💥Join UPSC 2027,2028 Mentorship (July Batch) + XFactor Notes & Microthemes PDF
Talk to Mentor

Civilsdaily

Login

Subject: Economics

  • Challenges in RBI’s inflation management

    Context

    The first bi-monthly meeting of the Reserve Bank of India’s Monetary Policy Committee (MPC) for the current financial year reaffirmed its focus on inflation management.

    Towards the normalisation of monetary policy

    • The MPC voted to keep the policy rate unchanged at 4 per cent and retained its accommodative stance.
    • However, the wording was changed to “remain accommodative while focusing on withdrawal of accommodation to ensure that inflation remains within the target going forward, while supporting growth.”
    • This statement sets the stage for a shift to a neutral stance in the next meeting and policy rate hikes in subsequent meetings.
    • RBI has announced the withdrawal of some of the steps taken during the pandemic to support the economy.
    • These will foster the normalisation of monetary policy.

    Inflation challenge

    • The central bank has acknowledged that the disruptions caused by the Russia-Ukraine crisis have upended their growth and inflation outlook.
    • It has steeply revised its inflation projection from 4.5 per cent earlier to 5.7 per cent now for the current financial year.
    • The projection is based on an average global crude oil price of $100 per barrel.
    • The Food and Agriculture Organisation’s (FAO’s) Food Price Index, a gauge of global food prices, posted a record growth of 12.6 per cent from February.

    Formalisation of Liquidity Adjustment Framework (LAF)

    • The RBI has been managing liquidity infused into the system during the pandemic through the Variable Rate Reverse Repo Auctions (VRRR) to withdraw liquidity and Variable Rate Repo auctions to inject liquidity.
    • RBI has now formalised the Liquidity Adjustment Framework (LAF).
    • The LAF is a framework to absorb and inject liquidity into the banking system.
    • The LAF is now a symmetric corridor with a width of 50 basis points.
    • The policy repo rate is at the centre of the corridor, with the MSF 25 basis points above the policy rate and the SDF 25 basis points below the policy rate.

    What is a Standing Deposit Facility

    • The RBI has introduced the Standing Deposit Facility (SDF) as the lower bound of the LAF corridor to absorb liquidity.
    • The idea of the SDF was first mooted by the Urjit Patel Committee report on the monetary policy framework.
    • The RBI Act was amended through the Finance Act of 2018 to allow RBI to use this instrument.
    • The SDF will be a facility available to banks to park their funds.
    • The SDF will serve as the standing liquidity absorption facility at the lower end of the LAF corridor.
    • At the upper end of the corridor is the Marginal Standing Facility (MSF) to inject liquidity.
    • Through the SDF, the RBI can absorb liquidity without placing government securities as collateral, hence it will give greater flexibility to the central bank.
    • The change also marks a shift away from reverse repo being the effective policy rate.

    Key takeaways

    • While on the face of it, there are no rate hikes, the shift from the reverse repo rate to the SDF signals a tightening of monetary policy.
    • There is a 40 basis points increase in the floor rate.
    •  In the medium run, the call money rate would move towards the new LAF corridor, thus bringing orderly conditions in the money market.
    • As RBI begins to normalise liquidity in a calibrated manner, its ability to manage bond yields will likely be limited.
    • Yields on bonds are likely to inch up and remain above the 7 per cent mark.
    • Going forward, the trade-off between managing inflation and the borrowing programme of the government will become challenging.

    Conclusion

    For now the RBI has rightly decided to place top priority on inflation management. This will help in maintaining the credibility of the inflation targeting framework.

    UPSC 2022 countdown has begun! Get your personal guidance plan now! (Click here)

  • NITI Aayog publishes Energy and Climate Index List

    Gujarat has topped the list for larger States in the NITI Aayog’s State Energy and Climate Index–Round 1 that has ranked States and Union Territories (UTs) on certain parameters.

    State Energy and Climate Index

    • The States have been categorized based on size and geographical differences as larger and smaller States and UTs.
    • The index is based on 2019-20 data.
    • It ranks the states’ performance on 6 parameters, namely
    1. DISCOM’s Performance
    2. Access, Affordability and Reliability of Energy
    3. Clean Energy Initiatives
    4. Energy Efficiency
    5. Environmental Sustainability; and
    6. New Initiatives
    • The parameters are further divided into 27 indicators. Based on the composite SECI Round I score.
    • The states and UTs are categorized into three groups: Front Runners, Achievers, and Aspirants.

    Performance by the states

    • Gujarat, Kerala and Punjab have been ranked as the top three performers in the category of larger States, while Jharkhand, Madhya Pradesh and Chhattisgarh were the bottom three States.
    • Goa emerged as the top performer in the smaller States category followed by Tripura and Manipur.
    • Among UTs, Chandigarh, Delhi and Daman & Diu/Dadra & Nagar Haveli are the top performers.
    • Punjab was the best performer in discom performance, while Kerala topped in access, affordability and reliability category.
    • Haryana was the best performer in clean energy initiative among larger States and Tamil Nadu in the energy efficiency category.

     

    UPSC 2022 countdown has begun! Get your personal guidance plan now! (Click here)

     

  • RBI proposes ATM cash withdrawals using UPI

    The RBI’s Monetary Policy Committee (MPC) has proposed to make cardless cash withdrawal facility available at all ATMs, irrespective of banks, through the Unified Payment Interface (UPI).

    What is UPI?

    • UPI is an instant real-time payment system developed by National Payments Corporation of India (NPCI) facilitating inter-bank transactions.
    • The interface is regulated by the Reserve Bank of India and works by instantly transferring funds between two bank accounts on a mobile platform.

    How will cash withdrawals via UPI work?

    • While the RBI did not disclose specific details on how the process will work, a person having knowledge about the matter said ATMs soon will show an option to withdraw cash using UPI.
    • Upon selecting that option, a user would have to add the amount they wish to withdraw following which a QR code would be generated on the ATM machine.
    • The user would then have to scan that code on their UPI app and enter their pin following which the ATM will dispense cash.

    Why such move?

    • Allowing cash withdrawals through UPI would increase the security of such transactions.
    • The absence of the need for physical cards for such transactions would help prevent frauds such as card skimming and card cloning, among others.

    What are the current ways of cardless cash withdrawals at ATMs?

    • At the moment, a few banks such as ICICI Bank, Kotak Mahindra Bank, HDFC Bank and SBI, allow their users to withdraw cash from their ATMs without a card.
    • This was a feature introduced in the wake of the Covid-19 pandemic.
    • However, it is a long-drawn process.
    • Users have to install apps of their respective banks and first select the option of cardless cash withdrawal on the app, followed by adding beneficiary details and the withdrawal amount.
    • After confirming the mobile number of a user, the bank will send an OTP and a nine-digit order ID to the beneficiary’s phone.
    • Post that, the beneficiary would have to visit an ATM and key-in the OTP, order ID, amount for transaction and mobile number to get the cash.

    Could this impact debit card usage?

    • Debit cards are currently the most popular way of cash withdrawals at ATMs.
    • As of now, there are more than 900 million debit cards in the country, and experts have cautioned that allowing cash withdrawals through UPI could negatively impact debit card usage.
    • There could be a potential first-order impact on debit cards as this step would reduce the need to carry debit cards.

    What’s next in the UPI pipeline?

    • It is projected that in the next 3-5 years, UPI would be processing a billion transactions a day, and to enable that, a number of initiatives have been introduced.
    • Chief among these is UPI’s AutoPay feature, which has already seen increased adoption owing to RBI’s disruptive guidelines on recurring mandates.
    • According to industry experts, the AutoPay feature will be crucial to increasing daily transactions on the platform.
    • The RBI has also announced UPI123 on feature phones without an Internet connection, which is expected to open up the payments system to more than 40 crore individuals who use such devices.
    • This will expand digital financial inclusion and add to the number of transactions made on the platform.

     

    UPSC 2022 countdown has begun! Get your personal guidance plan now! (Click here)

  • RBI shift on monetary policy

    Context

    The Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) on Friday gave a surprise, with a formal start to policy normalisation. This was contrary to the predominant market expectations of a hold.

    RBI on the path of policy normalisation

    • Focus on target of 4% +/- 2%: While the MPC voted unanimously to remain accommodative, in a change of language, the focus would now be on “withdrawal of accommodation to ensure that (CPI) inflation remains within the target (of 4 per cent +/- 2 per cent) going forward”.
    •  Remember, the RBI had become a (flexible) inflation-targeting central bank since FY17, whose primary objective is price stability, that is, inflation management.
    • The Liquidity Adjustment Facility (LAF) corridor was narrowed back to the conventional 0.25 percentage points from the earlier extraordinary pandemic widening in late March 2020.
    • The cap of the erstwhile corridor was the repo rate and the floor was the reverse repo.
    • Now, while the repo rate was held at 4.0 per cent and the latter at 3.35 per cent, the floor of the corridor was increased by 0.4 percentage points from 3.35 per cent.
    • There was also a change in the monetary policy orientation, of which the stance is one component.
    • The priority for monetary policy now is inflation, growth and financial stability, in that order.

    Reasons for unexpected tightening of policy

    • Inflation concerns: Despite uncertainty over growth impulses and demand concentrated at the upper-income level households, inflation has increasingly emerged as a big concern.
    •  Given that inflation is likely to average 6.1 per cent in Q4 of FY22, this increases the risk of inflation remaining above the 6 per cent upper target for three consecutive quarters, necessitating an explanation to the government by the MPC.
    • One comforting aspect of this scenario is that household inflation expectations remain anchored, with the median of three months to one year ahead expectations (as of March ’22) rising by only 0.1 percentage points from the earlier January readings.
    • Stabilisation of demand: On demand conditions, the RBI scaled-down the FY23 real GDP growth projection to 7.2 per cent (from 7.8 per cent), indicating that a combination of continuing supply dislocations, slowing global economy and trade, high prices and financial markets volatility are likely to take a toll.
    • One possible reconciliation with modest GDP growth is continuing weakness in services, which is also borne out by channel checks.
    • Certainly, continuing high inflation is likely to lead to some demand destruction, which will act as an automatic stabiliser.
    • A relatively loose fiscal policy is likely to offset some of this reduced demand, particularly with continuing subsidies to lower-income households.
    • Financial stability: This has multiple dimensions – interest and foreign exchange rates, market volatility, banking sector asset stress, and so on.
    • An important objective for the RBI is the management of money supply and system liquidity.
    • In a rising rate cycle, with a large borrowing programme of the Centre and state governments, interest rates on sovereign bonds are likely to increase without a measure of support from the RBI through Open Market Operations (OMOs).
    • This will entail injecting more liquidity into an already large surplus, which might add to inflationary pressures.
    • The introduction of the overnight Standing Deposit Facility (SDF) was a significant measure in this context.
    • Unlike the reverse repo facility, the RBI will not need to give banks government bonds as collateral against the funds they deposit.
    • This is thus a more flexible instrument should a shortage of government bonds in RBI holdings actually transpire under some eventuality, say the need to absorb large capital inflows post a bond index inclusion.

    What are the implications?

    • Interest rates will begin to increase but, for bank borrowers, this is likely to be a very gradual process.
    • For corporates and other wholesale borrowers, who also borrow from bond markets, this increase is likely to be faster as the surplus system liquidity is gradually drained.
    • How this is likely to affect demand for credit is uncertain, given the capex push of the government, some revival of private sector investment and likely continuing demand for housing.

    Conclusion

    This cycle of policy tightening will present a particularly difficult mix of economic and financial trade-offs, but RBI has demonstrated the ability to innovatively use the multiple instruments at its disposal to ensure an orderly transition.

    UPSC 2022 countdown has begun! Get your personal guidance plan now! (Click here)

    Back2Basics: Liquidity Adjustment Facility corridor

    • Liquidity adjustment facility (LAF) is a monetary policy tool which allows banks to borrow money through repurchase agreements or repos.
    • LAF is used to aid banks in adjusting the day to day mismatches in liquidity (frictional liquidity deficit/surplus).
    • The liquidity adjustment facility corridor is the excess of repo rate over reverse repo.

  • What is Standing Deposit Facility (SDF)?

    The Reserve Bank of India (RBI) introduced the Standing Deposit Facility (SDF), an additional tool for absorbing liquidity, at an interest rate of 3.75 per cent.

    What is SDF?

    • In 2018, the amended Section 17 of the RBI Act empowered the Reserve Bank to introduce the SDF – an additional tool for absorbing liquidity without any collateral.
    • By removing the binding collateral constraint on the RBI, the SDF strengthens the operating framework of monetary policy.
    • The SDF is also a financial stability tool in addition to its role in liquidity management.
    • The SDF will replace the fixed-rate reverse repo (FRRR) as the floor of the liquidity adjustment facility corridor.
    • Both the standing facilities — the MSF (marginal standing facility) and the SDF will be available on all days of the week, throughout the year.

    How it will operate?

    • The main purpose of SDF is to reduce the excess liquidity of Rs 8.5 lakh crore in the system, and control inflation.
    • The SDF rate will be 25 bps below the policy rate (Repo rate), and it will be applicable to overnight deposits at this stage.
    • It would, however, retain the flexibility to absorb liquidity of longer tenors as and when the need arises, with appropriate pricing.
    • The RBI’s plan is to restore the size of the liquidity surplus in the system to a level consistent with the prevailing stance of monetary policy.

    Also read:

    What is Reverse Repo Normalization?

    UPSC 2022 countdown has begun! Get your personal guidance plan now! (Click here)

     

  • Indonesia’s Palm Oil Crisis

    The world’s largest producer and exporter of palm oil, Indonesia, is facing domestic shortages, leading to price controls and export curbs.

    What is the news?

    • It’s rare for any country that is the largest producer and exporter of a product to experience domestic shortages of the same product.
    • Consumers are unable to access or paying through the nose for a commodity in which their country is the preeminent producer and exporter.

    What is Oil Palm?

    • Palm oil is an edible vegetable oil derived from the mesocarp of the fruit of the oil palms.
    • The oil is used in food manufacturing, in beauty products, and as biofuel.

    Palm oil production in Indonesia

    • Its palm oil production for 2021-22 (October-September) at 45.5 million tonnes (mt).
    • That’s almost 60% of the total global output and way ahead of the next bigger producer: Malaysia (18.7 mt).
    • It is also the world’s No. 1 exporter of the commodity, at 29 mt, followed by Malaysia (16.22 mt).

    Do you know?

    14,000 IDR is less than $1 or Rs 74! See the extent of depreciation one currency can undergo!

    Have you ever heard of the Zimbabwean hyperinflation of 2009? One literally had to pay a heap of cash to buy a piece of bread!

    Why in headlines?

    • Indonesia has seen domestic prices of branded cooking oil spiral, from around 14,000 Indonesian rupiah (IDR) to 22,000 IDR per litre between March 2021 and March 2022.
    • Much recently, the government imposed a ceiling on retail prices at 14,000 IDR.
    • This led to the product disappearing from supermarket shelves, amid reports of hoarding and consumers standing in long queues for hours to get a pack or two.

    India’s imports of palm oil (in lakh tonnes)

    Plausible factors

    (1) Ongoing War

    • The possible reason has to do supply disruptions — manmade and natural — in other cooking oils, especially sunflower and soyabean.
    • Ukraine and Russia together account for nearly 80% of the global trade in sunflower oil, quite comparable to the 90% share of Indonesia and Malaysia in palm.
    • Russia’s invasion of Ukraine has resulted in port closures and exporters avoiding Black Sea shipping routes.
    • Sanctions against Russia have further curtailed trade in sunflower oil, the world’s third most exported vegetable oil after palm and soybean.

    (2) Diversion for Bio-Fuels

    • Another factor is linked to petroleum, more specifically the use of palm oil as a bio-fuel.
    • The Indonesian government has, since 2020, made 30% blending of diesel with palm oil mandatory as part of a plan to slash fossil fuel imports.
    • Palm oil getting increasingly diverted for bio-diesel is leaving less quantity available, both for the domestic cooking oil and export market.

    Impact on India

    • India is the world’s biggest vegetable oils importer.
    • Out of its annual imports of 14-15 mt, the lion’s share is of palm oil (8-9 mt), followed by soyabean (3-3.5 mt) and sunflower (2.5).
    • Indonesia has been India’s top supplier of palm oil, though it was overtaken by Malaysia in 2021-22 (see above table).
    • The restrictions on exports, even in the form of levy, take into cognizance Indonesia’s higher population (27.5 crores, against Malaysia’s 3.25 crore) as well as its ambitious biofuel program.
    • To that extent, the world – more so, the bigger importer India – will have to get used to lower supplies from Indonesia.

     

    Answer this PYQ from CSP 2019:

     

    Q.Among the agricultural commodities imported by India, which one of the following accounts for the highest imports in terms of value in the last five years?

    (a) Spices

    (b) Fresh fruits

    (c) Pulses

    (d) Vegetable oils

     

    [wpdiscuz-feedback id=”x9wprtcv5c” question=”Please leave a feedback on this” opened=”1″]Post your answers here.[/wpdiscuz-feedback]

     

    UPSC 2022 countdown has begun! Get your personal guidance plan now! (Click here)

     

  • The HDFC Ltd.-HDFC Bank Merger

    Mortgage lender HDFC Ltd. and India’s largest private sector bank HDFC Bank on Monday announced a mega-merger.

    Impact of the move

    • Under the terms of the deal, which is one of the biggest in the Indian financial sector, HDFC Bank will be 100% owned by public shareholders.
    • Existing shareholders of HDFC Ltd. will own 41% stake in HDFC Bank.
    • Post-merger HDFC Ltd. will no longer be a separate mortgage lender, it will get folded into the bank.

    What are the terms of the merger?

    • The merger has to go through a series of regulatory approvals.
    • It has to get approval from the shareholders of both companies.
    • At this moment what has been announced by the two entities is that its an all-share deal, so there’s no cash transaction involved.
    • The terms of the share swap are such that shareholders of HDFC Ltd. will receive 42 shares of HDFC Bank for every 25 shares they hold in HDFC Ltd.

    What happens to existing customers and employees?

    • As far as customers are concerned, HDFC Ltd.’s customers will become the bank’s customers as well.
    • As for employees, HDFC Bank is planning to absorb and retain all the employees.
    • Neither of the entities are very heavy on employee numbers and have been fairly conservative in their employee sizes.

    What is the rationale behind this merger?

    • HDFC have largely had a fairly conservative lending culture, both reasonably customer-friendly, customer-centric, culturally, there wouldn’t be a big challenge.
    • The evolution of the regulatory framework for the NBFC (non-banking financial company) industry has been gradually moving closer, to harmonise with the banking sector’s regulatory framework.
    • Earlier, NBFCs had a fairly different and a far more loose sort of framework for lending and deposits.
    • This led to issues in the industry with some NBFCs struggling and going under or being taken over by others.
    • As Basel III norms for capital adequacy are in place, the NPA (non-performing asset) book is very closely monitored.

    What is in it for HDFC Ltd. and HDFC Bank?

    • Post-merger, the mortgage lender, HDFC Ltd., gets access to HDFC Bank’s CASA (current and savings accounts) deposits, which are lower cost funds.
    • For the mortgage lending business, the capital cost will come down. As the capital cost comes down, automatically it will have the ability to lend at a finer rate.
    • For HDFC Bank, every home loan customer can be tapped to become a bank customer.

    Impacts of the deal

    • It’s possible that we might see more NBFCs seeking to merge with banks.
    • There is already talk of the number of banks coming down.
    • So in some ways, this merger may be a precursor to what is going to happen in the state-run banking space, where the government has said it is going to reduce the number of public sector banks.

    Back2Basics: Basel Accords

    • They refer to the banking supervision Accords (recommendations on banking regulations)—Basel I, Basel II and Basel III—issued by the Basel Committee on Banking Supervision (BCBS).
    • They are called the Basel Accords as the BCBS maintains its secretariat at the Bank for International Settlements in Basel, Switzerland and the committee normally meets there.
    • These are a set of recommendations for regulations in the banking industry.
    • India has accepted Basel accords for the banking system.

    Let’s revise them:

    [1] Basel I

    • In 1988, BCBS introduced capital measurement system called Basel capital accord, also called as Basel 1.
    • It focused almost entirely on credit risk. It defined capital and structure of risk weights for banks.
    • The minimum capital requirement was fixed at 8% of risk-weighted assets (RWA).
    • RWA means assets with different risk profiles.
    • For example, an asset backed by collateral would carry lesser risks as compared to personal loans, which have no collateral. India adopted Basel 1 guidelines in 1999.

    [2] Basel II

    • In June ’04, Basel II guidelines were published by BCBS, which were considered to be the refined and reformed versions of Basel I accord.
    • The guidelines were based on three parameters, which the committee calls it as pillars:
    • Capital Adequacy Requirements: Banks should maintain a minimum capital adequacy requirement of 8% of risk assets.
    • Supervisory Review: According to this, banks were needed to develop and use better risk management techniques in monitoring and managing all the three types of risks that a bank faces, viz. credit, market and operational risks.
    • Market Discipline: This need increased disclosure requirements. Banks need to mandatorily disclose their CAR, risk exposure, etc to the central bank. Basel II norms in India and overseas are yet to be fully implemented.

    [3] Basel III

    • In 2010, Basel III guidelines were released. These guidelines were introduced in response to the financial crisis of 2008.
    • A need was felt to further strengthen the system as banks in the developed economies were under-capitalized, over-leveraged and had a greater reliance on short-term funding.
    • Also the quantity and quality of capital under Basel II were deemed insufficient to contain any further risk.
    • Basel III norms aim at making most banking activities such as their trading book activities more capital-intensive.
    • The guidelines aim to promote a more resilient banking system by focusing on four vital banking parameters viz. capital, leverage, funding and liquidity.

     

    UPSC 2022 countdown has begun! Get your personal guidance plan now! (Click here)

  • Asian Development Outlook Report

    The Asian Development Bank (ADB) forecasts has provided some useful insights about India’s GDP growth.

    About Asian Development Bank (ADB)

    • The ADB is a regional development bank established on 19 December 1966 which is headquartered in Philippines.
    • ADB is committed to achieving a prosperous, inclusive, resilient, and sustainable Asia and the Pacific, while sustaining its efforts to eradicate extreme poverty.
    • The bank admits the members of the United Nations Economic and Social Commission for Asia and the Pacific (UNESCAP).
    • The ADB was modelled closely on the World Bank, and has a similar weighted voting system where votes are distributed in proportion with members’ capital subscriptions.
    • The president has a term of office lasting five years, and may be re-elected.
    • Traditionally, and because Japan is one of the largest shareholders of the bank, the president has always been Japanese.
    • ADB is an official United Nations Observer.

    Highlights of the ADB Outlook Report 2020

    • India’s GDP growth will moderate to 7.5% in 2022-23, from an estimated 8.9% in 2021-22.
    • It has factored in the Russia-Ukraine conflict’s implications for India, which would be largely indirect through higher oil prices
    • The severity of the COVID-19 pandemic would subside with a rise in vaccination rates.
    • Higher public capital spending is expected to improve the efficiency of India’s logistics infrastructure, crowd-in private investment, generate jobs in construction and sustain growth.

     

    UPSC 2022 countdown has begun! Get your personal guidance plan now! (Click here)

  • Unlocking the potential of green hydrogen

    Context

    The ongoing tensions between Russia and Ukraine have led to the prices of crude oil shooting to $130/barrel. Green hydrogen is an emerging option that will help reduce India’s vulnerability to such price shocks.

    Four deficiencies in Renewable Energy Technologies

    • 1] Intermittent nature of RE: RE can only be generated intermittently.
    • Battery technology cannot store electricity at a grid scale.
    • 2] Financial viability: There are question marks on the financial viability of green power.
    • In India, renewable electricity is a replacement for coal-based power, the cheapest form of energy.
    • That’s a big constraint on its viability.
    • Moreover, the customers of this power – the state distribution companies – are collectively insolvent.
    • A business cannot prosper if its primary customers are not financially viable.
    • 3] Batteries are not suitable for heavy trucks: While electric cars and two-wheelers get a lot of visibility, much of India’s oil is burnt in heavy trucks.
    • Lithium batteries are not viable for trucks.
    • 4] Critical minerals: Electric vehicles require large quantities of lithium and cobalt that India lacks.
    • These minerals also have very concentrated supply chains that are vulnerable to disruptions.
    • Large-scale investments in electric vehicles may create unsustainable dependencies for the country.

    Is green hydrogen a solution?

    • Intermittent hydrogen in the energy mix can help circumvent some of these problems.
    • Hydrogen is an important industrial gas and is used on a large scale in petroleum refining, steel, and fertiliser production.
    • As of now, the hydrogen used in these industries is grey hydrogen, produced from natural gas.
    • Green hydrogen produced using renewable energy can be blended with grey hydrogen.
    • This will allow the creation of a substantial green hydrogen production capacity, without the risk that it may become a stranded asset.
    • Creating this hydrogen capacity will provide experience in handling the gas at a large scale and the challenges involved.
    • Blending with CNG: To widen the use of green hydrogen, it can be blended with compressed natural gas (CNG), widely used as a fuel for vehicles in Delhi, Mumbai and some other cities.
    • This will partly offset the need for imported natural gas and also help flag off the challenges of creating and distributing hydrogen at a national level.
    • By bringing down the price of green hydrogen sufficiently, India can help unlock some stranded assets.
    • The country has close to 25,000 megawatts of gas-fired power generation capacity that operates at a very low-capacity utilisation level. The high price of natural gas reduces the viability of such electricity.
    • These plants could use hydrogen blended with natural gas. Hydrogen should, however, be used to generate electricity after it has served its utility in other avenue.

    Way forward

    • To catalyse a hydrogen economy, India needs some specialist players to execute projects as well as finance them.
    • Participation of private players: Apart from government-backed players, the hydrogen economy will need private sector participation.
    • India’s start-up sector, with over 75 unicorns, is perhaps the most vibrant part of the country’s economy currently.
    • This ecosystem has been enabled by a mix of factors, including the presence of entrepreneurs with ideas and investors who are willing to back up these ideas
    • Creation of refueling network: One challenge of using new transport fuels, whether CNG or electric vehicles, is the creation of large-scale refuelling networks.
    • Bringing hydrogen vehicles on the road too soon will require the creation of yet another set of infrastructure.
    • Building fleets of hydrogen-fueled vehicles for gated infrastructure can be a good starting point.
    • Airports, ports and warehouses, for instance, use a large number of vehicles such as forklifts, cranes, trucks, tractors and passenger vehicles.

    Conclusion

    The government’s Green Hydrogen Policy sends the right signals about its intent. It now needs to ensure that investment can freely come into this space.

    UPSC 2022 countdown has begun! Get your personal guidance plan now! (Click here)

  • Tariff problem of renewable energy

    Context

    We need to shift to a two-part tariff for solar and wind to incentivise private investments.

    Background of power generation tariff in India

    • The two-part tariff has been in vogue since 1992.
    • It applies to thermal and hydro generation.
    • 1] Fixed component: The first part is a fixed component – the cost that a generator incurs.
    • This is not linked to the amount of power generated.
    • 2] Variable component: The second part varies with the quantum of generation.
    • It does not apply to renewable generation — solar, wind, and also nuclear.
    • Under the two-part formula, the variable cost is calculated on the basis prescribed by the regulatory commissions.
    • This is based on the cost of fuel — coal or gas or lignite — as the case may be.
    • The fixed cost is also determined by regulatory commissions and it has a graded payment system depending on the extent to which the plant would be in a position to generate.
    • The point here is that when a generator is in a position to generate, it gets to recover the fixed cost (or some part of it), irrespective of whether it actually generates power.

    Single-part tariff for nuclear, wind and solar

    • In contrast, solar and wind generation and also nuclear are still governed by a single-part tariff.
    • The single-part tariff applies to nuclear power stations for various reasons including the fact that given the technology, a nuclear generator does not usually increase/decrease the generation at a quick tempo, but maintains a steady stream.
    • In any case, nuclear power accounts for only about two per cent of the entire generation, so let’s leave it aside.
    • On the other hand, solar and wind generation account for about 10 per cent of the generation today and going by the statement delivered during COP26 in Glasgow, we want to ramp it up to 50 per cent by 2030.

    Issues with single-part tariff for wind

    • Must run status: The renewable sector has been given a “must run” status.
    • This means that any generation from renewables needs to be dispatched first.
    • The problem is that “must run” runs counter to the basic economic theory that in order to minimise total cost, dispatch should commence from the source offering the cheapest variable cost and then move upwards.
    • With a single-part tariff, whenever the renewable generator is asked to back down for maintaining grid balance, it is paid nothing.
    • With a single part tariff for renewable generation, the entire cost is variable and at Rs 2.5 per unit for solar generation, it is not the cheapest source.
    • There are several NTPC coal-fired pit head plants whose variable costs are far lower, for example, Simhadri (Rs 1.36), Korba (Rs 1.36), Sipat (Rs 1.43).
    • For the older solar plants, the tariff could be well above Rs 3 per unit and for wind-based generation, it is even higher, averaging around Rs 4.5 per unit.
    • Therefore, the SLDCs often flout the principle of “must run”, since the distribution companies would save money by asking the renewable generator to back down while keeping the tap on for a coal-based generation.

    Solution

    • Two-part tariff for solar: The solution to this problem is to apply a two-part tariff for solar and wind generators as we do for hydro plants today.
    • Lowest variable cost: The overriding principle is that the percentage allocated as variable cost should ensure that renewable generation has the lowest variable cost so that there is no violation of the “must-run” principle.
    • At the same time, the fixed cost component should not be kept so high that it hurts the consumers. 
    • A fine balance between the proportion of the fixed and variable costs will have to be maintained.
    • It would also ensure a certain minimum return to developers even if they are not generating during certain hours, as in the case of coal and hydro plants.
    • Proper environment: If we are serious about having a renewable generating capacity of 450-500 GW by 2030, we need to create a proper environment and ensure adequate returns to invite fresh investments into renewable generation.

    Conclusion

    The switch from a single to a two-part tariff structure for renewables has to be made right now as we are at the cusp of ramping up our renewable generation and it takes time for matters to get streamlined as we have seen in the past.

    UPSC 2022 countdown has begun! Get your personal guidance plan now! (Click here)