Economic Survey to have special chapter on financing of climate change

The Finance Ministry will include a special chapter on financing of climate change in the Economic Survey, the Chief Economic Advisor, Mr Kaushik Basu, has said. “This year we have decided to devote a special chapter on the topic of financing of climate change in the Economic Survey,” Mr Basu said while addressing a UNDP event. Speaking at the event, the Economic Affairs Secretary, Mr R. Gopalan, said that the climate change issue is posing a challenge for the world.
“The challenges are both environmental and developmental. Addressing climate change is a challenge for all humanity and it is in our interest that the world community address the issue effectively,” Mr Gopalan said.
He said there is a need to change the way we use natural resources and device new technology to meet the challenges. As per the 2010-11 Economic Survey, India’s total carbon-di-oxide emissions were about 4 per cent of the global emissions. The survey also showed that it cost India 2.84 per cent of its GDP to adapt to climate change. Studies show that even with 8-9 per cent GDP growth every year for the next decade, India’s per-capita emissions will be well below developed countries average.

Bankrolling the banks
The Reserve Bank of India's (RBI) recently released draft guidelines on the proposed implementation of international norms of capital adequacy (Basel–III) would require Indian banks to mobilise huge sums of capital during the next five years. Under the existing Basel-II norms, the Indian banking industry has to maintain total capital — drawn from a combination of equity and preference shares plus long-term debt, both accorded lower priority to monies belonging to depositors — amounting to 9 per cent of their assets calibrated suitably for riskiness (‘risk-weighted assets' or RWA). While the overall ratio has been retained under the proposed new norms, a minor reshuffle has been attempted between equity/preference stock holders and long-term bond holders in the event of a bank failure, with the former having to contribute an additional one percentage point capital to their existing 6 per cent of the total 9 per cent. Further, equity/preference share holders have to come up with an additional 2.5 percentage points in capital as a
buffer for any unforeseen contingencies. That takes the aggregate capital adequacy ratio (CAR) to 11.5 per cent, of which common equity alone would make up 8 per cent. The emphasis is clearly not just on meeting a broadly defined overall CAR of 8 per cent (as it was two decades ago), but also on improving the transparency and quality of the capital base. The implementation period for all these is from January 1, 2013 to March 31, 2017.
The rationale behind fashioning a tighter capital (especially core equity) regulatory regime for banks stems largely from the banking crises that followed the global recession of 2008 and also the ongoing European sovereign debt troubles. These have created renewed concerns over the banking sector's ability to withstand financial shocks and minimise risks of spill-over to the real economy. But implementation will be a huge challenge, with the estimates of fresh capital needed to be raised by all Indian banks ranging anywhere from Rs 1.4 lakh to Rs 3 lakh crore. Given the dominance of public sector banks, it would necessitate large government infusion of funds. Where this money is going to come from, if the Centre would not even be prepared to dilute its stake below 51 per cent, is a huge question mark. This issue came to the fore not too long back, when Moody's downgraded the State Bank of India's credit rating, after its Tier-1 CAR fell below the Government's own 8 per cent prescription. Related to this is the more immediate problem of rising non-performing assets (NPA) on account of loans to a host of troubled sectors from telecom and airlines to power. As these mount – under pressure from high interest rates and the general economic slowdown – banks would have to find resources to maintain even existing capital adequacy levels. The RBI, under the circumstances, cannot be totally oblivious to concerns over the proposed implementation schedule for Basel-III, which is seen to be rather front loaded.