Discover more from Anticipating the Unintended
#212 Myths & Misconceptions
Being Pragmatic about ESG Norms, Lessons for India's Semiconductor Strategy, and Challenging Common Wisdom about India's Constitution-making.
India Policy Watch #1: Securing Energy
Insights on issues relevant to India
Something that we have discussed in the past on these pages is about energy security and India. All future growth scenarios are predicated on an uninterrupted supply of energy to power the economy. But as multiple geopolitical shocks in the past decade have shown, this is a significant non-controllable risk for India’s aspirations. We have made two points here. One, while India has promised to have net zero emissions by 2070 during the COP26 summit, India cannot mimic the energy strategy of a developed economy for its stage of development. Simply put, fossil fuels and hydrocarbons cannot be wished away if India has to continue on its growth trajectory. The environmental costs of following this are real, but so are the costs of continuing to be poor. In fact, poverty cannot be good for the environment. Two, with over 80 per cent dependence on foreign sources for oil and coal, which will continue to grow, it is important to secure these supply chains. Even the move to renewables won’t resolve this dependence because it imports most components for harnessing solar or wind energy. Therefore, the question of global oil prices and the resultant import bills hangs over any prediction about India’s future. We often complain about the lack of realism or appreciation of unintended consequences of policy by governments here. But on rare occasions, the state surprises us with its thinking on a particular issue. This week was one of those, and I will come to it.
Back to the energy security challenge. There are three ways to address this challenge.
Firstly, clinical focus on energy diplomacy without being constrained by ideological factors. There’s no global power that can sermonise on who India should be buying its oil from, given the track record of these powers to secure their energy needs over the decades in supporting regimes that are the worst human rights offenders. Bilateral deals that secure long-term supply contracts, working with large friendly suppliers like Iran and Russia, and asserting its status as one of the two biggest consumers of energy globally over the next three decades should all be part of this approach. On this count, India has played its cards well in the past few years. The ease with which it continues to source Russian gas in the aftermath of the Ukraine war while avoiding sanctions from the West is a good case in point. Almost 90 per cent of Russian oil and gas is now sold to Asia, with China and India being its two biggest consumers. Russian Urals imports at almost 2 million barrels a day are now almost at par with what it imports from Iraq, Saudi Arabia and the UAE. A similar story holds for Iranian oil too. India now has over 39 partner countries from where it meets its crude oil requirements. While not exactly following the China playbook in investing massively in Africa, India has strengthened its relationships with energy and resource surplus countries like Gabon, Equatorial Guinea and Libya to secure its future.
Secondly, India has to continue to invest in the exploration and production of fossil fuels to meet its short-term needs. India has promised to have 50 per cent of its power requirements met from renewables by 2030. While the installed renewable power generation capacity is at 25 per cent now, only about 11 per cent of the actual supply is from these sources. It has inched up in the last few years, but it is difficult to see this even doubling anytime soon. Fifty per cent seems like a bridge too far. The cost of generation of renewable energy and, importantly, the transmission and storage infrastructure for them are way more expensive than what India can afford at this moment. You just cannot ignore coal in India if you have to meet the demand for electricity, which will grow at 1.5 times the GDP growth rate.
Lastly, climate change is real, and therefore, the shift to a green economy is inevitable in the long run. So, the only real option for India is to reduce its oil import dependency through investments in alternate sources of energy. But this has to be done while fully recognising its quantum of demand, specific areas where there is a real possibility to substitute fossil fuels with green options, and a government-backed capex cycle in these areas. Ethanol blending in petrol, green hydrogen capacity build-out and compressed biogas plants are the right kind of moves in this direction. Another option which should be invested in is nuclear energy. It is clean, cheap and can be scaled to match the demand of the Indian economy. Contrary to the naysayers, on a joule-to-joule basis, it is way safer and less harmful to human beings than power derived from coal. Uranium supply is a challenge, but Kazakhstan, Namibia, Canada, and Australia are a better set of supply countries than oil suppliers.
One of the things, therefore, I have argued here earlier is that both the Indian government and companies shouldn’t jump onto the ESG (environment, social and governance) norms around eschewing fossil fuel companies and investments as has happened in the West. A whole lot of influential and large investors have been forcing the hands of Indian corporations by indexing the quantum of their investments in their stock to their ESG standards. The idea of banks and financial institutions being rewarded for reducing their exposure to ‘non-clean’ sectors at this time in India is bizarre. It will stifle capacity expansion in the non-renewable energy sector while diverting scarce funds to a renewable sector that’s sub-scale and costly. Yet, I have seen a continued focus on such norms in India even while the West has conveniently taken its foot off this, as seen by the retreat on ESG by large fund houses like Blackrock and Vanguard. And for all the posturing on Saudi Arabia because of its decision to cut production in tandem with Russia and the many rights abuses, the U.S. has made a convenient u-turn on its relationship with it knowing well any real action will push it further into the arms of Russia and China and jeopardising its own energy security.
It is in this context I found the remarks made by the chief economic advisor (CEA), V Anantha Nageswaran, at the CII AGM this week interesting. As the Mint reports:
“Energy is going to be the input and it is an important driver for economic growth. It is energy security that is coming under a lot of pressure thanks to geopolitical developments and thanks to climate change etc. If at all there is a single most important worry in my mind for sustaining the growth rate that we have been able to achieve in the last two to three years, it is energy security," he said.
Nageswaran stressed on the importance of continued funding to the fossil fuels sector, even as we move towards a better balance of renewables in the energy mix. This, he said, was necessary to not jeopardize growth. He further advised that financial institutions should look at overall environmental costs while evaluating green projects, and to be aware of greenwashing, referring to projects which are not necessarily contributing to green in the economy but pass off as green projects and actually end up causing damage to the environment through their unintended consequences.
That’s the most pragmatic and clear-headed view I have heard from an Indian government official in a while. Hopefully, this will be followed up with policy action that supports this objective.
P.S.: In edition #209, we discussed a report suggesting that government plans to stop building new coal-fired power plants apart from those already in the pipeline. We hope that’s not truly the case because projections in the National Electricity Plan suggest that we would need more coal-generated power (at least 17GW capacity) even after accounting for increases in renewable substitutes.
India Policy Watch #2: Policy Lessons for India’s Semiconductor Strategy
Insights on issues relevant to India
— Pranay Kotasthane
(Cross-posted from our Technology Geopolitics newsletter, Technopolitik)
Curveball: The UK’s National Semiconductor Strategy
The UK announced its National Semiconductor Strategy on May 19. A lot more people should read it. Here's why.
Many news items ridicule how the UK's £1 billion spending commitment over the next decade is minuscule compared to that of the US (~$52 billion) or EU (~$46 billion). But I think the UK's semiconductor strategy is qualitatively and markedly different from the others. It only focuses on the UK's comparative strengths rather than trying to build the entire ecosystem locally.
The policy vision is clear. The UK has three strengths: "research and development (R&D), design and IP, and compound semiconductors". And the policy is about converting this potential into a definitive advantage. There is no mention of reducing "import dependence" at all. For commercial off-the-shelf silicon chips, the strategy relies on international cooperation rather than indigenisation.
Instead, the focus is on compound semiconductors. It's not about manufacturing silicon chips within the UK but about gaining an asymmetric advantage by getting good at something few others in the world are thinking about.
So, it presents a radical departure from national semiconductor strategies announced by most countries in the recent past. Analysts should observe closely how the UK fares. It will have broader lessons for the tech geopolitics community.
Finally, do read the strategy document. Having read the semiconductor strategy documents of some other countries, I found this one to be the best-written. The vision, objectives, and pathways are all tightly coupled and well-explained.
A Hard Nut to Crack: The Curious Case of a No-show by Taiwanese Outsourced Assembly and Test (OSAT) in India
On the face of it, India and Outsourced Assembly and Test (OSAT) should be a perfect match. OSAT facilities test the manufactured chips for defects and ensure protective packaging for all finished chips. This stage requires significant capital investment, though not of the same order as fabs. Further, this stage requires large numbers of relatively low-skilled labour, whereas the chip manufacturing stage requires a sizeable high-skilled workforce. With low-skilled labour better available in India, Taiwanese firms like ASE Technology and Powertech Technology would benefit by offshoring these operations to India. The Indian government has also announced several attractive financial incentives in this area that Taiwanese companies can avail of. And yet, there has been no breakthrough. Taiwanese players have shown more interest in Malaysia, Vietnam and the Philippines. Why?
The not-so-glamourous reasons
The lack of policy consistency and high import tariffs are the bottlenecks that can explain why Taiwanese companies haven't moved ahead.
Trade policy misconceptions
Taiwanese officials have asked for tariff reductions on products used to make semiconductors. It makes sense because OSAT would require a lot of imports. Further, Taiwan had also filed a case against India for violation of the agreement on tariff reductions in WTO - also known as the Information Technology Agreement (ITA). We should reduce import tariffs soon. There's not even an "infant industry" argument to be made because there isn't any of it at all.
Lack of policy consistency
Frequent changes in tax policies and restrictive labour laws have proven to be a significant deterrent. Surajeet Das Gupta in the Business Standard has a couple of reports covering this problem. He writes:
"Nor do they want coercive tax regimes followed by long legal battles against the revenue department in highly import-intensive export businesses... Investors are asking for deeper consultation between the nodal ministry and the revenue department so that they are in sync. And they are seeking more liberal labour laws (especially longer and more flexible work hours) as an essential condition to investing." (Source).
So, fixing trade and tax policies is mandatory if we need industrial policy measures such as production-linked incentives to deliver. These pro-market policies can't be substituted with financial incentives.
India Policy Watch #3: Is the Indian Constitution Elitist? No.
Insights on issues relevant to India
— Pranay Kotasthane
A popular caricature of the Indian Constitution is that it is an elite-given, top-down project; a result of deliberations of a small number of high-profile people elected to the Constituent Assembly on an extremely limited franchise. Using this caricature, many commentators infer that a constitution by the elite would, by definition, also be elitist in its vision. Such a constitution-making process could hardly expect to have a better understanding of social realities. And for this reason, we are still in a position where the gap between the Constitution’s lofty vision and real implementation is as wide as it can possibly get.
I have always found this argument to be an inaccurate diagnosis of our current condition. Consider these two arguments.
1. Almost all political projects of this nature are elite-driven.
Only the relatively well-off and well-educated individuals in any society can understand and afford to participate in political acts like Constitution-making. Political scientist Alexander Lee explains this phenomenon in his paper Who Becomes a Terrorist as follows:
the politically involved are likely to be relatively wealthy and well educated because they have access to political information and can afford to devote time and energy to political involvement. Within this subgroup, the higher opportunity costs of violence for rich individuals will lead them to avoid it.
Elite-driven political projects are the norm, not an exception. What matters is how broad this section of “elites” is. A richer and more equitable society would have a larger number of “elites” who can afford to participate in lengthy political processes actively. It should not be a surprise then that the Indian Constitution was an elite-driven political process.
Now, a new paper based on archival evidence suggests that the elite community that shaped the Indian Constitution was far larger than the 300 odd-members seated in the Constitution Hall in Delhi. Rohit De and Ornit Shani—two brilliant historians of the period around Indian independence—in Assembling India’s Constitution: Towards a New History, explain that the Constituent Assembly members were “assembling disparate but simultaneous constitution-making efforts across the country” rather than handing down their diktats in a top-down fashion.
This exciting new paper cites three examples to reach this conclusion. First, the elite in many princely states had already created their constitutions for their own jurisdictions. Many of these projects had already prepared the ground for the much-bigger constitution-making project taking shape in Delhi, as they were ahead of it in time.
Second, the authors find that the judiciary played a much more active role in shaping the Constitution than is usually imagined. In their words:
Generally, the drafting of a constitution is understood as a linear process, with a draft being circulated for comments, suggestions being incorporated and the revised draft being debated and eventually promulgated by the constitution-making body. However, the Indian judiciary was able to draw upon its embeddedness within the state structure and personal connections with politicians to make repeated interventions for changes in the draft constitution.
Third, many tribal populations, concerned about their status in the new Republic, were making their own constitutional frameworks and simultaneously making demands from the national Constitution.
These three instances illustrate that the number of elites involved in Constitution-making was far larger than we ordinarily think. I still insist on calling this broad swathe of people “elite”. At a point in time when the literacy rate was twelve per cent and the poverty rate was seventy per cent, only the elite would have had the capacity and the opportunity to participate in constitution-making.
2. Elite-driven is not the same as Elitist
It’s ludicrous to label the Indian Constitution as “elitist”. Whether it was due to the broader participation and feedback from across the country or because of the enlightened thinking of the assembly members, the Indian constitution was definitely not elitist in its content. Unlike the American Constitution, the Indian Constitution project aimed to bring about economic, political, and social revolutions. The project was not about cementing the positions of people in power, but it was about providing dignity to a large number of poor, discriminated, and disadvantaged people far away from the hallowed walls of the Constitution Hall. Many of the framers were acutely cognisant of their privilege and responsibility. The provisions in the Constitution protecting the rights of individuals and marginalised sections are proof enough that protecting elite interests was not its main concern.
Finally, the obsession to locate our current failures in the Constitution’s elite origins is to forget Ambedkar’s prescient remark:
“.. however good a Constitution may be, it is sure to turn out bad because those who are called to work it, happen to be a bad lot. However bad a Constitution may be, it may turn out to be good if those who are called to work it, happen to be a good lot.”
The American Constitution, a project that was both elite-driven and elitist at its inception, affirms what Ambedkar said. In the hands of good people, their Constitution permitted the expansion of freedoms and the privilege of prosperity to a large number of citizens.
Reading and listening recommendations on public policy matters
[Podcast] Over at Puliyabaazi, we discuss what it would take for a sustainable rise of electronics manufacturing in India.
[Book] Commanding Hope by Thomas Homer-Dixon will help you overcome cynicism about policy and society.
[Podcast] A new limited series on policing over at All Things Policy, featuring a former top cop and an inquisitive lawyer.
* Post cover image generated by Stable Diffusion.