Incrementalist approaches based on short-term economic returns have rarely worked for seemingly insuperable problems. Great human problems require important public choices. Governments need to take the lead here, as they did in the past.
In the 19th century, public funds set up railroad networks in the US. The subsequent boom and bust left several investors penniless but the infrastructure created was the bedrock of industrial growth in the US in the early part of the last century.
The Indian government needs a similar approach to its climate change agenda. It has taken the lead through its national action plan on climate change. It is unclear how much money the government is putting behind its planned initiatives. One can guess that this will require investment on a large scale. McKinsey and Co. has predicted in a recent study that an investment of nearly $900 billion (Rs42.4 trillion) is required to gradually reduce per capita emissions by half. It is thus unarguable that some start must be made towards this.
Making such an investment is not quite as risky as it seems. Today, governments have a much greater level of financial security than they did 50 years ago. Capital markets are wide and deep and technologies can be commercialized faster than before. The returns on investment in even the most exotic projects can be visualized in years and not decades, as was the case previously. Therefore, our current approach could be more entrepreneurial.
Secondly, one government, pushed by a crisis, has perhaps opened the floodgates of investment in clean technology. US President Barack Obama, in the large stimulus proposal announced this year, provided a package loaded with clean energy incentives. These include $6 billion to fund local energy conservation projects, $11 billion to create a smarter power grid and $3 billion for the so-called carbon capture project. If the money is fully utilized, an investment of close to $50 billion is on the anvil.
To place this in perspective, about $80 billion went into venture capital at the height of the dot-com boom. Despite the subsequent wealth destruction, we must recognize that this frenzy of investment, particularly in fibre optic roll-outs and Internet protocol technologies, led to the development of a far more global, connected and collaborative world.
Similarly, the current stimulus must represent the opening of the financial floodgates into clean tech and surely provide a host of opportunities for Indian companies. Although Indian firms may not directly benefit from such funds, they are likely to be potential vendors to many companies that will. Are there sustained governmental measures to encourage investment into and by companies that can benefit from the Obama stimulus?
The Indian government also needs to develop its own package that can support investment in energy efficient technologies relevant to India. Is this forthcoming?
Direct investment by government is one part of the solution to clean technology investing. The New York Times columnist Thomas Friedman quotes former Saudi Arabian oil minister Sheikh Zaki Yamani as having warned his colleagues at the Organization of Petroleum Exporting Countries that the Stone Age ended not because people ran out of stones but because alternative tools came into being, suggesting that the main threat to oil suppliers would come if customers found it economically acceptable to pay for alternative energy.
Disappointingly, alternatives have been slow in emerging. The energy industry has seen little change in its technologies. This anomaly in today’s Schumpeterian world is possibly a fallout of the various monopolies that energy companies have traditionally enjoyed, leading many investees to feel that any alternative energy project is doomed to fail at the altar of the politically well-connected energy complex.
Such breakthroughs will happen only if entrepreneurs can invest in alternative energy with the confidence that they will make money. This can happen only if the government can also encourage private investment.
Private investment requires faith that there will indeed be a consumer for the product. There is no better way to influence green behaviour and generate confidence among investors to put money behind green projects than through gradual changes in the price people pay for clean technologies. If this were to happen, the tide of innovation that this unleashes would turn into a flood.
The Obama package could just be the fillip the industry needs to make the quantum jump in innovation to create the basic infrastructure in clean technology. His plan for clean energy might have critical consequences. At this time, greater investment from the Indian government, as well as carefully thought-out regulation, could reinforce the impetus from the Obama stimulus and light the fuse for a large and potentially world-beating clean tech industry in India.
India should not lose the chance to be an early mover in the largest new business opportunity of this century.
Govind Sankaranarayanan is CFO, Tata Capital Ltd. He writes every other Friday on issues related to governance. The views expressed here are his own.
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