A Climate-responsible COVID Stimulus Makes Sense for India
By Tarun Gopalakrishnan
India is struggling with a surge in coronavirus cases that is seriously threatening its hospital system and which requires urgent support and collaboration from the world community. In 2020, its economy suffered successive quarters of de-growth, a first since Independence in 1947. Economic growth projections for 2021, which were trending upward a few weeks ago, are now looking bleaker.
Last year, the lockdowns imposed in response to rising cases displaced at least 10 million people and cost 19 million jobs, with young people in the informal sector hardest hit. As India faces a new set of trying choices on public health and economic activity, climate policy does not seem a priority. It is not surprising that, at the climate summit of April 23 organised by the Biden administration, Prime Minister Modi’s statement contained no new commitments.
However, it is difficult to separate out the rapidly-developing COVID crisis from the slower-onset climate one. Every shift in the biological nature of the virus triggers a fresh mini-crisis. While vaccines exist, there is now talk of annual booster shots. This suggests that the pandemic will continue to aggravate long-standing governance challenges in developing countries.
Not only will both these crises co-exist for a while, they may be inter-linked. There is increasing evidence that air pollution (which overlaps significantly with climate pollution) is an aggravating factor in COVID deaths, both as a carrier for the virus as well as a cause of co-morbidities such as lung and heart disease.
In terms of long-range policy, improving public health will require massive public sector investment in developing countries. Climate policy in developed countries is already following a similar public spending paradigm: governments take the lead through green stimulus initiatives or so-called “Green New Deals.”
Since the onset of the COVID crisis, economic stimulus has been re-framed as roadmaps to ‘green recovery’ or ‘building back better’. The question is whether these ideas are useful for India, especially when it is facing a longer road out of the pandemic than previously thought. Evidence supports that they are relevant, for three reasons.
The right principles
Firstly, the principles of a green recovery prioritise people and public welfare, not just in the long-term, but starting now. The key stimulus principles CIERP/CPL has outlined for the United States are –
1. Do good
2. Do no harm
3. Achieve multiple social goals at once, as soon as possible, with down payments for the future
These principles are fleshed out with policy ideas grouped into six categories, addressing a diversity of economic stakeholders - Industrial and Manufacturing Stimulus, Workforce Support and Development, Farms and Food, RD & D, Technology Deployment, and Regulatory Reform. They aim to simultaneously deliver on the desire for economic growth, social justice and climate responsibility.
Similarly, the idea of ‘building back better’ acknowledges the pressing need for immediate economic relief. A seminal working paper in this genre identifies policies - such as healthcare investment, disaster preparedness, clean R&D spending, and clean energy infrastructure investment - which combine such relief with positive climate impact.
More crucially, the paper identifies policies which are bad for the economy as well as bad for the climate, which includes some ‘popular’ items such as income tax cuts, and reduction in VAT and other goods and services taxes. It is nuanced about policies such as rural support – to be avoided by large economies, but a useful climate-and-economic policy tool in low-and-middle-income economies.
So, ‘green recovery’ is not a repeat of old climate politics, which play up the potential for transformations in developing countries, while minimizing the need for the same in developed countries. These proposals align with broader activism which has highlighted the rising economic and social inequality within the global North, as well as between the global North and South. They are useful to India, if appropriately applied to its national circumstances.
An overdue course correction
COVID19 is the most pressing circumstance, but solving the current crisis must look to underlying conditions that preceded the pandemic. Well before the pandemic struck, economists were concerned that India’s GDP growth was not being matched by improvements in employment. Manufacturing and exports were similarly lagging, which prompted the government to launch a ‘Make in India’ programme in 2014. The results were not encouraging, in part because too much focus was put on attracting private capital from abroad.
In the energy sector, a milestone was achieved in 2018 with the extension of the electric grid to all villages in the country, but it did not extend to access for all households. In large states such as Uttar Pradesh, Jharkhand and Assam, fewer than 60 percent of households are connected. Beyond connections, the biggest barrier in ensuring actual affordable electricity use is the poor financial health of the state electricity distribution companies, the so-called ‘discoms’, which buy power from generators and sell to households.
These discoms have been bailed out multiple times. The latest discom bailout policy initiated in 2015 came with conditions attached – requiring improvements in metering technology and prevention of electricity theft. The reforms did not, however, address the core problem – that electricity is unaffordable to large portions of the population, which results in massive state subsidies. The reforms also did not address the fact that highly polluting old coal plants have become a liability, and that shutting them could save discoms USD 7.2 billion - as much as half of their outstanding dues.
These issues preceded COVID19. In India, therefore, it is not as much a question of building back, as it is of building better. Unfortunately, the government’s response to the pandemic has doubled down on its pre-COVID approach. This emphasises minimal government expenditure, preferring instead to relax rules – especially labour and environmental protections, and foreign capital restrictions – to stimulate investment.
To an extent, this is an extension of a long trend in de-regulating the Indian economy since 1991. The opening to foreign capital is likely justifiable in the national interest (the dilution of environment and labour protections, not so). However, with a flagging economy and renewed crisis, there have been demands from different economic stakeholders for the government to deliver a more direct stimulus, instead of hoping for investments from elsewhere. These appeals have intensified since the onset of the pandemic, but to little avail.
In 2020, India undertook four rounds of stimulus totalling approximately USD 350-400 billion. There is considerable confusion around the exact quantity of the infusion, in part because many items in the ‘stimulus’ are a repeat of items in the March 2020 annual budget approved pre-COVID. The government claimed it infused around 15 percent of GDP, but independent experts indicate it was well below 10 percent.
More concerning is the way in which this money has been allocated. The positives first –
In March 2020, the government announced USD 26 billion in direct cash transfers and food distribution to highly vulnerable recipients, along with some distribution of free cooking gas cylinders.
In May 2020, the government announced USD 5.5 billion to the National Rural Employment Guarantee policy, which has potential to improve rural climate resilience through public works such as drought-proofing. This included much-needed support for workers migrating from cities to villages.
In November 2020, around USD 16 billion of ‘production-linked incentives’ were announced for selected ‘sunrise’ sectors, which included significant allocations for advance chemistry cell batteries, specialty steel and high efficiency solar PV modules.
These measures are partially financed by raising taxes on oil and gas, which is now drawing political criticism, but which is part of a long-standing Indian approach to stabilising domestic oil prices and raising revenues when international prices are low. As prices recover, the government is under increasing pressure to reduce these taxes, but it has not yet done so.
These policies are likely to produce some limited climate benefits. However, the bulk of the stimulus makes no reference to climate priorities. A lot of items which could have been good news for the economy and climate now have question marks hovering over them. For example, states have been given permission to spend up to 50 percent of the money ear-marked for disaster relief on COVID recovery. In the absence of instructions to address the current and the climate crisis in parallel, this could result in maladaptation. A similar lack-of-conditions problem affects USD 40 billion in loans to small and medium enterprises.
USD 12 billion was allocated to the discoms. It is expected that this will largely be used to pay (and effectively bail out) coal power producers, while more financially vulnerable renewable power producers are forced to wait to recover their dues. This has been combined with some puzzling ‘reforms’ in the midst of the crisis, such as the opening up of coal mining to privatization, which has seen a lukewarm response from the private sector.
Considering that the government claims that it has limited ability to infuse money into the economy, this lack of direction is a problem. In power generation, new renewable power is now cheaper than new coal plants, storage costs have fallen by more than half over the past decade, and many old coal plants have become a liability. In addition, the privatization of the sector is likely to cost jobs.
This takes away the strongest arguments for coal, which claims 100,000 lives a year through air pollution. The large number of plants already built as well as the centrality of coal mining to India’s political economy means that coal generation is not going away soon. However, it is not the industry that needs further government support. In contrast, the renewable energy industry accounted for over 700,000 jobs nationally in 2018, and the investment it attracts is critical to the government’s intent to create a USD 5 trillion economy.
The automobile sector was in a slump before COVID, with middle-class demand for cars plateauing. In contrast, a transition to electric vehicles could save INR 1.2 trillion in fuel imports, and could generate up to 10 million jobs over the coming decade. Yet, the government is willing to offer a stimulus to the automobile sector generally, without encouraging increased manufacture of affordable EVs. When the government does incentivize EVs, it is slower to use these incentives to decarbonise the electricity grid.
In a sense, this approach was a reflection of India’s ‘all-of-the-above’ energy policy approach. By this logic, the government could announce a laudably ambitious target of 450 gigawatts of renewable energy capacity by 2030, whilst continuing to subsidise coal. It could set aggressive targets for electric vehicle penetration and battery manufacture, while also announcing its intention to be a gas-based economy. This approach outlived its usefulness, and its inherent contradictions were exposed by the pandemic.
To some extent, the latest annual Union budget (approved in March 2021), acknowledged the need to re-orient. It significantly cut expenditure on oil and natural gas, and coal and lignite exploration. It increased allocations to the Solar Energy Corporation of India and the Indian Renewable Energy Development Agency. The Finance Minister’s budget speech acknowledged the need to shut down old coal plants.
However, many contradictions remained. Actual financial allocations to shut down old coal plants were missing. More money has been allocated to discoms, without a clear plan to improve performance on ensuring affordable access or cleaner energy. The same is true of the plan to sell off and privatize some publicly owned transmission assets. There is increased spending for public transport as well as vehicle scrappage, but without a clear mandate to switch to EVs. Import duties on batteries and solar cells remain as they were.
More concerning is that the energy sector may be one of the more robust parts of the latest budget. The allocation for tackling air pollution has been cut by half. There is evidence that spending on health infrastructure has also effectively been cut, despite the government insisting otherwise. In real terms, the budget has likely shrunk overall, with expenditures on food and employment programmes worst hit.
The government seems to be relying on private investments, particularly from abroad, to drive economic growth and recovery. It justifies this, in part, by referring to the fiscal deficit - the Finance Minister argued that the increase in the fiscal deficit from 3.5% to 9.5% during 2020 shows that the government has spent as much as it can.
Space available for a green recovery
The deficit has been a long-term preoccupation of the Modi government; it won plaudits for its performance on this front in 2018. In the two years since, the fiscal deficit has ballooned again, driven by falling revenue collection due to a slowing economy, even prior to the COVID crisis. Not only is fiscal ‘discipline’ now counter-productive, there is evidence that India has the fiscal space to do more stimulus than it has, a view echoed by the usually deficit-wary International Monetary Fund.
The latest Union budget acknowledges this to an extent, aiming for a gradual reduction of the fiscal deficit over 5 years. While some growth estimates were too optimistic, the Reserve Bank of India took into account uncertainty around managing the pandemic when it forecasted GDP growth of 10.5% for 2021-22. That projection has not changed, even with the current intensification of the pandemic. Combined, these facts suggest that there is fiscal space for a responsible increase in government spending.
Politically, the government’s focus on solar power has been popular. Air pollution has been an ongoing political issue, and the emerging links with COVID should increase public demands to simultaneously address both crises. The private sector continually pushes for more government investment in domestic innovation and manufacturing. In an increasingly warming world, investing in public health has significant co-benefits for climate resilience.
In addition, the government should ensure that available spending is usefully focused. While the government has increased R&D spending this year, it could clarify how it will prioritize leapfrog emissions-reducing technologies, especially in under-researched sectors such as steel and cement. It could attach a condition requiring state distribution companies to pay renewable power producers in full and on time, in order to receive their stimulus payments. It could instruct state governments to use their disaster funds in a way that provides pandemic relief while building climate resilience.
The government should allocate finance to permanently close unviable coal plants and mines. Companies which acquire coal mines could pay into a just transition fund, which would offset the health and inequitable economic impacts of coal mining. Small and medium enterprises which benefit from stimulus loans as well as the recipients of stimulus in the ten designated ‘sunrise’ sectors could be required to start systematically accounting for their carbon impact.
In planning this transition, policymakers must avoid the false dichotomy between self-sufficiency and foreign intervention in the economy. India has the ability to raise finance domestically, but needs a favourable international environment to maximize this ability. Around the world, developed country governments (including economically conservative ones) have set aside fiscal deficit concerns and committed to spending their way out of the crisis. Yet, there is still resistance at international fora to relaxing similar constraints on the developing world.
This is true of the climate and the COVID crises. For example, the Biden administration’s decision to deploy USD 1.2 billion in supplies and support to India is a step in the right direction. The gesture, well intended, does not remove the need to seriously re-examine some American policy choices which contributed to the current situation.
Decades of diplomatic effort have positioned India in productive partnerships with many Western governments on climate mitigation and adaptation. If there was ever a time to make the political argument, at home and abroad, for India to have maximum cooperation in increasing government spending, it is now. Doing so would not only enable an appropriate response to the intensifying pandemic, it would highlight India’s economic and moral centrality to resolving the climate crisis.
Conclusion
In sum, prioritising a climate-responsible recovery is economically beneficial for India, with significant benefits for the globe. It is based on the right principles, emphasising the equitable approach that India has often championed at international fora. These principles suggest a re-orientation that would have made sense even without the COVID crisis, and make even more sense today. This re-orientation is within India’s economic capacity and, if appropriately supported by the international community, could ease its path out of the pandemic and set it up for a decade of sustainable growth.
Tarun Gopalakrishnan is a junior fellow at The Climate Policy Lab at The Fletcher School, Tufts University.