Editorial 1: How an orderly transition to net zero could propel growth
Context:
- India’s per capita emissions are relatively low (1.8 tons of CO2e per person), but we are still the world’s third-largest single emitter.
- India has pledged to get to net zero by 2070. This goal can only be met with urgent actions in this decade, potentially accelerated through India’s recently-assumed G20 presidency.
- And reaching net-zero could benefit India through lower-cost energy, greater energy security and the growth of futuristic industries
India’s Current Situation:
- On its current trajectory, India’s emissions are set to grow from 2.9 GtCO2e a year to 11.8 GtCO2e in 2070.
- According to a recent McKinsey report, effective decarbonisation, down to 1.9 GtCO2e by 2070, would require India to spend a total of $7.2 trillion on green initiatives by 2050.
- This “line of sight” (LoS) scenario is based on announced policies and expected technology adoption.
Technological investment in Decarbonisation which will help in GHGs emission reduction:
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- Deeper decarbonisation — an “accelerated scenario” that would reduce emissions to just 0.4 GtCO2e by 2050, or close to net zero — would require $12 trillion in total green investments by 2050.
- Under this scenario, India could create 287 gigatonnes (GT) of carbon space for the world, almost half of the global carbon budget, for an even chance at limiting warming to 1.5 degrees Celsius.
- Decarbonisation will drive many changes, from how we source energy to how we manufacture materials; from how we grow food to how we move around; from how we treat waste to how we use our land.
- An orderly transition to net zero could help India decarbonise while creating an engine for growth.
- To take just one example: If India shifted to a predominantly renewable (and hydrogen)-based energy and materials system, it could save as much as $3 trillion in foreign exchange by 2070 (largely crude oil and coking coal). While the investment is large, a vast majority of the abatement projects are in the money.
- This is because India is in a special place. Three-quarters of the buildings, infrastructure, and industrial capacity of India in 2050 is yet to be built. We have a choice to invest in current technologies or to invest futuristically.
- Futuristic investment will need India to take urgent actions in this decade — on regulation, technology development, and on technology adoption — to make the right investments.
- This is something that India has done before. In renewable power, the right policies, strong institutions and industrial capabilities built in the last decade are providing India with the base to scale up four to five times in this decade
Necessary steps need to be taken for the path of Decarbonisation:
- Set out five-year, 10-year, and 25-year national decarbonisation plans:
- If we do not act now to set up and enable such a plan, more fossil fuel-driven infrastructure will be built, locking India into higher emissions for decades.
- Without decarbonisation plans, it is possible that companies, fearful of getting stranded at a later point, do not invest enough in building capacity, thus leading to shortages, inflation and greater import dependence — in other words, a disorderly transition.
- As, the green route requires higher upfront investment and will also sometimes cost more overall. Yet, policies that enable carbon prices or blending mandates can make the economics viable.
- Such policies need to be held steady and require coordination across sectors like power, hydrogen and steel
- A national decarbonisation plan would enable timely investment decisions.
- Second, A national land use plan.
- India risks being land-short for its dual goals of growth and decarbonisation.
- For example, McKinsey estimates that renewable power and forest carbon sinks need 18 million additional hectares of land.
- India would need to maximise the use of barren land for renewable power, urbanise vertically, improve agricultural productivity, and increase forest density.
- This forms the case for establishing a national authority, in consultation with the states, to set land-use guidelines
- Third, accelerate compliance with carbon markets.
- Pricing carbon creates demand signals that accelerate emissions reductions, especially in hard-to-abate sectors.
- Let’s illustrate this through steel, demand for which could multiply eight times by 2070; right now, much of the new capacity is likely to be added using high-emission coal.
- With a price on carbon emissions, more expensive green steel becomes competitive against high-emission steel.
- Investing in new emerging areas of technologies:
- Companies can aim to play on the front foot, investing in opportunities like recycling, hydrogen, biomass, electrolysers, rare earths, battery materials and battery making.
- Some of these opportunities would take time to mature. Meanwhile, companies could invest in opportunities opened up by decarbonisation of other countries, such as exporting green hydrogen derivatives like ammonia.
- Therefore, to embark on an orderly path to net zero, India needs imagination, realism, determination — and a sense of urgency. We must take steps this decade to set things up, to establish momentum, and to build India right for generations to come.
Editorial 2: Interest rate hike for small savings schemes: Implications, concerns
Recent Context:
- Amid rising yields on government securities, the Finance Ministry last week hiked the interest rates for some small savings schemes by 20-110 basis points for the January-March quarter.
- While the hike will serve as protection against high inflation and interest rates, the small savings rates are still below desired levels.
The hike in small savings rates
- This is the second consecutive quarter when the rates for small savings schemes have not been hiked across the board. While interest rates have been kept unchanged for a 5-year recurring deposit, the public provident fund scheme and the Sukanya Samriddhi scheme,
- However, rates for 1-year, 2-year, 3-year and 5-year time deposits and the senior citizens savings scheme have been hiked for January-March.
- In October-December, the Finance Ministry had hiked interest rates on some of the small savings schemes by 10-30 basis points, after keeping them unchanged for nine consecutive quarters.
- Interest rates were marginally hiked for 2-year and 3-year time deposits, the senior citizens scheme and the Kisan Vikas Patra.
Rising interest rate cycle
- Coming amid a higher inflation rate and a rising interest rate cycle, the hike in small savings rate is seen as necessary to protect savers, especially senior citizens.
- The view within the ministry is to balance the interests of senior citizens and persons saving in instruments without tax benefits, along with keeping the interest rate for small savings in check, as it essentially translates into a higher interest cost for the government when it borrows against the National Small Saving Fund.
Fixing level of rates
- Interest rates on small saving schemes are reset quarterly, in line with the movement in benchmark government bonds of similar maturity.
- Typically, the small saving rates are linked to yields on benchmark government bonds, but despite the movement in G-sec yields, the interest rate changes have not strictly matched the yield movements over the past two years.
- The reference period for small savings rates for the January-March quarter is September-November, when the yield for five-year government securities rose about 15 basis points.
Are the hikes enough?
- Savers are concerned about the real rate of return on their investments in small savings schemes.
- If both inflation and interest rates are high, savers have a low real rate of return.
- Retail inflation rate has remained above 6 per cent most of last year, easing only a bit in November to 5.88 per cent.
- Meanwhile, the Reserve Bank of India has hiked the key policy rate by 225 basis points, with the repo rate now at 6.25 per cent.
- Most small savings schemes, till the beginning of the previous quarter, were fetching less than 6 per cent interest rate.
- The RBI in its Monetary Policy Report released on September 30 had noted that with government bond yields increasing, the revised small savings rates were 44-77 basis points below the formula implied rates.
What does it mean for savers?
- While young investors can go to equity markets through mutual funds for their wealth creation, conservative investors and those who have retired or are nearing retirement rely mostly on small savings schemes, monthly income schemes or fixed deposits.
- While some increase in rates on certain instruments is good news for investors of small saving instruments, barring PPF, Sukanya Samriddhi Yojana and senior citizens’ savings scheme, all others are currently fetching negative real returns.
- Even the senior citizen savings scheme is generating negative returns for someone in the highest tax bracket.
- Considering that the retail inflation is around 6 per cent, the post tax return on most of the small savings instruments will not even cover inflation for those in the highest tax bracket.
What can investors do?
- As the inflation and interest rates go down, it will provide a boost to equities. Those who are comfortable with equities should look to them when it comes to saving for retirement.
- An individual in the highest tax bracket can go for high rated debt papers and invest in debt mutual funds, which are also more tax-efficient. However, for protection against inflation, equities remain the best bet.