Modi’s dilemma

Good morning! A big hello to readers who signed up this week. Welcome to The Intersection, The Signal's weekend edition. This weekend we bring you an overview of the geopolitical and strategic risks for the Indian economy’s green transition and future businesses. Also in today’s edition: we have curated the best weekend reads for you.

In a cutting reminder of western powers’ Tinder-like approach to global relationships, India’s foreign minister S Jaishankar pointed out that when rules-based order was challenged in Asia, India was advised to do more trade.

Europe is completely preoccupied with the Ukraine crisis but there is the rest of the world too. “I am very glad that you are sitting in India because it would remind you that there are equally pressing issues in other parts of the world,” the minister told sermonising European diplomats at the Raisina Dialogues.

Jaishankar’s jibe not only spoke to the urgency, joint effort and demand for global unity on display when it comes to issues close to Europe or the US, but also the burden and arm-twisting that countries such as India have to bear to uphold the world order designed in Washington or Brussels.

Portents indicate that the Narendra Modi government would be on a high wire in the coming months hoping to preserve strategic independence while chasing economic prosperity. With globalisation in retreat, multilateralism on life-support, and great powers locked in a battle for technological supremacy and global advantage in industry, India has to choose its policies carefully to be on the right side of the realignment of global supply chains.

“Earlier it was Russian roulette. Now it is poker with big players,” a renewables industry veteran, who did not want to be named, told The Intersection.

Nowhere is it more evident than in the weaponisation of finance and the manoeuvres to control the global supply of critical resources for future green industries.

Pulls and pressures

At a WTO seminar on food security earlier this week, Sachin Sharma, associate professor at the Centre for WTO Studies at the Indian Institute of Foreign Trade, showed how public food stockpiles funded by taxpayers’ money had helped India overcome critical periods of shortages. Had it not been for the stocks in 2002-2003, when it faced a 21 million tonne rice shortage, it would have had to pay a huge price as the total supply in the global market was only 29 million tonnes. Public granaries also helped the country feed its vast population during the pandemic lockdowns.

Sharma urged for a review of the nearly four-decade-old WTO agreement on agriculture which limits developing country governments' financial support for food production and public stock holding.

The US representative, however, said that India may have insulated itself from the need for buying food supplies, but that served only its own interest. “We are particularly interested in other values, including developing a resilient system where all countries, in a moment of crisis, have access to a world of suppliers,” he said. Although that sounds lofty, reality plays out differently, as was evident from the “vaccine nationalism” of 2021.

The renewables industry veteran pointed out that in 2013, when India tried to promote domestic industry by insisting that foreign solar equipment suppliers source a certain proportion of components locally, the US dragged it to the WTO. India lost. Contrast this with the US’ own ‘Make in America’ rhetoric in its recent strategy to ‘secure’ clean energy supply chains. More about this below.

“Supply chains will dictate almost all global trade negotiations in the coming years,” says Murali Kallummal, professor of international trade and development economics at the Centre for WTO Studies under the commerce ministry. Kallummal told The Intersection that negotiations will turn more contentious as monitoring becomes more data and AI-driven and current anomalies creep into the analysis as well. An example, he points out, is WTO data shows European agricultural tariffs at under 6% while the actual effective levies work out to over 21%.

Future-proofing

Acting on an executive order on America’s supply chains that President Joe Biden signed in February 2021, the US Department of Energy designed a strategy to secure the supply chain for a clean energy transition. The strategy, aimed at ensuring self-sufficiency in green tech and securing key resources, has a strong foreign policy element and will interlock with global security arrangements.

“The conflict is in the security perspective, the geopolitical perspective and geoeconomic perspective through which this issue (supply chains and state support to industry) will be viewed, as opposed to a business perspective. That is going to be a fundamental conflict,’’ says Amitendu Palit, senior research fellow and research lead (trade and economics) at the Institute of South Asian Studies (ISAS), National University of Singapore.

“We are riding through multiple crossroads. Developments are getting ahead of us too fast,’’ Palit, who also sits on the World Economic Forum’s Global Future Council on Trade and Investment, told The Intersection.

What does this bode for India? The country’s need to balance economic growth, security alliances and green transition comes with stiff challenges. Consider that it does not have key resources required for batteries—lithium, cobalt, nickel and copper. Australia, which is India’s Quad partner and also signed a broad economic treaty in a rush after prevaricating for a decade, has lithium deposits. Australia being a close partner is reassuring, but there are no guarantees of uninterrupted material supply.

Even well-laid plans can go wrong in a tense world. Russia’s invasion of Ukraine has tripled international gas prices, hitting India’s city gas suppliers, messing up public finances and raising the cost of staples across the country.

To cite another example, copper is a key element for green transition. India was a net exporter of refined copper until 2018 even though it has only 2% of the world’s reserves and extracts only 0.2%. Its three major refiners—Hindustan Copper, Hindalco and Sterlite—however, produced 4% of the global supply. Sterlite Industries’ unit in Thoothukudi on the Tamil Nadu coast, which was already facing charges of polluting groundwater, shut down following protests when it decided to double its capacity. In the three years it has remained shut, India has turned a net importer of copper, paying $1.2 billion annually to make up for the shortfall.

Neighbouring China aggressively pursues mineral resources worldwide. Sometimes, the hunt makes for strange bedfellows.

Robert Friedland, the Chicago-born Singapore resident and founder of Canadian Ivanhoe Mines, is a controversial businessman. Friedland’s company owns the Kamoa-Kakula copper mines in Congo—a country known for corruption and child labour. These mines are expected to become the second-largest producer of copper in the world. Kamoa-Kakula is a joint venture with Chinese giant Zijin Mining. That ensures new supplies for China, which consumes about half of the world’s copper production annually.

While batteries used in automobiles and most electronic devices are made of sheets of lithium and cobalt or nickel, electric vehicles use five times more copper than a regular car.

Conflict of incentives

One way to partly mitigate the lack of resource availability is to set up extraction capabilities. That is where a country’s private sector strength comes into play. Apart from state-owned refiners, Reliance Industries’ petroleum refinery, with its global scale, relationships and network, ensures some measure of certainty in fuel availability. Yet, without natural oil reserves, India is at the mercy of global producers. The same will likely repeat with green energy.

China dominates resource extraction for green energy. That is why one Chinese company shook the global nickel industry in March after the Russia-Ukraine war broke out. Russia accounts for a fifth of the world’s supply of the metal. China also does not have any qualms doing business with dubious businessmen and poorly governed countries to secure its supplies. Global gamesmanship over cobalt is playing out in Congo.

“The US is worried about China’s control over extraction. And India will compete with rich countries in the international market for cobalt, lithium and copper,” said the renewables industry veteran quoted earlier.

India needs big corporations: nimble, cash-rich public entities or fast-moving private companies, to have a chance in what The New York Times described as the age of heightened self-interest. But Indian prospectors and miners need to be adept at operating responsibly. Or they will get mired in distant lands, as Adani is in Australia.

India made its solar equipment manufacturing industry viable by raising tariff walls. It has now also rolled out production-linked incentives for battery and solar panel makers. That may not go down well with foreign investors who invested in renewable power producers such as Renew Power, Greenko and Azure, whose profitability is eroding because of high customs duties.

Production-linked incentives for solar have flowed to large companies such as Reliance, Tata and Adani. Incentives for battery makers have also benefited large projects being set up by Reliance, Hyundai and Ola Electric. Yet, not all big companies are happy.

“The government knows India needs corporations that have scale, but its policies are all aimed at small industry,’’ the COO of an Indian multinational which operates in the US, Europe and Latin America, told The Intersection.

Allocation of resources is a dilemma the government will find hard to solve. Much of India’s labour force is employed by small and medium enterprises and the past two-three years have devastated the sector. It’s a slippery slope.

“The problem is once you start financially incentivising companies, it would be a race to the bottom,” says ISAS’s Palit.

Palit also points to a flaw in the incentive system. A decade ago, the incentives, especially the ones offered by states to industry, were for greater capital investment, depreciation on the value of plant and machinery and so on. Those have now been replaced by incentives for engaging more labour. “That means enterprises know from the start that they have to pick up a certain load right from the beginning. If they don’t employ a certain number of people, they will not get the incentives,” he says.

Non-economic tools

As India vies to secure supplies for its industry and markets for its finished goods, it will be faced with increased scrutiny and demands. In 2020, the US government paid $4 million to Verite, an organisation that works for labour welfare to audit India’s textiles supply chain for five years.

An official with a US multinational company which buys merchandise, including garments, from India told The Intersection that the costs of making sure that everything is in order as per US laws is high.

In the long term, high costs, meagre resources, international pressure and domestic challenges heighten another risk for India: creating (more?) oligarchs.

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