RRR-RRR for Circular Economy

Ever since, the United Nations General Assembly set the Sustainable Development Goals (SDGs) in 2015 and intended to achieve them by 2030, the efforts toward a circular economy both in totality and in individual sector and country, has caught momentum. The Sustainable Development Goals are a collection of 17 interlinked global goals designed to be a blueprint to achieve a better and more sustainable future for all by 2030.

In circular economy, 6Rs – reduce, reuse, recycle, recover, redesign and remanufacture are followed. In this way this concept strives to minimize the consumption of natural resources by reusing waste back into the production cycle to produce new products and uses, instead of wasting such materials. In such an economy, all forms of waste return to the economy and are used more efficiently and repeatedly.

Inspired by the UN’s commitment, various national and international agencies are making good headway towards achieving the goals of the circular economy. For example, UNCTAD’s work on the circular economy started in 2015 itself like activities on tackling fossil fuel. Multilateral organizations encourage discussions and activities around this concept by seeking to bring value out of the waste. They also promote collaborative economic activities, innovative business models, consumer awareness and intended behavioural shifts.

A circular economy also entails a market that gives incentives to reusing products, rather than scrapping them, which provides a way to not only protect the environment, but also use natural resources more judiciously, develop new sectors & new capabilities with newer technologies and create jobs. With 45% of global greenhouse gas emitting from manufacturing cars, clothes, food and other products being used daily, the circular economy has huge potential to reduce greenhouse emissions and mitigate the climate crisis, which is fast engulfing the globe and causing severe food crisis in over 20 countries.

India is also working vigorously on this concept with an estimation that its policy could bring in annual benefits of 40 lakh crores in 2050, besides reducing the greenhouse emission by 44% along with significant reduction in congestion and pollution, which would significantly contribute to health and economic benefits also. The Centre is actively formulating policies and promoting projects that are leveraging advanced IT and OT solutions to drive the country towards a circular economy system in critical areas like electricity from recyclable resources, waste management and others. Majority of the countries across the globe are also working on this model of economic development. For example, UAE has very recently approved 22 policies aimed to accelerate the country’s transition towards a circular economy.

Owing to devastating consequences of climate change, the concept of sustainable development has gained much traction among governments, policymakers, economists, environmentalists and business people in recent years. The circular economy has borne out of this concept only, which refers to a model of production and consumption and involves sharing, leasing, reusing, repairing, refurbishing and recycling existing materials and products as long as they are possible. By raising the life cycle of products, this economic concept implies reducing waste to a minimum, thereby protecting the fast degrading environment. This concept does have rich prospects of creating wealth worth trillions of dollars besides generating jobs for millions. According to the Global Commission on Economy and Climate, adopting circular economy principles could deliver 26 trillion dollar in economic benefits by 2030.

Prospects of Platform Economy

Platform economy is fast picking up in India employing lakhs of people and promises to give livelihood to many more in the years to come, thereby changing the face of the traditional employer-employee arrangement. Going by what Niti Aayog says in its report titled ‘India’s Booming Gig and Platform Economy,’- the gig economy gives employment to more than 77 lakh people in India, which can broadly be classified into platform and non-platform based workers. Gig economy being a larger concept, platform comes within its ambit, however it becomes much more substantial with its immense prospects being in the process. With many Digital India initiatives, low cost internet, increasing penetration of smartphones with good specifications and associated technologies, India is fast becoming the new frontier of the platform economy. The world’s youngest population equipped with the required technical knowhow and language skills and the fast rising urbanisation add to the momentum of this change.

Delving deeper into the platform economy, the NITI Aayog reports provides insights into the possibilities of the sector, as well as a road map for further research and analysis. The report estimates that 77 lakh workers were engaged in the gig economy in 2020-21 with construction, manufacturing, retail, transportation and logistics sectors having the highest potential to produce ‘gigable’ jobs in the future for India. Currently more than 75% of the companies have less than 10% of its workforce in gig mode, but this proportion is bound to rise fast with a large number of companies including MNCs fast turning to flexible hiring options.

The scope of the growth of the platform economy is huge as large number of consumers are moving towards digital platforms/apps for their day to day needs and self-employed individuals engaged in the business of selling regional, rural and other things like cuisine, street food, goods etc. also want to be parts of the larger process, so that they can sell their produce to wider markets in towns and cities. However as suggested by the Niti Aayog, this whole process needs some arrangement on the lines of ‘Startup India Initiative’ to accelerate creation of digital platforms through hand holding, funding support, incentives and skill development with accelerating access to finance through products designed for platform workers and linking street food vendors with gig platforms. Platform economy does need unsecured loans especially for the first-time borrowers participating in the process. FinTech and platform businesses may be leveraged to provide cash flow-based loans to such entrepreneurs as against collateral-based loans, thereby catering to the needs of those new to credit. Platform-led models of skilling and job creation also need to be promoted for this sector.

The immense prospects of the platform economy can be gauged from the facts put forward by the Niti Aayog. The gig workforce is expected to expand to 2.35 crore workers by 2029-30. At present, about 47% of the gig work is in medium-skilled jobs, about 22% in high skilled and about 31% in low-skilled jobs. Trends show the concentration of workers in medium skills is gradually declining and that of the low skilled and high skilled is increasing. It may be expected that while the domination of medium skills would continue till 2030, gig work with other skills will emerge.

Demand Destruction – Another way of controlling inflation?

A measure of demand by USA consumers has hit all time low at a time which is seeing very high consumer price inflation, a paradox of sorts, creating a unique situation which can be termed as “Demand Destruction”. Each month University of Michigan publishes USA Consumer Sentiment Index. The consumer confidence measures were devised in the late 1940s which have now developed into an ongoing, nationally representative survey based on telephonic household interviews, and the index is normalized to have a value of 100 in the first quarter of 1966. This index helps to understand how consumers view their own financial situation and the economy, short-term and long-term.

The official release from the university states,”The final June reading confirmed the early-June decline in consumer sentiment, settling 0.2 Index points below the preliminary reading and 14.4% below May for the lowest reading on record. Consumers across income, age, education, geographic region, political affiliation, stockholding and homeownership status all posted large declines. About 79% of consumers expected bad times in the year ahead for business conditions, the highest since 2009. Inflation continued to be of paramount concern to consumers; 47% of consumers blamed inflation for eroding their living standards, just one point shy of the all-time high last reached during the Great Recession……Consumers also expressed the highest level of uncertainty over long-run inflation since 1991, continuing a sharp increase that began in 2021.”

Central Banks across the globe have been raising rates in a very aggressive manner, perhaps most aggressive in this millennium. Soaring Food and Fuel prices over last three month have posed high inflation problem in front of surprised central banks which have been pumping liquidity since Global Financial Crisis. Higher and adamant inflation level might have started due to supply constraints but demand for goods came at unprecedented speed too. Especially in USA where almost half of consumed goods are imported and increase in disposable income of lower income strata on account of covid relief fund distributed fuelled unprecedented demand for available goods. Covid induced social distancing norms meant much of this extra cash in hands could not be spent on services. The sudden surge in demand for goods and inability of producing at home meant windfall gains opportunities for shipping companies though. However painful the situation became due to runaway inflation, supply side ramp up is no where in sight for the biggest economy in the world. A measure of activities in US manufacturing and services, Composite Purchasing Managers Index, fell to lowest level in last 5 months too. With no surge in supply to match the unmet demand consumers are feeling low in confidence about their financial condition as well as robustness of the economy, i.e. needs of goods has to be withdrawn – Demand Destruction is here.

Managing Inflation – Handling Global Troubles Locally

NRIs report price of gas in Bay Area spiking from around $1.3/gallon in March this year to current rate of around $6/gallon. The lingering conflict between Russia and Ukraine has thrown nagging challenges which accentuate the existing supply chain disruptions, causing food, energy and commodity prices being elevated, inflation to hit decadal highs and persistence of demand-supply imbalances. This globalisation of inflation makes it mandatory for the central banks across the globe to reorient and recaliberate their monetary policies. Emerging market economies are facing even bigger challenges from increased market turbulence, monetary policy shifts in advanced economies and their spillover effects, which slow the process of economic recovery in emerging economies like India as is seen by the GDP growth forecasts of World Bank, Moody’s Investors Service, S&P Global Ratings, Fitch, IMF, ADB and RBI.

The protracted conflict in Europe and the accompanying sanctions being increasingly imposed by the western world have kept global commodity prices elevated across the board, exerting sustained upward pressure on consumer price inflation, well beyond the targets in many economies. The ongoing conflict is also turning out to be a dampener for global trade and growth. The steps taken by the advanced economies are also leading to heightened volatility in global financial markets, causing corrections in major equity markets, sizeable swings in sovereign bond yields, US dollar appreciation, capital outflows from emerging markets like India. Globally, stagflation concerns are also growing, which also spurs volatility in global financial markets.

Navigating through difficult times makes it necessary to be sensitive to the new realities and incorporate them into thinking and actions. After much debate and discussions over all possible dimensions of macroeconomic situations and newer challenges being thrown upon by different geo-political and economic happenings globally, today the RBI took a unanimous decision to increase the policy repo rate by 50 basis points to 4.90% with immediate effect. Inflationary pressures going much beyond the upper tolerance level- a gradual, orderly and calibrated rise in repo rates, is something that the RBI is required to take account of, without losing sight of the growth requirements and disturbing macroeconomic stability. However, despite these challenging times, the Indian economy has remained resilient, ably supported by strong macroeconomic fundamentals and buffers. The recovery has gained momentum despite the pandemic and the conflict in Europe.

As the RBI is of the opinion that inflation is likely to remain above the upper tolerance band of 6% through the first three quarters of 2022-23. The reduction in excise duties on petrol and diesel will certainly help in mitigating the inflationary pressures to some extent, however further monetary policy measures appeared necessary to anchor the inflation expectations. According to the provisional estimates released by the NSO on May 31, 2022, India’s real GDP growth in 2021-22 is estimated at 8.7%. The level of real GDP in 2021-22 has exceeded the pre-pandemic (2019-20) level. The recovery in domestic economic activity also remains firm, with growth impulses getting increasingly broad-based. Manufacturing and services PMIs for May point towards further expansion of activity, corroborated by encouraging movements in railway freight and port traffic, domestic air traffic, GST collections, steel consumption, cement production and bank credit. While urban demand is recovering, rural demand is also gradually improving. The contact-intensive services related to trade, hotels and transport have also recovered substantially. Capacity utilisation in the manufacturing sector increased further to 74.5% in the fourth quarter of 2021-22, which is likely to increase further in 2022-23, which is sure to spur the investment activities. Government’s capex push, pick-up in bank credit, persisting growth in imports of capital goods, buoyancy in merchandise exports with double digit growth for the fifteenth successive month in May and high growth of non-oil and non-gold imports are the indications of a sustained recovery in the Indian economy. Hence, there appears no trouble even when RBI raises repo rates in a calibrated fashion.

Crises due to Pandemic, Price Rise & Payments

As if Struggle of twin defecits of BOP and budget were not challenging enough for democratic governments, that triple whammy of post-pandemic systemic stress, price inflation and pay more on debts scenarios are here. Countries of South Asia seem to be exceptionally badly affected by these at the moment,except for India, whose deeply democratic values are not only giving it strength to manage the crises reasonably well at home, but also lend a helping hand to those in need of desperate help.

Economies like Maldives, Nepal and Sri Lanka lie largely dependent on tourism and remittances that dried up due to COVID-19 outbreak. And just when things were beginning to ease up, the Ukraine-Russia crisis caused a global spike in oil and commodity prices. This has caused such economies to face multiple simultaneous problems that include accelerating inflation, widening current account and budget deficits, fast depleting foreign exchange reserves making the nations unable to pay oil bills, and eventually protests and social unrest.

Political turmoil in Pakistan pales in front of looming economic crisis, as food prices are hitting record highs, the value of Pakistan rupee is tumbling uncontrollably, double-digit inflation, low foreign currency reserves and dangers of meeting a serious balance of payment (BoP) crisis. Nepal is also showing classic symptoms of brewing economic crisis as its Forex reserves plunged 18% since July 2021, enough to last for just six months of imports. Inflation is hitting a record high in 67 months due to crop loss due to last floods and war-induced inflation.

Afghanistan has gotten into the hold of Taliban in August last year, who have not shown any intent of changing their ideological bearing on gender and minority issues. Similarly, the iron hold of the Myanmar generals on the nation does not seem to be getting loose anytime soon. The history of Burma weighs heavily on its present despite an educated young populace of digital age.

Sri Lanka stands broke. So much so that Mahinda Rajapaksa, who has long been seen by a large section of the majority Sinhalese as a national Hero who defeated the Liberation Tigers, had to vacate his Colombo Residence, for safety from protesters. The island nation is in turmoil amidst crippling inflation due to the worst economic crisis the country has ever seen since it gained independence in 1948.

Amid such a fiery turmoil in the region, India is trying to help neighbours with resources and aids. It has been promoting a futuristic and planning-oriented economic approach which focuses on nation-building through development, self-reliance in all sectors, modern and innovative economic solutions, digital connectivity, and security solutions.

Vicious cycle of inflation and crisis

India has reported inflation at a 17-month high of 6.95%, the US inflation rate hit the 8.5% mark, a four-decade high, and in the UK, the inflation rate surged to a three-decade high of 6.2% in March 2022. With such high inflation rates, central banks are expected to continue more aggressive interest rate hikes in order to control rising prices, a move that could also prompt more market sell-offs, and making loans and economic activities more expensive.

Post pandemic world was surely not ready for Russia-Ukraine crisis. Oil prices crossed $100 a barrel in few days since crisis started unfolding and jumped to even $139 a barrel at one point, the highest level for almost 14 years, while wholesale gas prices for next-day delivery more than doubled. Such a massive surge in energy-prices is sure to negatively affect the global economy as Russia, the world’s third largest producer and exporter of oil after USA and S.Arabia meets 10% of global demand. The European continent is most vulnerable as Russia caters to around 27% of oil and around 40 % of the natural gas needs of the region. Germany which has abandoned nuclear power and relies heavily on Russian gas, has great stakes.

Russia is also a good supplier of grains, vegetable oils and industrial resources such as iron and steel, other metals, machinary and equipment, chemical products, food stuff and agri products, besides being world’s largest exporter of wheat, sixth largest exporter of gold, etc. Trade interruptions and sanctions have meant higher prices for all such products, a development that is further stoking food inflation backed with already disrupted global supply chains of the post-COVID world.

The embargoes and sanctions imposed on Russia by the US, EU and other Western Nations are already showing effects. The move by US, UK, Canada and EU to cut off several Russian Banks from the SWIFT Payments System, is particularly very punitive. Similar step has been taken against Iran and North Korea in the past but the impact registered had not been huge because of the limits of these economies.

Though Russia accounts for a small percentage of India’s total trade, the other sectors that have connections with Russian Firms may get hugely impacted. With Russian banks excluded from SWIFT system, those Indian entities trading with Russian firms will have to face added tensions about future payments and outstanding bills.

India has to strategise as to how to control rising crude prices. In such cases the government is met with two choices i.e. It can either pass on the brunt to consumers or has to let it affect India’s Current Account Deficit (CAD). An RBI study shows that a $10 per barrel increase in oil prices results in an additional deficit of $12.5 billion or Rs. 94,750 crore. It also has about a 24 basis direct impact on retail inflation measured by CPI. This calculation makes the above-mention choice a tough call.

Unlocking potentials of mutual benefits

“I don’t think the things have ever been strong or as good between India and UK as they are now,” said UK Prime Minister Boris Johnson during his two-day maiden visit as PM to India. What remained highlight of British PM’s visit to India was New Delhi’s and London’s major push towards the conclusion of the Free Trade Agreement. This FTA has the potential to double out trade and investment by the end of the decade. The third round of talks begin next week,and negotiators seems to have been given a target to it done by Diwali.

India and the United Kingdoms enjoy a long and historical relationship which was elevated to a comprehensive Strategic Partnership during the India-UK virtual summit in 2021. India’s multi-faceted bilateral relations with UK witnessed a significant stride in the recent past and now the two vibrant democracies are set to give major push to its elevated trade ties with the finalization of the FTA. The agreement will expand India-UK cooperation in different sectors ranging tourism, technology, startups, education, climate change among others. Expected results on both sides are of creating jobs, increasing wages and driving innovations. This will also contribute in integrating value chains and help augment mutual efforts to strengthen the resilience of supply chains. The finalization of ambitious trade deal will also give major boost to Indian exports in labour intensive sectors like Leather, Textile, Jewellery and processed Agri-products. With UK currently as India’s 17th largest trading partner, the total trade between India and UK stood at USD12.5 billion FY 2021-22 (April-Dec).

From describing India-UK ties as ‘beacon in stormy seas’ to describing Prime Minister Narendra Modi as Britain’s ‘khaas-dost’, the British Prime Minister Boris Johnson has spelt out a better understanding between two vibrant democratic countries. The signing of the India-UK FTA will usher in a new age of cooperation and open the way for huge trade and investment opportunities for UK and Indian companies.

Green Money and Entrepreneurship Opportunities

‘Follow the money trail’, this adage from crime novels is proving true to look at the developments towards zero-emission economies. Literally, a sea change in mindset and flow of capital is needed to prevent reaching to the point of no return towards ecological damages. Finance Minister in her budget speech rightly pointed out that, “The risks of climate change are the strongest negative externalities that affect India and other countries.” Prime Minister had also said at the COP26 summit in Glasgow last November that, “what is needed today is mindful and deliberate utilisation, instead of mindless and destructive consumption.”

Presently around two-third of capital goes into high carbon emission economic activities, which need to be reversed completely towards low emission activities. The low carbon development strategy as enunciated in the ‘panchamrit’ that PM announced is an important reflection even of India’s strong commitment towards sustainable development. Further, This strategy opens up huge business and employment opportunities in multiple domains.

Consulting firm McKinsey identifies 11 domains with huge churning and opening up new business opportunities going forward. These are Transport, Building, Power, Water, Consumer, Agriculture and land use, Oil Gas and Fuels, Hydrogen, Waste, Industrials and Carbon Management. Some of these are surely on radar of budding entrepreneurs in India. With Gati Shakti promising to build unprecedented transportation infrastructure, electrification, micromobility and infrastructure for electrical vehicles are seeing increasing number of startups. It is becoming clear that automakers would cease to manufacture cars with internal-combustion engines and roll out EVs instead. Oil consumption would drop, in part because drivers would no longer need to fuel up—and electric-power generation would increase to help charge the world’s expanding fleet of EVs. A much greater share of that electricity would come from solar and wind rather than today’s coal- or gas-fired power plants. Similar opportunities are becoming viable in other domains too.

Capital to fund these have to increasingly come from Green Bonds. India issued $6.11 billion in green bonds in 2021, One of the strongest year since green bonds were first issued in 2015. India’s green bond issuance is set to reach a new record in 2022. Budget promised that, “As a part of the government’s overall market borrowings in 2022-23, sovereign Green Bonds will be issued for mobilizing resources for green infrastructure. The proceeds will be deployed in public sector projects which help in reducing the carbon intensity of the economy.”

Twin Engines of Robust Recovery & Efficient Taxation

India has made a quantum leap in Tax-to-GDP ratio in 2021-22 to reach a level of 11.7%. Tax to GDP ratio of 15% is said to be the tipping point for any country’s developmental trajectory. Some researchers have estimated that over 10 years, per capita GDP is 7.5 percent larger than would otherwise be expected in countries with tax revenues above the 15 percent ‘tipping point’. Below this level, key aspect for pushing for higher economic growth is increasing domestic resource mobilisation (DRM) and getting to 15% level of Tax-to-GDP ratio helps any country in generating sufficient domestic resources to invest in healthcare, education, and infrastructure. Therefore taking this ratio above 15% is a key ingredient for economic growth and, ultimately, poverty reduction.

India’s post pandemic recovery in tax collection is very remarkable even when looked from recent trends perspective. Ratio had fallen to 9.9% in 2019-20 from 11% in 2018-19. Last year, due to poor GDP it had increased to 10.2% and now with significant jump in economic activities, indicating robust recovery the jump of tax ratio to 11.7% is indeed a great news. India’s total tax revenue jumped 34% to ₹27.07 lakh crore in 2021-22, around ₹5 lakh crore more than the Budget estimate. This is clearly indicating the rapid recovery of the economy last year, and also efficient tax administration.

The key ingredients to this increase in tax collection are initiatives under Digital India and simplified corporate taxation. Measures related to ease of compliance and the use of data analytics and artificial intelligence to check evasions have laid the foundation for modern, convenient and transparent taxation system. Gross corporate taxes during 2021-22 were ₹8.6 lakh crore against ₹6.5 lakh crore last year, which shows that the new simplified tax regime with low rates and no exemptions has lived up to its promise thereby enhancing Ease of Doing Business. The number of corporate tax returns filed by businesses increased by 43,000 to over 986,000 .

It is also heartening to see that more of this tax growth is coming from direct taxes. Direct taxes play bigger role in reducing socio-economic inequality. This 11.7% includes a direct tax to GDP ratio at 6.1% and indirect tax to GDP ratio at 5.6%, the ministry added. According to provisional data released on Thursday , the revenue collection is led by 49% growth in direct taxes and 20% growth in indirect taxes. Total direct tax collection in the financial year ended March 31 was ₹14.10 lakh crore and indirect tax, ₹12.90 lakh crore.

It is common observation that as countries develop and income level rises, the ask from government for healthcare, public transportation, education etc rises rapidly and to fulfil that higher Tax-to-GDP ratio is instrumental. Developed countries have this ratio upwards of 30%, unless they have a huge contribution from non-tax revenue source like oil fields etc. In this light, efforts towards making India $5 trillion economy, thereby a global economic powerhouse, have started bearing fruits as directly reflected in India’s GDP growth in recent years.

Discussing Discounted Diesel

Availability, Accessibility, Affordability, and Acceptability – these form the conceptual framework for India’s energy security to support its economic growth and developmental goals. Modern world’s success parameters have primarily been economic, where energy consumption has become both a necessary condition as well as an outcome of it. India lacks capabilities to meet all its energy demand from domestic sources and it has sought to achieve its energy security through multiple partners like Indo-USA nuclear deal, Oil import from Middle East etc. Further, one can see a heightened focus on developing renewable and alternative sources of energy, particularly nuclear, solar and wind. Yet the bitter truth is that presently India is heavily dependent on imported oil.

India’s oil import bill for financial year 2021-22 has doubled against previous year, and it’s natural gas import bill have risen by 61%. It paid USD 82.4 billion for the crude oil in first three quarters,till December 2021, as opposed to around USD 39.6 billion for the same period year before,a jump of 108%. Russia-Ukraine conflict has been the primary reason for the surge in crude prices, which soared to a 14-year high of USD 140 a barrel on March 7, 2022. Amidst this, India has continued to import oil from Russia, and seems to be a target of negative campaign.

India gets bulk of its oil imported from middle east, around 8% from the USA, and in the past maybe less than 1% from Russia. “When the oil prices are high it is natural for countries to go out in the market and look for what are ‘good deals’ for their people,” said External Affairs Minister, S Jaishankar. He added, “We have seen for sometime what looks like a campaign on this issue. I was reading a report. Europe has bought 15% of more oil and gas from Russia than it did a month before. If you look at the major buyers of oil and gas from Russia, I think you will find most of them are in Europe.” Finance Minister, Nirmala Sitharaman has also hit back saying, “why shouldn’t we buy cheap oil from Russia. We need to take care of our national security.” She also said the decision of continuously buying discounted oil from Russia has been taken keeping India’s overall interest in mind, ‘If the fuel is available at a discount, why shouldn’t I buy it?’ Reaffirming India’s position on continuing trade with its all weather friend Russia, despite the western sanctions on it, Finance Minister said, we need to protect our own interest.

It is common knowledge that India’s fragile energy security is under severe strain due to its dependence on imported oil, where monopolies and opaqueness reign. The growth aspirations of this young nation has seen long term increase of energy demand, which has been around 3.6 % pa over the past 30 years, and is likely to grow faster. In this backdrop, the impact of simmering Russia-Ukraine crisis has rightly been summed up by EAM when he says, “I think the real problems are still to come certainly for our part of the world. The financial world is disrupted, the logistics world is disrupted & markets are in turmoil. All of this is going to have consequences on rest of the world.”