Is India’s political economy ready for a low-carbon transition? Due to the climate crisis, India is now being hit by frequent extreme weather, causing loss of lives, livelihoods and economic output ranging from crops to infrastructure. At the same time, the energy transition is increasingly visible – from rising sales of electric vehicles to new plans for solar energy deployment to announcements of green hydrogen and, more recently, green steel. However, the transition to net-zero industries, cities, states, and economies calls for an economic transformation. To sustain this multi-decade marathon, India needs domestic consensus across economy, society and politics.
Extreme weather events are classified for disaster management purposes rather than as a requirement for economic resilience. Repeated shocks – droughts, floods, cyclones – escalate in two ways. One, their frequency and intensity are increasing. Two, they are affecting the same areas, creating multi-threat vulnerabilities. Indian states will face fiscal limitations in responding to recurring shocks. Disaster risk reduction (not just disaster management) is now an imperative. Climate risk is a macroeconomic risk. It will cause social disruption, force migration of internally displaced people, and test the resilience of vulnerable communities and the adaptive and fiscal capacity of the state, especially local administrations.
All risks have costs and the question is who will bear them. Politicians respond to what their constituents want, and Indians are accustomed to protections ranging from low-cost electricity or water to low-cost carbon or natural capital. It is possible that what is good for the planet may also be good for people. But India’s political economy must be able to manage the disruptions that are inevitable in any transition. Can the macroeconomics of political patronage (increasing fiscal constraints) also be environmentally sustainable (by directing public finances towards green alternatives)? Conversely, can environmentally sustainable infrastructure and investment be both economically rational (renewables and energy storage are now cheaper than coal-fired power) as well as politically “sellable”?
Part of the answer will lie in economic feasibility. But the delivered price of electricity, clean public transportation or treated water also depends on other factors, such as who gets the cross-subsidy and who bears the burden. Four paths can be explored to align economics, environment and politics.
First, green livelihood. A “green economy” paradigm extends far beyond energy and may include the bioeconomy, nature-based solutions, and the circular economy. India should identify opportunities across multiple value chains. Not all regions will attract investment in large-scale manufacturing of cleantech products. Instead, new value chains can support more evenly distributed jobs, livelihoods and investment. In a state like Odisha, bio-economy sectors such as seaweed farming, mangrove management or bio-based packaging are more labour-intensive and can attract substantial investment. In 2021, 8,600 million cubic meters of treated wastewater was available, which could have irrigated an area nine times the size of Delhi and generated revenue of $12 billion. The list extends to recycling plastic e-waste, waste from construction and demolition, or batteries.
Second, taxes and subsidies. The low-carbon transition will not succeed unless externalities are taxed and subsidies are repurposed. Both are full of political minefields. As economist As reported a few months ago, there is a conundrum for politicians: Indian voters expect support from the government in terms of cash and food welfare schemes, yet this is insufficient to garner votes as they seek more investment in infrastructure. And also expect better delivery of education and health. Services. For sustainable growth, India’s central and state governments will have to work within limited fiscal space (the state fiscal deficit for FY2015 is likely to be 3.2% of state GDP).
One way is to price and tax externalities such as carbon emissions or water pollution, but in a way that those with larger environmental footprints pay progressively higher rates. With a limited direct tax base, other indirect taxes may have to be reduced to reduce inflationary pressures.
Furthermore, subsidy targeting should be the mantra to optimize budget room and efficient use of natural resources. To reverse the politics of subsidies, costs must be distributed, and benefits must be local and visible. Many plans with positive potential environmental benefits fail because the adverse effect becomes dominant. Take air pollution for example. When pollution abatement measures are implemented, polluting industries or farmers who burn stubble feel the pinch directly, but the broader public health benefits for a healthy and productive workforce are dissipated. More immediate and targeted benefits – such as better public transport for poor workers living in remote suburban areas, cleaner and cheaper fuel for cooking and small industrial clusters or revised agricultural procurement policies – may yield more immediate political benefits.
Third, resource security. India imported coal worth $49 billion, oil worth $132.4 billion and natural gas worth $7.7 billion in FY 2024. Overall, this accounted for ~28% of India’s total merchandise imports. Resource security is an integral part of national security. A transition to clean energy could reduce import bills, and that would be good for the economy and security. If benefits increase with greater indigenization of cleantech components in which India has a comparative advantage.
Building a circular economy reduces the import of virgin minerals and materials. A recent study by CEEW, RMI and WRI India found that systematic recycling of solar panels could meet 20% of the global solar photovoltaic industry’s demand for aluminium, copper, glass and silicon between 2040 and 2050, and battery recycling Less raw material can be produced. Procurement costs will be reduced by 25% to 30% and dependence on critical minerals will be reduced by 15% to 20%. Rajasthan, Gujarat, Karnataka, Andhra Pradesh and Tamil Nadu will account for two-thirds of the 340 kilotonnes of solar waste generated by 2030. They have the opportunity to build substantial mineral-recycling and reprocessing industries.
Fourth, differentiated leadership. India (rightly) supports climate justice by demanding differentiated climate action based on historical responsibility. Also, its domestic policies have helped create large markets for clean energy and (now) electric mobility and (in the future) green hydrogen, green steel, etc. India has taken this home story to the world by co-creating the International Solar Alliance, the Coalition for Disaster Resilient Infrastructure or launching the recently announced Global Biofuels Alliance.
India can articulate its unique approach to the energy transition. It has provided energy access to millions of people (through electrification and clean cooking schemes) while creating a vast clean energy infrastructure. These multiple changes are not sequential (as is the case in advanced economies) nor can they be easily controlled. Instead, they relied on competitive markets, targeted subsidies, and new institutions. These lessons are relevant to other energy-deprived economies, especially in sub-Saharan Africa.
There is also more scope to tell an evolving sub-national story. Several state governments are exploring their own net-zero pathways (Bihar, Gujarat, Odisha, Tamil Nadu) or have updated their state action plans for climate change (Maharashtra). With their different levels of development, there is scope for different leadership even within countries. Some states may aggressively emphasize clean heavy industry, other states may emphasize EV manufacturing and still others may emphasize sustainable agriculture. Differentiated leadership is more authentic, bottom-up, and can offer greater political returns from low-carbon development when strategies are localised, and communities see benefits closer to home.
Change is never straightforward and never unopposed. Managing change requires leadership. We often make the mistake of assuming that the political will for low-carbon and sustainable economic growth will emerge externally. That may be a desirable fantasy. To make this more possible, we must highlight the economic and political returns from new sources of livelihoods, more targeted public expenditure, resource security and opportunities to attract investment and demonstrate leadership at multiple levels. In short, the kind of change that can be supported.
Arunabha Ghosh is the CEO of the Energy, Environment and Water Council. Views expressed are personal
