Is the Sensex ready for climate change?

Reports talk about a 'carbon tax', which will hit energy-guzzling industries, enough to shake our next budget, writes N Madhavan.

When a fine monsoon rain is pouring out there on Dalal Street, it is difficult to ponder over global warming. But that is what brokers, analysts and eager investors in Mumbai’s financial district should do in the coming days, as they enjoy their hot cups of tea while the Sensex cruises upwards of 14,000.

The country’s premier stock index has right reasons to be where it is now. India is clearly a growth story, and overseas funds pouring into the market are matched by global ambitions of Indian companies, and corporate earnings turn out to be sound enough to combine all that and spin an optimistic picture about where the Sensex could/would/should go.

Finance Minister P Chidambaram is even talking of 10 per cent economic growth in the current fiscal year. He may be right. There is sufficient momentum from both foreign investments and the overhang of the public spending and services sector growth in the past three years of growth to take India to the next level.

But then, there is always room in any story for the plot to thicken – with or without the monsoon rains.

Earlier this month, I enjoyed a flight to Berlin with Prime Minister Manmohan Singh on board, as he left for the German beach resort of Heiligendamm for the Group of Eight (G-8) summit of developed countries. The high point of the summit was President George W Bush’s reluctant-sounding decision that the United States would come into a UN mandated framework on climate change to reduce carbon emissions.

For those of you still not in the loop, the short-hand truth is that fossil fuels like coal, petrol and diesel are heating up the earth, with potentially difficult consequences in climactic conditions. Depending on who you are talking to, you can get gory tales on tsunamis or desertification of the earth. Whatever the detail, the simple fact is that the world is gearing up to contain carbon emissions through a complex set of measures.

Just before boarding the plane to Germany, Dr Singh constituted a high-level panel on global warming, which includes senior bureaucrats, industrialist Ratan Tata, and leading lights on climate change such as RK Pachauri of The Energy Research Institute (TERI) and Sunita Narain of the Centre for Science and Environment (CSE).

As Hindustan Times reported earlier this week, there is already talk of a “carbon tax” that could hit energy-guzzling industries. My guess is that this could land on us as early as the next budget. Add to this, the fact that heavily subsidised Indian fuel prices are already well below global levels, with prices crude oil showing no real signs of easing below the levels of $70 a barrel.

For both fiscal and environmental reasons, I would expect energy prices to go up in the coming days. And energy is an across-the-board thing. It affects costs, pushes up prices and potentially hits corporate demand and earnings.

The 20-something analysts in Mumbai’s mushrooming brokerages may yet await some long-drawn e-mail from their bosses (who receive their wisdom from Hong Kong, Singapore, London or New York) before they shift to crunching numbers on what global warming would do to the earnings of Sensex companies, but there is little doubt in my mind that in the next two or three years, this issue would get some real focus in discussing valuations and earnings of companies.

Things will acquire some shape in December this year, when an international conference at Bali in Indonesia will take us to the next episode of the climate change story. Negotiations may drag on for another two to three years, given the complexity of the issue, but smart governments (including our own) have already begun their work on the issue.

Young analysts and fund managers are advised to read international news if they want to do some real valuations beyond the parroting of company-provided numbers. India is doing badly in cricket anyway, and the sports page may not be where the action is.

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