experts have cautioned the government that the recovery from pandemic lows is fragile and would need to be kept supported. Disregarding the advice, the government has decided to fully withdraw most Covid related stimulus. Food and Fertilizer subsidies have drastically cut. Rural development and social sector allocations have also been cut. Expenditure on health has also been cut. Of course, this all is done in the name of fiscal consolidation. I understand it is a tough choice , but if I must choose between 1000 km of new highway and food to 800million people for one year, I will choose the latter.

Transparently intransparent

The finance minister defined “transparency of financial statement and fiscal position” as a fundamental tenet of the budget process. However, it appears that in some cases the economic survey and budget documents have tried to evade or manipulate the statistics. The data points have deliberately chosen to show the latest numbers in good light. Points that could have hurt stock markets were evaded or manipulated in the budget speech. In some cases numbers have been stated ambiguously.

For example consider the following:

·         The finance minister skipped mentioning about restricting the practice of bonus stripping.

·         The actual growth in capital expenditure is yet to be figured out by experts.

·         The government has proposed Rs2/litre excise duty on diesel wef October 2022, i.e., 2HFY23. Instead of saying it in these many words, the FM chose to say “Blending of fuel is a priority of this Government.   To encourage the efforts for blending of fuel, unblended fuel shall attract an additional differential excise duty of ` 2/ litre from the 1^st day of October 2022”. As per her government order, it is mandatory to blend ethanol with petrol. Only high speed diesel is unblended fuel.

·         In last year's budget a whole deal of emphasis was given on disinvestment and privatization of banks etc. Nothing happened in the current year. The finance minister evaded even a cursory mention of this in her latest speech. If the government is so concerned about markets and investors, does it not hold any accountability to investors who would have acted on the promise of disinvestment and privatization?

·         The finance bill makes a significant effort to tighten the regulation over charitable institutions. There was no mention of this in the budget speech.

There is so much more to say, but I think I have broadly made my point.

The finance minister presented the union budget for FY23 this morning. The 90minutes speech was apparently the shortest budget speech delivered by the incumbent finance minister. There is little doubt that the presentation of both the budget and economic survey are smartly aimed at markets and investors.

The two fundamental ideas underlying the budget speech appear to be – (i) the government is now in a hurry to catch the digital train it has been missing for past more than a decade; and (ii) the government is earnestly keen to plug the leakages and loopholes in the taxation system.

Though the budget speech and economic surveys have made overwhelming use of digital and management jargon, signifying that professional managers are now running the policy defining exercise at North Block, I would try to derive the key message from the budget in common man language.

Positive take away

The three best features of the Union Budget for FY23 are perhaps

• The general status quo on tax rates.
• The government conspicuously accepts the role of facilitator in investment, providing the lead role to the private sector. The government capex (up 9% over FY22RE) is mostly focused on four facilitating sectors – Roads, Railways, Communication and defense. Rest all has been left to the private entrepreneurs with a promise of supporting and transparent policy regime.
• Institutionalization of “Vivaad se Vishwas” settlement scheme through “Updated Return” process. This along with restriction on repetitive appeals on matter law shall curtail tax litigation significantly.

Besides, the following are key positive take away from the budget:

•    The government appears willing to be a part of the global digital transition. Initiative to increase the use of digital technologies in key sectors like education, health, logistics, agriculture is a good omen. Infrastructure status to data centers is a step in right direction.

The initiatives like digital education platforms, health registry, documents registry could potentially bring meaningful difference to many lives. India may be running 10-12years behind in adopting digital as way of life and governance, but hopefully no more delays will happen and the proposals will be implemented without much delay.

Recognition of animation, visual effects, gaming, and comic (AVGC) sector as a high potential employment opportunity for youth; introduction of digital currency; and recognition of virtual digital assets (VDAs) like cryptocurrencies and NFTs, as legitimate assets, demonstrate the change in bureaucratic mind set.

•     Both the budget and economic survey have overwhelmingly emphasized on the need to promote the clean energy. Incentives for solar panel manufacturing, national battery swapping policy, differential duty for blended fuel, mandatory co-firing of biomass pallets in thermal plants etc. are some key initiatives announced in this budget.
•    Developing a 5km wide chemical free agriculture corridor alongside the river Ganga is a noble thought. Hopefully it will be implemented fast and in right earnest.
•      The river linking project is given further impetus. After Ken-Betwa, DPR for 5 more river linking projects has been completed.
•       2023 has been announced as the International Year of Millets. Support will be provided for post-harvest value addition, enhancing domestic consumption, and for branding millet products nationally and internationally.
•       Recognition of mental health as one of the top priorities.
•       Need for a paradigm shift in urban planning process recognized.
•      Transparency and promptness in government payments to contractors and suppliers.
•      Required spectrum auctions to be conducted in 2022 to facilitate rollout of 5G mobile services within 2022-23 by private telecom providers.

Negatives

The finance minister may not have answered the wishes of many people. They can see it as key negative take away of the budget.

For me the key negatives are:

•     The detail of ministry wise allocations of budgeted capital expenditure also raises many questions. Allocation to 4 ministries (Roads, Railways, Defense, and Communication) and Transfer to states for central schemes accounts for 87% of FY23BE capital expenditure. This leaves little allocation for important ministries like Tourism, Food processing, Science & technology, Education, Power etc. This seems incongruent to the stated objective of inclusive growth.
•     There has been too much emphasis on “reform” of taxation of charitable institutions for past few years. The trend continues this year also. While the government has is doing its best to plug the loopholes and repair the leakages, it has not addressing the legitimate hardships being faced by the institutions doing genuine work to help the poor and destitute. During Covid second wave, many of these institutions worked much more than the government institutions to help the distressed people.
• The size of LIC IPO seems to have been cut to below Rs500bn fromRs1trn earlier. Disinvestment target for has been cut from Rs1.75trn (FY22BE) to Rs780bn (FY22RE) and further lower to Rs650bn in FY23BE. This is incongruent to the promise of less government more governance.
• Lower disinvestment target is translating into higher net borrowing.
• The reliance on expensive source of funding (small saving fund) the fiscal deficit remains high; even though it has come down little from the previous year level.
• The gap between the fiscal deficit and revenue deficit continues to rise and is now 2.6% of GDP. In FY18 it had shrunk to 90bps.
•  NIL allocation for capital expenditure on building capacity for Bio Technology R&D.
• All Covid relief measures have been withdrawn. Food and Fertlizer subsidy cut sharply. Rural DBT allocation also cut. MNREGA allocation cut. The rural consumption shall get hit hard by this budget.
• The futile lack of transparency and attempts to manipulate the truth. Not mentioning “end of bonus stripping”; terming payment of Air India liabilities worth Rs50bn as capital expenditure does not bode well for transparency. Adjusted for this, FY22RE is marginally less than FY22BE. FY23BE Capex growth appears to much less than the 36% pronounced by the FM.

The finance minister has proposed to base the country’s development agenda on the following four pillars:

1   Accelerated development of world class infrastructure (PM Gati Shakti)

2.  Using digital capabilities for delivering inclusive development

3. Productivity Enhancement & Investment, Sunrise Opportunities, Energy Transition, and Climate Action

4. Crowding in private investment through enabling policy environment

 Let’s consider India as a company; annual budget as the annual account for the current year and forecast for the next year and the budget presentation in the Parliament and subsequent press conference as the conference call with various stakeholders.

An investor who wants to invest in this company would want to objectively analyze:

(i)    The past performance of the company in terms of growth;

(ii)   The credibility of the management in terms of professionalism, integrity, execution and delivery on promises;

(iii)  The future prospects in terms of growth, competitiveness, financial stability, cost of capital, price stability, etc.; and

(iv)   The relative positioning in terms of expected returns, access to markets, regulatory flexibility, costs (taxation etc.).

The past performance of the Indian economy in terms of growth has not been particularly outstanding, especially in the past one decade. The growth trend appears to have stabilized at lower trajectory and is showing no sign of transcending to the higher orbit anytime soon. Industrial growth has remained volatile but overall in a lower range. Exports have stagnated for more than a decade; though some spurt has been seen in recent months.

The credibility of the top management (Prime Minister) is high, but few of his managers enjoy the similar ratings. The execution and delivery of promises have been much below par on many counts. For example, the government has not achieved its disinvestment targets in the past one decade. The tax to GDP ratio has not improved. The unemployment situation has worsened only. The FRBM targets have never been achieved. The goalposts for the big infrastructure investments are being shifted consistently.

The future prospects in terms of growth do not appear particularly promising. The growth rate is likely to settle in below potential 6-7% range once the low base effect of FY21 and FY22 wanes. The financial stability remains very strong; though the cost of capital is rising. The government is consistently reliant on the most expensive source of funds to finance the fiscal deficit, which is feeding through the economy. Inflation has remained close to the upper bound of RBI’s tolerance range for many months, raising questions about the “growth over inflation” strategy of RBI, since a majority of the population seems to be facing Stagflationary conditions.

In terms of relative positioning, India has not been able to capture any substantive part of China+1 global shift. Many smaller economies like Bangladesh, Vietnam, Taiwan, etc. appear to have become much more competitive than India. Despite stated policy position, the access to Indian markets has remained highly regulated and costs (taxation) elevated. Many global players have announced major investments into Indian manufacturing, but the actual flows have been slow to come due to regulatory and other hurdles. The economy has lost critical time due to these delays.

Overall, India as a company appears a stable business with decent fundamentals. It however lacks strong growth drivers in the near term. The only moat for India is its pool of skilled tech workers; not many of whom hold loyalty for India as a business. If I am a global fund manager I would be too glad to invest in Indians, but remain underweight (unexcited) on India for now.

 Expectation is a strange animal. More you beat it, the stronger it rises. Consistent underachievement is perhaps the only way to kill it.

The weather in the market has changed rather dramatically over the past two weeks. As we changed the calendars about four weeks ago, it was a partially clouded sky, but no one was forecasting a hailstorm, the markets are witnessing for the past 6 trading sessions. Seven odd percent fall in the benchmark Nifty is certainly not indicative of the damage that has been caused to equity investment portfolios, as the theater has been mostly outside the Nifty.

The sharp correction in equity prices is nothing unusual. In fact it has been a regular feature of the markets ever since the advent of public trading of corporate. However, in modern times this volatility assumes a wider socio-economic significance because the markets have become increasingly democratic. The access to the market is no longer confined to an elite section of the society. Investors in listed equities now come from all walks of life – young college students to old pensioners and top metros to the poorest districts of the country.

No surprise, the policy makers afford significant importance to the “markets” and markets also expect undivided attention from the policy makers like a possessive child. The markets begin to throw tantrums if they get any hint of likely coercive or disciplinary action from the policymakers.

Moreover, social media has not only made markets more sensitive to the flow of information; it has also made markets more susceptible to manipulation by vested interests. The market participants are often inundated with incoherent data from across the globe, invoking “fast finger first” type reactions from traders. Robotic traders, which account for a significant part of the market activities these days, often follow the herd and accelerate the prevailing trend.

As per the popular commentary, the market fall in the present instance is precipitated by the following “factors” and/or “fears”:

(a)   The US Federal Reserve (The Fed) is expected to end its bond buying program that was started in 2019, and begin hiking the policy rates from March onwards. It is expected that these Fed policy actions may result in higher bond yields and tighter liquidity leading to unwinding of USD carry trade. This shall lead to outflow of foreign funds from emerging markets that have benefitted from the deluge of liquidity created by central bankers of developed countries.

In this context, it is relevant to note that:

(i)    This move of the Fed is most anticipated since the past many months. The markets are known to act in much advance of these anticipated events and rarely wait till the last minute.

(ii)   The foreign investors have been net sellers in the Indian secondary markets for most of the current financial year. In fact, in the past 13months they have already sold Rs1.1trn worth of equities.

(iii)  The empirical evidence indicates that the Fed rate hike cycles usually lead to higher equity prices.

(iv)   Indian bond yields have already risen sharply over the past six months. Even if the Fed raises 50-75bps over 2022, the yield differential will still be attractive for the foreign investors.

(v)    In 2021, the last action of 17 central banks was a hike in rate, and none reduced. In spite of this, markets made all-time highs across the world.

(b)   There could be a Lehman like collapse or a dotcom like bust in the market.

The global central bankers have learned their lessons well from the global financial crisis. From the Greek sovereign crisis to Evergrande default, there is sufficient evidence to support their ability to mitigate the contagion impact of any major failure.

Insofar as the valuation bubble is concerned, we have already seen 50-70% correction in numerous inflated assets/stocks in the past three months, while global indices were recording new highs every day. The ability of markets to handle sectoral busts is certainly much better than the dotcom era of 2000.

(c)    Hyperinflation is upon us and financial assets will lose their value.

The global experts are still struggling to define whether the current episode of inflation is supply driven or demand pulled. The helicopter money that led to sudden spurt in demand has been largely exhausted. It is paradoxical to assume that no more helicopter money would lead to price erosion in the equity market but continue to fuel inflation in goods markets. The growth has already moderated world over and logistic constraints are not structural enough to last for years. Technology that has been the biggest deflationary force in the world continues to advance.

The traditional inflation hedges like gold have shown no sign of heating in demand. The German and Swiss benchmark yields are still negative and Japanese bonds are witnessing no bear attacks. The Chinese central bank has lowered rates.

(d)   There could be a full-fledged war between Russia and NATO allies.

Neither the conflict at Yatseniuk’s Wall (Russia and Ukraine border) is new; nor is the conflict in Middle East Asia new. The bogeyman of WDM (Weapons of Mass Destruction) in Iraq killed almost every chance of significant united NATO action two decades ago. Russia invaded and annexed Crimean peninsula from Ukraine in 2014. The US and Russian relations have shown no apparent signs of deterioration post that. The German Navy Commander recently revealed the German thoughts on potential Russia-Ukraine conflict.

(e)    The pandemic effects are unknown. The rising inequalities and poverty will plunge the world into chaos.

There is sufficient empirical evidence available to show that the rising inequalities have benefitted the larger companies and therefore stock markets. The world has been a chaotic place for at least the past 2 million years. In fact the past two decades perhaps have been the most peaceful period in the post Christ era.

(f)    The finance minister may impose new taxes in the budget to manage the resources for populist agenda of the government.

The Union Budget actually ceased to be an important event many years ago. Indirect taxes are mostly no longer part of the budget now. Direct taxes are mostly rationalized and have little scope for tinkering. Fiscal data is announced every month and it is easy to estimate the deficit and borrowing figures on a regular basis. Usually there are no negative surprises on this account in the budget.

This time particularly, the finance minister is in no position to cut tax rates and it can hardly afford to hike taxes. There could be some minor tinkering here and there, but nothing major should be expected. The fiscal deficit figure will account for Rs 1trn from LIC IPO, which is not certain. Obviously, assessing the accounting part of the budget may be difficult.

Obviously, the market behavior is not in congruence with the narrative. If the investors were truly fearful about the factors they are talking about, then they must have moved towards the shelter (defensive and deleveraged) from the cyclical. Whereas, in 2022 so far, IT, Pharma, FMCG have been the worst performing sectors and cyclical energy and financials which mostly face the brunt of tightening money cycle have performed the best.

In my view, the markets are fearful because (a) they are feeling guilty about the excessive greed shown towards internet and renewable energy; and (b) a large majority of investors lacking in conviction would have followed the pied pipers rather than making an informed decision about their investments, are falling in the ditch.

 The latest edition of the World Economic Forum’s global risk report (The Global Risk Report 2022) offers some valuable and interesting insights into the current global risk perceptions and areas of concern. The key message is that “A divergent economic recovery from the crisis created by the pandemic risks deepening global divisions at a time when societies and the international community urgently need to collaborate to check COVID-19, heal its scars and address compounding global risks.”

The clear and present global challenges include “Supply chain disruptions, inflation, debt, labour market gaps, protectionism and educational disparities are moving the world economy into choppy waters that both rapidly and slowly recovering countries alike will need to navigate to restore social cohesion, boost employment and thrive. These difficulties are impeding the visibility of emerging challenges, which include climate transition disorder, increased cyber vulnerabilities, greater barriers to international mobility, and crowding and competition in space”. To meet these challenges, the world needs trust and cooperation within and between countries, lest the world shall continue to drift apart.

Risk Perception of global managers

Results of the Global Risks Perception Survey, that underpins the report, highlight the following key sentiment indicators:

·         Most respondents see social risks in the form of “social cohesion erosion”, “livelihood crises” and “mental health deterioration” continue to worsen.

·         Frighteningly, “only 16% of respondents feel positive and optimistic about the outlook for the world, and just 11% believe the global recovery will accelerate. Most respondents instead expect the next three years to be characterized by either consistent volatility and multiple surprises or fractured trajectories that will separate relative winners and losers.”

·         The societal and environmental risks are seen as the most concerning for the next five years.

·         However, over a wider horizon of next 10 years, health of the planet dominates concerns;  with “climate action failure”, “extreme weather”, and “biodiversity loss” ranking as the top three most severe risks. “Debt crises” and “geoeconomic confrontations” are seen as among the most severe risks over next 10 years.

·         Technological risks—such as “digital inequality” and “cybersecurity failure”—are seen as the other critical short- and medium-term threats to the world.

·         About the present risk mitigation methods and techniques, the global risk managers believe that “the current state of risk mitigation efforts fall short of the challenge in areas like “Artificial intelligence”, “space exploitation”, “cross-border cyber-attacks and misinformation” and “migration and refugees”. The present risk mitigation efforts are seen as effective in facing the established risks such as “trade facilitation”, “international crime” and “weapons of mass destruction”.

Climate Action Failure – top most long term risk

The failure in addressing the climate concerns is perceived as “the number one long-term threat to the world and the risk with potentially the most severe impacts over the next decade. It is highlighted that the “Climate change is already manifesting rapidly in the form of droughts, fires, floods, resource scarcity and species loss, among other impacts. In 2020, multiple cities around the world experienced extreme temperatures not seen for years—such as a record high of 42.7°C in Madrid and a 72-year low of -19°C in Dallas, and regions like the Arctic Circle have averaged summer temperatures 10°C higher than in prior years.

It is evident that “Governments, businesses and societies are facing increasing pressure to thwart the worst consequences. Yet a disorderly climate transition characterized by divergent trajectories worldwide and across sectors will further drive apart countries and bifurcate societies, creating barriers to cooperation.”

Cyberthreats emerging as prominent risk

As per the Report, “in 2020, malware and ransomware attacks increased by 358% and 435% respectively—and are outpacing societies’ ability to effectively prevent or respond to them. Lower barriers to entry for Cyberthreats actors, more aggressive attack methods, a dearth of cybersecurity professionals and patchwork governance mechanisms are all aggravating the risk.”

It is anticipated that “attacks on large and strategic systems will carry cascading physical consequences across societies, while prevention will inevitably entail higher costs. Intangible risks—such as disinformation, fraud and lack of digital safety—will also impact public trust in digital systems. Greater cyberthreats will also hamper cooperation between states if governments continue to follow unilateral paths to control risks. As attacks become more severe and broadly impactful, already-sharp tensions between governments impacted by cybercrime and governments complicit in their commission will rise as cybersecurity becomes another wedge for divergence—rather than cooperation—among nation-states.”

“Involuntary migration” poses a potent risk

Economic hardships, climate change and political instability in many countries is forcing a lot of people to migrate to safer places involuntarily. At the same time, effects of pandemic and other factors are resulting in increased economic protectionism and restrictive labor markets, creating higher barriers to entry for migrants. “These higher barriers to migration, and their spill-over effect on remittances—a critical lifeline for some developing countries—risk precluding a potential pathway to restoring livelihoods, maintaining political stability and closing income and labour gaps.”

In the most extreme cases, humanitarian crises will worsen since vulnerable groups have no choice but to embark on more dangerous journeys.

It is noteworthy that “the United States faced over 11 million unfilled jobs in general and the European Union had a deficit of 400,000 drivers just in the trucking industry.”

Space could be new war zone

The report mentions that ‘New commercial satellite market entrants are disrupting incumbents’ traditional influence over the global space commons in delivering satellite services, notably internet-related communications. A greater number and range of actors operating in space could generate frictions if space exploration and exploitation are not responsibly managed. With limited and outdated global governance in place to regulate space alongside diverging national-level policies, risks are intensifying.”

“One consequence of accelerated space activity is a higher risk of collisions that could lead to a proliferation of space debris and impact the orbits that host infrastructure for key systems on Earth, damage valuable space equipment or spark international tensions.”

 ·         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.