By prioritising renewable energy, Finance Minister Sitharaman shows foresight, aiming to decrease reliance on volatile crude oil imports and combat environmental degradation. It is a step in the right direction towards sustainability.
In some of her interviews, Finance Minister Nirmala Sitharaman has expressed that uncertainties such as war, attacks on trading vessels, and relations between countries are the biggest challenges to the economy. These uncertainties have the potential to disrupt the supply chain, impact trade and commerce, and increase inflation.
Iran-supported Houthi rebels have been attacking trade ships and oil tankers passing through the Red Sea in solidarity with the residents of Gaza, who have been suffering from the Israeli attack that began on October 7 last year.
Trading communities are dismayed to see freight rates increasing substantially, along with additional burdens related to surcharges. Exporters, hoping for an early resolution of the issue, are even holding back a sizable volume (nearly one quarter) of the consignment scheduled to be traded along this route. This is adding to skepticism and nervousness in the global business community.
The duration of sailing through alternate routes has increased by two weeks, resulting in higher shipping and insurance costs. Furthermore, shortages of containers are inevitable as existing containers are engaged in the journey for longer durations. On the Amsterdam-Asia route, the 0.1 per cent premium in early December 2023 has risen to 0.5 to 0.7 per cent. Nearly 20 per cent of our $1.1 trillion merchandise destined for Europe, the US East Coast, West Asia, North African countries, and Russia passes through the Red Sea-Suez Canal route. Additionally, 40 per cent of our crude oil comes from Russia through this route.
The US and the UK have organised themselves against Houthi attacks and responded by targeting more than 60 rebel sites in Yemen using missiles and drones. As a result, Yemeni people in the capital, Sana’a, have shown sympathy for the rebels and supported them, indicating that the conflict and disruptions are likely to prolong. Major shipping companies are already avoiding the Red Sea route and diverting merchandise shipping via the Cape of Good Hope to and from several European destinations. Other groups causing disruptions could be equally dangerous; Iraq’s strongest Iran-backed militias say they will continue to target US troops. The US has taken note of this and is preparing to strike, boosting its defenses at the Jordan base and preparing for a wider response to drone attacks.
Meanwhile, the combined response of the US and the UK, which commenced on January 10, has further intensified and targeted 36 Houthi targets in Yemen a few days ago. The uncertainties are not likely to be resolved anytime soon.
The official stance of the Houthis is that they will continue to attack all ships bound for Israel until food and medicine start arriving in Gaza. However, the truth is different; they aim to pressure the Yemeni Government to gain leverage in their domestic conflict. Additionally, they are supported by Iran against the Arab coalition led by Saudi Arabia; they have attacked ships from more than 30 countries using drones and missiles. While many countries are grappling with the challenge of high shipping costs along the new route, Egypt has acknowledged a 40 per cent decrease in revenue from the Suez Canal route.
Despite being militarily powerful, the Saudis are helpless against the rebels, who have already caused billions of dollars in losses in the past. In September 2019, the Houthis sent 10 UAVs that struck Aramco facilities in Abqaiq and Khurais, Saudi Arabia, resulting in substantial losses in crude oil production for the company.
With shipping costs rising by 40 to 60 per cent, along with corresponding increases in insurance premiums, India’s trade may suffer. Our industries require parts from Japan, South Korea, and Europe for manufacturing electronic items, machinery, and cars, among others. The additional transportation costs and disruptions in the supply chain have the potential to impact production domestically. Similarly, Indian petrochemicals, plastics, and chemicals may become more expensive in European markets.
The latest domestic figures suggest a decline in exports of textiles, chemicals, leather, and petroleum products. India has also been affected by high inflation in Western countries and the continuous postponement of interest rate cuts in those countries. These factors have led to reduced spending, decreased demand, and ultimately, a decline in prices.
Data released by the Ministry of Commerce and Industry just before the Interim Budget shows that the growth in coal, crude oil, natural gas, refinery products, fertilizers, steel, cement, and electricity in December 2023 was only 3.8 per cent, compared to the 7.9 per cent registered in November 2023. In fact, crude oil growth had contracted.
At a time when there are uncertainties in trade and commerce, it is logical for the Finance Minister to demonstrate resilience in the area of energy production. The uncertainties in crude oil supply cannot be allowed to continue indefinitely. Moreover, as COP 28 has resolved, we need to transition away from fossil fuel consumption. Mindful of this context and building on PM Modi’s Ayodhya announcement of rooftop solar for one crore households, Finance Minister Nirmala Sitharaman has allocated Rs 10,000 crore as seed money in the Interim Budget and also promised free power of 300 units per month to each individual household. This will result in an annual savings of Rs 15,000 to Rs 18,000 in electricity bills per household. The scheme is known as the Pradhan Mantri Suryodaya Yojana.
The scheme also creates opportunities for additional income for households. They will receive payment for the surplus power produced on their rooftops and fed into the power grid, as well as for power consumed by electric vehicle charging stations.
The project will also generate employment opportunities for solar panel and EV charging station installation and maintenance. Most importantly, it will reduce our dependency on crude oil imports, saving foreign exchange, and reducing greenhouse gas emissions.
In response to the Paris Climate Accord, our commitment under our nationally determined contribution is to generate 500 Gigawatts (GW) of renewable energy capacity by 2030, with solar power comprising 292 GW of this target. Data from the Ministry of New and Renewable Energy suggests that our current solar capacity is 72.31 GW, including 11.08 GW of grid-connected solar rooftop capacity. Thus far, rooftop solar installation has been slow, with our achievement until 2022-23 reaching a mere 5.87 GW against a target of 40 GW. By integrating the Pradhan Mantri Suryodaya Yojana with the Pradhan Mantri Awas Yojana, solar rooftop installations are expected to accelerate, and the total solar capacity of 292 GW is likely to be achieved ahead of schedule.
It is heartening to note that the Finance Minister has not included any revadis or freebies in the interim budget. She has imposed very strong fiscal discipline and proposed to bring down the fiscal deficit from 5.8 per cent in 2023-24 to 5.1 per cent in 2024-25, which will have a positive impact on the economy. Government borrowing would decrease, lowering the debt-to-GDP ratio, currently at 83 per cent. Additionally, interest rates would come down, allowing private investors to take advantage of cheaper financing and enhance investment, resulting in more job creation.
Furthermore, the Finance Minister’s new definition of “Secularism” makes the Budget more inclusive and sets us on the trajectory of “Viksit Bharat” by 2047. She has linked “Secularism” with the saturation of schemes. Regardless of caste, creed, and religion, beneficiaries under schemes are moving towards saturation, demonstrating real secularism in action.
The critics of the Interim Budget are questioning why there is no indication of an increase in the outlay for social sector schemes related to health and education, as well as a very limited increase of 11.1 per cent in capital outlay compared to the previous financial year. In response, the Finance Minister has maintained that it is not disputed that the health and education sectors require a larger Budget, but there is a maximum absorption capacity by the respective departments of State Governments. These sectors fall under the concurrent list, and it is the prerogative of the States to prioritise the creation of assets and infrastructure. If the provided outlay exceeds the absorption capacity of the state, the amount remains unutilised at the end of the financial year.
My 38 years of experience working in both State and Central Governments also support the Finance Minister’s observation. Often, officers accept additional Budget allocations towards the end of the financial year without any pending bills. This surplus amount becomes available when other units fail to implement all components of a scheme and surrender it in March.
Those who accept the money in the second half of March cannot effectively utilise it. Firstly, the amount is withdrawn from the treasury without creating physical assets, and secondly, even if assets are created in the following one or two months, there will always be questions about their quality and quantity.
(The writer is retired Principal Chief Conservator of Forests (Head of Forest Force) Karnataka)