Is India’s political economy ready for a low-carbon transition? India is now repeatedly buffeted by extreme weather thanks to the climate crisis, which is costing lives, impoverishing livelihoods, and damaging economic output from crops to infrastructure. At the same time, the energy transition is increasingly visible — from the rising sales of electric vehicles to new schemes for solar deployment to announcements about green hydrogen, and more recently, green steel. However, a shift to net-zero industries, cities, states, and the economy is a call for an economic transformation. To sustain this multi-decadal marathon, India needs domestic consensus for the economy, society and politics.
Extreme weather events are categorised for disaster management rather than the need for economic resilience. Repeated shocks — droughts, floods, cyclones — are compounded in two ways. One, their frequency and intensity are on the rise. Two, they are impacting the same regions, creating multi-hazard vulnerability. Indian states will face fiscal limitations in responding to repeated shocks. Disaster risk mitigation (not just disaster management) is now an imperative. Climate risk is a macroeconomic risk. It will also cause social disruption, forcing internally displaced migration, and testing 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 used to patronage, from underpriced electricity or water to unpriced carbon or natural capital. It is possible that what is good for the planet can be good for people. But India’s political economy must be capable of managing the disruptions that are inevitable in any transition. Can the macroeconomics of political patronage (rising fiscal constraints) also be environmentally sustainable (by directing public finance towards greener alternatives)? Framed conversely, can environmentally sustainable infrastructure and investments be both economically rational (renewables plus energy storage are now cheaper than coal-based electricity) as well as politically “sellable”?
Part of the answer will lie in economic feasibility. But the delivered price of electricity, clean public transport or treated water depends on other factors as well, such as who gets cross-subsidised and who bears the burden. Four avenues can be explored to align economics, environment and politics.
First, green livelihoods. A “green economy” paradigm extends well beyond energy and could include bio-economy, nature-based solutions and circular economy. India must identify opportunities across many 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 investments. Bio-economy sectors like seaweed cultivation, mangrove management or bio-based packaging in a state like Odisha are more labour-intensive and can attract substantial investments. In 2021, 8,600 million cubic metres of treated wastewater was available, which could have irrigated an area nine times the size of Delhi and generated $12 billion in revenue. The list extends to recycling waste from plastics e-waste, 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 laden with political minefields. As The Economist 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 that is insufficient to garner votes because they also expect greater investment in infrastructure and better delivery of educational and health services. For sustainable growth, India’s central and state governments will have to manoeuvre within limited fiscal room (state fiscal deficit is likely to be 3.2% of state GDP for FY25).
One route is to price and tax externalities such as carbon emissions or water pollution, but in a manner that those with larger environmental footprints pay progressively higher rates. With a limited direct tax base, other indirect taxes might have to be reduced to mitigate inflationary pressures.
Moreover, subsidy targeting must be the mantra to optimise for budget room and efficient use of natural resources. To upend the politics of subsidies, the costs must be distributed, and the benefits localised and visible. Many schemes with positive potential environmental benefits fail because the opposite takes hold. Take air pollution, for instance. Polluting industries or farmers burning stubble feel the pinch directly when pollution abatement measures are enforced, but the wider public health benefits for a healthy and productive workforce are dispersed. More immediate and targeted benefits — such as improved public transport for poorer workers living in distant peri-urban areas, cleaner and cheaper fuels for cooking and small industrial clusters or revised agricultural procurement policies — could deliver more immediate political returns.
Third, resource security. India imported $49 billion worth of coal in FY24, along with $132.4 billion of oil and $7.7 billion of natural gas. Together, these accounted for ~28% of India’s total merchandise imports. Resource security is an integral part of national security. A shift to clean energy could reduce the import bill, and be good for the economy and for security. The benefits increase if accompanied by greater indigenisation of cleantech components in which India has a comparative advantage.
Building a circular economy reduces imports of virgin minerals and materials. A recent study from CEEW, RMI and WRI India finds that systematic recycling of solar panels can meet 20% of the global solar photovoltaic industry’s demand for aluminium, copper, glass, and silicon between 2040 and 2050, and battery recycling could generate lower raw material procurement costs by 25% to 30% and reduce dependence on critical minerals by 15% to 20%. Rajasthan, Gujarat, Karnataka, Andhra Pradesh, and Tamil Nadu will have two-thirds of the 340 kilotons of solar waste that will be generated by 2030. They have an opportunity to build a substantial minerals-recycling-and-reprocessing industry.
Fourth, differentiated leadership. India (rightly) champions climate justice by demanding differentiated climate action based on historical responsibility. At the same time, its domestic policies have helped build large markets for clean energy and (now) electric mobility and (in future) green hydrogen, green steel and so on. India has taken this domestic story to the world, by co-creating the International Solar Alliance, launching the Coalition for Disaster Resilient Infrastructure or the more recently announced Global Biofuels Alliance.
India can articulate its unique approach to the energy transition. It has delivered energy access to hundreds of millions of people (via electrification and clean cooking schemes) while building a vast clean energy infrastructure. These multiple transitions are not sequential (as occurred in advanced economies) nor easily bankrolled. Instead, they relied on competitive markets, targeted subsidies and new institutions. These lessons are relevant for other energy-deprived economies, particularly in sub-Saharan Africa.
There is more scope to narrate an evolving subnational story as well. 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 differentiated leadership even within the country. Some states might push aggressively on cleaner heavy industry, others on manufacturing EVs and still others on 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 seldom unopposed. Managing change requires leadership. We often make the error of assuming that political will for low-carbon and sustainable economic growth will emerge exogenously. That might be a desirable fantasy. To make it more probable, 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 many levels. In short, the kind of change that can be championed.
Arunabha Ghosh is CEO, Council on Energy, Environment and Water.The views expressed are personal
