By Henry Teitelbaum
Editor, P3 Planet
A lot of positive press has been directed at Indian Prime Minister Narendra Modi for a budget that promotes long-term economic growth by investing in infrastructure and reforming the way it is delivered. But insufficient attention is being given to the disastrous long-term climate change implications of its heavy reliance on coal.
Supporters of sustainable growth inside and outside the country need to do a lot more than cheer-lead for Modi’s agenda if they want to prevent a potentially catastrophic rise in carbon emissions from what is already the world’s third largest CO2 producing country.
Modi’s 2015-2016 budget focus is geared heavily towards spending and investment to develop the country’s transportation infrastructure. High on the agenda is ensuring that regulatory and land acquisition issues that have hobbled the completion of rail and road links are corrected. For years, these issues have prevented India from making effective use of its existing Public Private Partnership (PPP) model for transportation infrastructure, particularly highways. An estimated $10 billion of such projects are uncompleted due to the inability to secure the land that is needed to finish them.
PPPs allow governments in developing countries such as India to get the infrastructure they need without adding massively to public debt by allowing private investment capital to pay for much of the upfront development costs. In return, the private sector project delivery businesses that are selected receive the right to design and build the asset. Once the project is operational, they get paid to operate and maintain it over the long-term through a share of the tolls collected or from dedicated government tax revenue streams.
To give an idea of how much of this infrastructure is needed, the International Monetary Fund (IMF) estimates that India, with the world’s second largest population, needs an additional $1 trillion in investment in the medium term.
Infrastructure’s Multiplier Effect
The experience in neighboring China over the past 20 years suggests the Modi government is right to view investment in infrastructure as central to India achieving its potential as a global manufacturing hub. With its stable democracy and vast pool of young, highly skilled workers, India has drawn interest from around the world, including from China, as a future export manufacturing center because wages are so low. But until now, the poor state of the country’s infrastructure has held India back.
Modi’s program for investment in infrastructure promises to do a lot to turn that around. His pro-growth policies, which include business tax cuts and measures to promote bank lending, are likely to support continued strong GDP growth, currently estimated to be over 7%. According to the OECD, India is already on course to become the fastest growing large economy in the world by next year.
A focus on domestic infrastructure investment is particularly appropriate for India because it quickly puts money in the pockets of working people. According to a recent study by Standard & Poor’s Corp., the “multiplier effect”, that is the increase in final income arising from any new injection of spending, is particularly strong in developing countries. It estimates that in India, any increase in infrastructure investment would result in a boost to GDP of at least double that increase. So a little investment in India’s infrastructure can go a long way towards addressing wealth inequalities in one of the world’s most economically polarized societies.
Elephant in the Room
But Modi’s strategy also brings big environmental challenges that few seem to want to discuss. These derive mainly from the fact that the government intends to rely on domestic energy resources, chiefly coal, to power its economic expansion. Considering the size of India, unchecked expansion of India’s use of coal at a time when other coal consuming countries are either cutting back or have plans to do so could soon turn India into the world’s largest carbon emitting nation.
According to the International Energy Agency (IEA), more than 80% of electricity generation in India comes from fossil fuels, with the power generation sector alone consuming about 70% of the domestically produced coal. Developing modern economic infrastructure is very energy-intensive by definition, requiring vast amounts of cement, bricks, lime, steel and aluminum. Heavy industry in India is already heavily reliant on coal, which is also the only fossil fuel for which domestic reserves are still plentiful. So it’s not hard to to see where the energy for the vast majority of India’s growth agenda is going to come from, or why.
Worse yet, coal-fired energy production in India is currently very inefficient by global standards, running at around 31% at a time when efficient rates of 45% have been achieved, according to the IEA Clean Coal Centre.
There’s no reason to doubt Modi’s word when he expressed the hope that India will become the “renewable energy capital of the world” through its focus on solar and wind deployments. But the government has released few details about how its renewable energy plan can be made to meet the country’s energy needs. In the meantime, its stated goal remains to double coal production to one billion tons annually within five years.
The Deafening Silence From Abroad
Perhaps the absence of a roadmap to sustainability in energy wouldn’t matter so much if there was at least a blueprint for eventually reducing India’s reliance on coal.
Unlike China, which concluded a bilateral deal with the US last November committing both countries to begin reducing carbon emissions, no such deal was struck with India when US President Barack Obama visited the country in January. And while China aims to start lowering carbon emissions by 2030, the best Obama could come away from India with was an agreement in which the US will financially support India in five clean energy programs.
It’s not just the US that’s been willing to overlook the potential for environmental degradation and global warming that will accompany India’s head-long rush for growth. IMF chief Christine Lagarde said nothing about the issue during her recent visit to India, where she instead heaped praise on the government for its pro-growth policies.
For the record, India’s latest budget does present some practical measures to fund renewable energy projects, notably a doubling of the coal tax for a second consecutive year. That represents about 10% of the price of coal and should bring in about $2 billion a year in revenue. This at least should start to encourage greater efficiency and lower CO2 emissions. But that revenue estimate will still bring in far less that the $100 billion commitment that Modi has made toward reaching India’s renewable energy targets of 100GW of solar and 175GW of total renewables by 2022.
Promoting Private Sector Involvement
So it would seem likely that a great deal of private sector participation, particularly from foreign investors, will be required if there is to be any chance of achieving these targets. In other countries where PPP is in use, the need to mobilize vast quantities of private capital to deliver such improvements would present an excellent opportunity for using this model. But India’s poor record of project delivery through PPP, particularly in road transportation projects, is likely to cause a great deal of hesitation among foreign investors.
The modal unit for PPPs in new and renewable Energy at India’s Ministry of Finance didn’t respond to numerous efforts seeking to discuss specific plans for encouraging private investment in renewables.
In all likelihood, India’s government will need to find other ways to encourage private investment in public infrastructure, particularly for frontier technologies in wind and solar energy. This could be done through the issuance of low-interest projects loans, guarantees, or some form of credit enhancement facility.
India’s increasing reliance on coal could also make it an attractive proving ground for carbon capture and storage technologies, particularly as carbon taxes continue to rise. The retrofitting of existing coal-powered energy facilities, as well as the design and construction of new ones, could prove more attractive and perhaps less risky for foreign private investors than PPP infrastructure, at least in the near term.
Ultimately, the best guarantee of performance for the energy and transportation infrastructure that India needs to reach its potential in a globalized economy will be for the government to ensure that its PPP reforms are effective. That means doing what needs to be done to make sure projects achieve completion and deliver value for money.