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Cabinet Note on Methanol

 

Relevancy

  • GS Mains Paper- 3, Environment and Biodiversity

Why in news?

  • NITI Aayog and the Ministry for Petroleum and Natural Gas are drafting a Cabinet Note on methanol.

What is a Cabinet Note and the initiative?

  • When a Cabinet note is circulated it covers all aspects and issues that may pose a challenge for Methanol Policy implementation.
  • The policy will be a combined effort of the Ministry of Petroleum and Natural Gas, Fertiliser and Coal among others.
  • The NITI Aayog will be a facilitator.
  • It is also looking at possible international collaborations.
  • This is to get help during the interim period till coal to methanol production in India reaches a level that it can meet the demand.
  • There is a need to import certain quantity of methanol till then.

What makes methanol a better option for India?

  • Methanol is a cost-effective, non-polluting and versatile fuel.
  • It can fully or partially replace petrol, diesel or liquefied petroleum gas (LPG).
  • With methanol, India aims at trimming the crude oil import bill by 10% by 2022.
  • It can thus reduce India’s dependence on energy imports.
  • Ethanol is made largely from plant-based sources, such as sugarcane and vegetable oil.
  • A land-constrained country like India can ill-afford this.
  • But unlike this, methanol can be derived from a variety of renewable, non-renewable and abundantly available feedstock.
  • These include agricultural biomass, urban solid waste, coal, and natural gas.
  • It, significantly, includes even carbon dioxide (CO2) present in the air.

What is the Potential?

India’s potential to produce methanol is huge. As, India has over –

  1. 125 billion tonnes of proven coal reserves
  2. 500 million tonnes of biomass (generated annually)
  3. substantial quantities of stranded natural gas
  • The locally generated and relatively cheaper methanol can significantly contribute to saving cost.
  • The Indian Railways is considering converting its entire fleet of 6,000 diesel engines to methanol-operated locomotives.
  • This could cut down the railways’ energy bill by half.
  • Besides, if about 20% of crude oil imports are substituted by methanol, vehicular pollution can be slashed by 40%.
  • In all, this is a positive move serving both the energy- and environment-related objectives.

What are the concerns?

  • Methanol-powered vehicles are almost totally non-polluting.
  • However, a large amount of CO2, a potent polluter, is emitted during the process of making methanol from coal.
  • This will need to be either captured and stored or used to co-generate power in methanol plants.
  • Otherwise, it has to be recycled into methanol.
  • However, the technology for this purpose needs further refinement and scaling up.
  • Also, internal combustion engines now can accept methanol-doping of only up to 15% with minimal modification.
  • Higher levels of blending will require changes in engine design.
  • Despite these, the overall gains from the use of methanol outweigh the cost of surmounting the drawbacks.
  • It could certainly add a new dimension to the country’s energy security.

 

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The Risks involving External Debts

 

 Relevancy

  • GS Mains Paper-2, Economy

What is the issue?

  • External borrowers in India are likely to face a turbulent future in the near term due to a depreciating rupee.

What is external debt?

  • External debt is the money that borrowers in a country owe to foreign lenders.

Denomination

  • External debt may be denominated in rupee or any other foreign currency (most of India’s external debt is linked to the U.S. dollar).
  • As of December 2017, about 48% of India’s total external debt was denominated in dollars and 37.3% in rupees.
  • This means most Indian borrowers will have to pay back their lenders by first converting their rupees into dollars.

Debt Profile

  • External debt is classified as ‘External Commercial Borrowing’, ‘Currency Convertible Bonds’ and ‘Government Borrowings’.
  • India’s external debt was $513.4 billion at the end of December 2017, an increase of 8.8% since March 2017.
  • Most of it was owed by private businesses and other non-government entities (about 79%), which borrowed at attractive rates from foreign lenders.

What are the risks involved?

Interest Rates

  • There is greater unpredictability and unexpected changes in the interest rates can result in defaulting of loans and precipitate a crisis.
  • The raising of interest rates by the U.S. Federal Reserve has already caused borrowing rates to rise in various countries.
  • This including in India where bond yields have shot up sharply (the yield on the 10-year government bond has risen by 1.5% in the last 6 months).

Exchange Rate

  • Unexpected changes in the exchange rates of currencies, like say a steep fall in the value of the rupee, for instance, is a big risk.
  • This can cause severe difficulties for Indian borrowers who will now have to shell out more rupees than previously, to pay back dollar-denominated loans.
  • Lenders generally take possible currency fluctuations into account when determining their lending rates, but currency predictions are prone to failures.
  • While there could also be gains from such fluctuations, emerging market currencies usually tend to depreciate when the world economy is reviving.

Current Trend

  • Over the past year, rupee has fallen about 7% against the U.S. Dollar, which is also in line with other emerging market currencies.
  • Such currency movements are due to the increasing dollar demand by investors who wish to sell their assets in emerging markets.
  • Such sell outs pull capital out from emerging markets to invest them in developed markets, as yield there has been rising there lately.

What next?

U.S. Factor

  • The U.S. central bank, has already raised its benchmark interest rate twice this year, and is expected to further raise rates.
  • This is likely to cause more outflow of capital from the emerging markets, thus causing unexpected changes in borrowing rates and the value of the rupee.
  • Both government and non-government borrowers in India, who are exposed to foreign debt, could be in trouble in such a scenario.

RBI Rescue

  • The foreign exchange reserves, held by the Reserve Bank of India (RBI), were around $425 billion as on March 2018.
  • This is the firepower that the RBI can use to support the rupee and bail out borrowers who get into trouble.
  • RBI recently raised its benchmark interest rate (minimum rate charged on non-government securities) for the first time in more than four years.
  • While such a step could help to stem the capital outflow from the country and support the rupee, it could unleash uncertainty in domestic interest rates.

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