Going green while being in the red

In the third post of a three-part blog series, I4I Editor-in-Chief Parikshit Ghosh advocates for a holistic approach that harmonises India’s environmental policy, social safety nets, and macroeconomic management. Given the difficulty of predicting where and when climate-related needs will arise, he puts forth the idea of a consolidated green fund for the country.

Growth became a mantra for the world after a wave of decolonisation in the middle of the 20^th century. Newly independent nations sought more than liberty. They were also in search of dignity, which could only come through economic parity with the erstwhile rulers.

That quest has traversed a wide arc by now, shifting from central planning and closed economies to liberalised markets and free trade. Regardless, a realisation has dawned on policymakers and the public over time – that economic growth can have serious side effects. It is often accompanied by a growing gap between the rich and poor as well as degradation of the environment (a thumbnail picture of this tendency is the twin Kuznets curves (Nuroglu and Kunst 2017)). Today, it is almost conventional wisdom that a single-minded pursuit of growth can be detrimental to human welfare. It must be tempered by two other equally important goals – equity and sustainability.

It is easy to fall into the conceptual trap that pursuit of these multiple goals presents sharp trade-offs and calls for a difficult balancing act. This is prima facie true in the short run; the high taxes needed to redistribute income and curb externalities will dampen investment and growth. If we take a long-term view, however, a very different conclusion might emerge. Runaway growth that pays no heed to resource depletion and environmental cost will burn itself out soon (Diamond 1995). Environmental regulation that does nothing to mitigate its distributive consequences will generate political resistance and non-compliance (Gaikwad et al. 2022). Reducing poverty and inequality requires government resources which are boosted by growth. Taking advantage of these complementarities is key.

More than tough choices, we need to make farsighted choices. There is much excitement over technological solutions (fortified grains, electric vehicles, solar power) and parsimonious policy instruments (carbon taxes, direct benefit transfers). It will be a mistake to simply tag on a few ‘smart policies’ to an otherwise growth-obsessed policy framework. We need to take a holistic approach and harmonise our environmental policy, social safety nets, and macroeconomic management. A myopic and piecemeal approach runs the risk of creating a dog’s breakfast of measures that often work against one another. Let me illustrate my point with an example or two.

Into thick air

A rapidly growing India is also rapidly urbanising. This has brought in its wake a big pile of urban problems – exorbitant rents, snarling traffic jams, crumbling infrastructure and above all, extraordinary levels of air pollution. The toxic smog that engulfs Delhi every winter has many sources, but a major one lies in its rural hinterland. Farmers in Punjab and Haryana burn paddy stalks to clear their fields for the planting of wheat in November, sending toxic plumes over the entire Indo-Gangetic plain.

Ironically, the crop-burning conundrum can be traced back to a series of well-intentioned steps taken over the years. These two states are the site of the State-enabled green revolution, which transformed them into India’s breadbasket. However, rising agricultural productivity was not matched by a rate of industrial growth high enough to absorb the surplus labour. To arrest the downward pressure on the terms-of-trade and farm incomes, the government has increasingly resorted to the minimum support price (MSP) as a policy instrument.

Though MSP is offered for 23 crops on paper, it is restricted to mainly rice and wheat in practice due to limitations of fiscal space and procurement infrastructure. The resultant distortion in the crop mix is reflected in a rising grain surplus coexisting with shortages in the supply of pulses, fruits and vegetables (Drèze and Oldiges 2024, Anand 2023). It may be a factor behind the unbalanced diet that contributes to India’s malnutrition woes (Thomas 2023). On the environmental front, incentivising the cultivation of water-guzzling crops through MSP and input subsidies has led to an alarming drop in groundwater levels in large swathes of northern India.

To combat the groundwater crisis, in turn, state governments imposed a statutory delay in the planting of the paddy crop, leaving a very short time window between the harvesting of rice and sowing of wheat. This has contributed to the hurried burning of the crop residue in late autumn. Thus, crises spread from incomes to water to air. We have walked our way through a cascade of problems and solutions, each solution triggering its own set of problems.

One might hastily advocate a withdrawal of MSP or a ban on crop burning but that will be throwing away the baby with the bathwater. Given that nearly half of Indian households still rely on agriculture, some policy intervention to keep the rural-urban income gap in check is both socially just and politically expedient, as the recent spate of farmer protests have underscored. Cleaner alternatives to meeting equity goals must be found and some have been proposed, though I will not go into their merits here.

There are also technological fixes – the Happy Seeder machine, for example (see Listman 2020). Farmers have no private motive to adopt this technology unless the government steps in with subsidies, extension services, and information dissemination. It has been estimated that the capital expenditure necessary to equip farmers with the Happy Seeder is to the tune of Rs. 18 billion (Gupta and Somanathan 2017). This comes to a one-time expense of about Rs. 600 for every resident of the national capital region (NCR), and Rs. 35 per head for the people of North Indian states that face the brunt of our winter choke. A Coasian solution that distributes the cost among all stakeholders seems like a no-brainer but it has also been a non-starter.

The revenue-rich Delhi government is sitting on an environment fund of nearly Rs. 7 billion that it is struggling to spend. The money does not find its way to a debt-ridden Punjab government to tackle the problem at source. Fiscal jurisdiction, administrative rigidity, and political rivalries stand in the way. Even Central Pollution Control Board (CPCB) funds collected through a levy on vehicle sales in the Delhi-NCR region remain 80% unspent. We seem unable to move money around while pollutants take a joy ride on the back of wind and water, honouring no state or national boundaries.

In the late 1990s, the Supreme Court ordered many severely polluted Indian cities to replace their petrol-driven fleet of public vehicles (buses, taxis and three-wheelers) by ones operating on natural gas (LPG (liquefied petroleum gas) or CNG (compressed natural gas)). A 2010 survey in Kolkata finds that for most operators, the capital cost of replacement was not covered by fuel cost savings and subsidies offered by the state government (Ghosh and Somanathan 2013). This may explain the street protests, the protracted litigation, and an implementation delay of nearly a decade. A higher subsidy funded by a modest tax on private vehicles may have saved precious time.

India’s battle against air pollution is a story of clumsy mandates trying to make up for lack of fiscal creativity. Technological solutions often concentrate the cost of transition on small but politically organised groups. Bereft of ideas on how winners can be made to compensate losers, missing reliable data on gains and losses, and fearing loss of vote banks, governments have sprung into inaction. Courts have moved in to fill their shoes and a big part of India’s environmental policy is now being spearheaded by judicial activism. However, judges lack political accountability as well as the financial and administrative means to spread out the pain. Will the real government please stand up?

A consolidated environment fund?

If the Centre and state governments have taken a back seat when it comes to air and water pollution, India has recently adopted a proactive stance on greenhouse gas emissions, which will also generate local environmental benefits. However, the bold COP26 pledges made by the Prime Minister bring with them the stiff challenge of climate finance. The share of renewables in India’s coal-hungry power sector is still miniscule, its rooftop solar potential yet largely untapped, its vehicle fleet is ageing and reliant on fossil fuels. We need big investments and targeted subsidies to make the transition.

It is estimated that even in the best-case-scenario, India faces a considerable adaptation cost due to climate change (Gupta 2022). There will be extreme weather events, human displacement, heat stress, reduced crop yields and productivity loss. Funds will be needed to minimise the damage, and since such events are likely to accelerate over time, financial resilience must be built up before the dam bursts.

As discussed earlier, funds often exist but sit in silos, vested in different authorities. Perhaps the time has come to build one consolidated green fund for India, administered by a single authority, similar in spirit to the GST (goods and services tax) reform. It is difficult to tell in advance where climate-related needs will arise and when. We need a robust system that allows resources to flow quickly and freely.

We are, after all, in the same sinking boat.

This article was published in collaboration with the IGC blog as a part of the upcoming India Sustainable Growth Conference at the London School of Economics and Political Science.

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