Editorial 1 : Post-pandemic, climate change will drive investments
Recent Context:
- Three years after the pandemic and despite 8 per cent average growth over the last two years, the level of India’s GDP is still running 5 per cent below that implied by its pre-pandemic trajectory
- as in the aftermath of the 2008 global financial crisis (GFC), the post-pandemic trend growth is likely to be lower and thus, this is an artificially high benchmark.
- In the five years prior to the GFC, India averaged 8 per cent growth when rapid globalisation boosted exports and private investment soared to set up the needed supply chains. Since the GFC, global trade has languished and with it, so has investment.
Investment as a tool for the economic growth:
- After rising from 5.5 per cent of GDP in 2000-01 to nearly 14.5 per cent by 2007-08, corporate investment has flatlined around 10.5 per cent of GDP.
- Household investment rose to 15.7 per cent of GDP by 2011-12, declined to 9.4 per cent of GDP by 2015-16 and has recovered to just over 11.5 per cent of the GDP today
- While some of this decline reflects the slowdown in residential housing, one suspects that a large part is due to falling SME investment, which is subsumed in this category.
- overall public sector investment has remained broadly unchanged at 7 per cent of GDP since the GFC, 1 percentage point lower than its peak before the crisis.
- The rise in central government capital spending has been offset by lower PSU investments, while state government investment has remained roughly unchanged. The public sector has neither compensated for the loss nor has it managed to “crowd-in” private investment.
Decline in investment is reflected in slow GDP growth:
- The 4-5 per cent of GDP decline in overall investment since 2011-12 is mirrored in growth outcomes: GDP growth has averaged 6 per cent since the GFC and is slightly better at 6.7 per cent if the post-pandemic years are excluded.
- These outcomes are similar across other economies. In fact, within the emerging market (EM) world, India, along with other manufacturing exporters, has fared much better than commodity exporters.
The Current scenario, Growth in post-pandemic scenario:
- The question is whether the pandemic will reset growth and investment lower as in the post-GFC years.
- The last two years’ average growth of 8 per cent is not a harbinger of how the medium term might pan out. It’s just a recovery from the around 6 per cent contraction in 2020.
- Growth in the two years after the pandemic averaged 8.2 per cent even though the economic damage from the GFC was far more benign than in the pandemic
- There are many reasons to believe that the world might see another leg down in economic activity, reflecting demographic shifts, falling productivity, high indebtedness, structural inflation, and interest rate among others.
The potential factors that may lead to next phase of economic growth:
- The first relates to the relocation of global supply chains. Public discussions and debates on this often conflate two separate drivers of the relocation.
- One type of relocation is the “China + One” shift, where firms are locating part of their new supply chains outside China as an insurance against pandemic-type disruptions.
- In this type of relocation, economies such as India, Mexico, and Vietnam have and will benefit from more FDI and expansion of manufacturing exports. But size matters and these economies do not have the capacity to absorb more than a limited scale of relocation investments.
- Thus, while the “China + One” relocation will be beneficial to some, it is unlikely to be as “game changing” as some commentators claim.
- The second type of relocation goes by names such as re-shoring, near-shoring, or friend-shoring.
- This is based on security concerns of the West in locating supply chains related to emergent technologies, such as advanced semiconductors, AI and quantum computing in countries outside their “circle of trust,” which one presumes is shorthand for NATO and close allies.
- The second type of relocation goes by names such as re-shoring, near-shoring, or friend-shoring. This is based on security concerns of the West in locating supply chains related to emergent technologies, such as advanced semiconductors, AI and quantum computing in countries outside their “circle of trust,” which one presumes is shorthand for NATO and close allies.
- Therefore, Emerging Market(EM)economies had the needed ecosystem to establish the advanced supply chains, only a few (such as Korea, Mexico, and Poland) would belong in the circle-of-trust. It is very likely that the security-driven relocation will be firmly set within the developed world.
Climate change is one the next reasons for the investment in post pandemic time:
- The other, and probably, bigger reason why investment might rise in the post-pandemic world is climate change.
- The world is moving irreversibly towards a lower carbon way of life. The investments required to achieve this will be massive.
- And the private sector will necessarily have to play a big role, not just in implementing public-funded projects but to compete.
- There is a sense that because the COP26 commitments of EMs are several decades away, the private sector does not need to be overly concerned with these issues now.
- However, the binding constraint is not their own timeline, but those of the countries that buy EMs’ products, which are decades sooner.
- If the importing countries do not want to or cannot, because of regulations, use high-carbon products, then firms in EMs will either need to produce lower carbon products or pay the cost of offsetting the carbon-content differential
- As early as January 2026, Europe will be implementing its cross-border adjustment mechanism (CBAM) to offset the carbon differentials for six products including cement, iron and steel, and aluminium.
Conclusion:
- Over time, the list of goods will expand, services will be added, and more developed markets will adopt similar rules.
- Moreover, other EM economies, like China, are already well advanced in lowering the carbon content of their products. So those who start late, might well find themselves outcompeted not on cost but on lower-carbon content.
Editorial 2 : Oil reserves in salt caverns: The potential in India
Recent Context:
- Recently, Government-owned engineering consultancy firm Engineers India (EIL) is studying the prospects and feasibility of developing salt cavern-based strategic oil reserves in Rajasthan, in line with the government’s objective of increasing the country’s strategic oil storage capacity.
- If the idea comes to fruition, India could get its first salt cavern-based oil storage facility.
- The country’s three existing strategic oil storage facilities — at Mangaluru and Padur in Karnataka, and Visakhapatnam in Andhra Pradesh are made up of excavated rock caverns.
Strategic crude oil reserves position of India:
- India’s strategic oil reserves come under the Petroleum Ministry’s special purpose vehicle Indian Strategic Petroleum Reserve (ISPRL). EIL was instrumental in setting up the country’s existing SPR as the project management consultant.
- Countries build strategic crude oil reserves helps in mitigate major supply disruptions in the global supply chain.
- India, the world’s third-largest consumer of crude, depends on imports for more than 85% of its requirement and strategic petroleum reserves (SPR) could help ensure energy security and availability during global supply shocks and other emergencies.
- India currently has an SPR capacity of 5.33 million tonnes that can meet around 9.5 days of demand. The country is in the process of expanding its SPR capacity by a cumulative 6.5 million tonnes at two locations — Chandikhol in Odisha (4 million tonnes) and Padur (2.5 million tonnes).
Salt cavern-based reserves v. rock cavern-based reserves
- Unlike underground rock caverns, which are developed through excavation, salt caverns are developed by the process of solution mining, which involves pumping water into geological formations with large salt deposits to dissolve the salt.
- After the brine (water with dissolved salt) is pumped out of the formation, the space can be used to store crude oil. The process is simpler, faster, and less cost-intensive than developing excavated rock caverns.
- Salt cavern-based oil storage facilities are also naturally well-sealed, and engineered for rapid injection and extraction of oil. This makes them a more attractive option than storing oil in other geological formations, according to a report by the Environmental Solutions Initiative at the Massachusetts Institute of Technology (MIT).
- The salt that lines the inside of these caverns has extremely low oil absorbency, which creates a natural impermeable barrier against liquid and gaseous hydrocarbons, making the caverns apt for storage. Also, unlike rock caverns, salt cavern-based storages can be created and operated almost entirely from the surface.
- The entire SPR programme of the United States has so far been based on salt cavern-based storage facilities. The US Strategic Petroleum Reserve, the world’s largest emergency oil storage, consists of four sites with deep underground storage caverns created in salt domes along the Gulf of Mexico coast in Texas and Louisiana. The US strategic oil reserves have a cumulative capacity of around 727 million barrels.
- Salt caverns are also used to store liquid fuels and natural gas in various parts of the world. They are also considered suitable for storing compressed air and hydrogen.
Potential in India for storing crude, petroleum products
- Rajasthan, which has the bulk of requisite salt formations in India, is seen as the most conducive for developing salt cavern-based strategic storage facilities.
- Plans over the past decade to build a strategic oil reserve in Bikaner did not take off — and EIL’s Chairman and Managing Director Vartika Shukla said the exploration of the possibility of salt cavern-based strategic storage in Rajasthan can be seen as a renewal of that proposal.
- A refinery is coming up in Barmer, and Rajasthan has crude pipelines as well; such infrastructure is conducive for building strategic oil reserves. However, no Indian company, including EIL, had the requisite technical know-how to build salt cavern-based strategic hydrocarbon storage
Strategic petroleum reserves programme: story so far
- India’s strategic oil reserves are part of the effort to build sufficient emergency stockpiles on the lines of the reserves that the US and its Western allies set up after the first oil crisis of the 1970s. The three existing rock cavern-based facilities were built during the first phase of the programme.
- Crude oil from the reserves are to be released by an empowered committee set up by the government, in the event of supply disruptions due to a natural calamity or an unforeseen global event leading to an abnormal increase in prices.
- The International Energy Agency (IEA), a Paris-based autonomous intergovernmental organisation in which India is an ‘Association’ country, recommends that all countries should hold an emergency oil stockpile sufficient to provide 90 days of import protection.
- In India, apart from the SPR that are sufficient to meet 9.5 days of oil requirement, the oil marketing companies (OMCs) have storage facilities for crude oil and petroleum products for 64.5 days which means there is sufficient storage to meet around 74 days of the country’s petroleum demand.
- India has also decided to commercialise its strategic petroleum reserves, as part of which the Abu Dhabi National Oil Company (ADNOC) stored about 0.8 million tonnes of crude oil in the Mangaluru strategic reserve.
- In the second phase of the programme, the government wants to develop strategic reserves through public-private partnerships so as to reduce government spending and exploit the commercial potential of the reserves.
Conclusion:
- Taking advantage of low crude oil prices in April-May 2020, the government completely filled these reserves, leading to estimated savings of around Rs 5,000 crore.
- In late 2021, India released 5 million barrels from its strategic reserves as part of a coordinated US-led action by major oil consuming countries against the joint decision of major oil producing nations to curb output.
- Salt cavern-based storage, which is considered cheaper and less labour- and cost-intensive than rock caverns, could add a new, much needed chapter to India’s SPR story.