India faces two sustainability challenges. First, environmental "bads" - air pollution, dirty rivers, poor urban ecosystems, toxic food - were historically addressed after a country had grown rich. This is what happened with the Thames in England, smog in the US and China. This is politically untenable in contemporary India. We have to fix these "bads" as we grow richer.
Second, India is the first country in the world that will have to complete its development transformation without substantial incremental recourse to fossil fuel energy. And energy is India's binding supply-side constraint for inclusive growth.
Last Friday, UNEP and Ficci launched a report that addresses these challenges, "Delivering a sustainable financial system in India" (which I co-authored). The approach taken in this report is different from that taken by sustainability advocates. The key message: economic growth is at the heart of India's transformation agenda. Generating such growth involves securing considerable financial resources to address supply-side constraints. To secure such resources, sustainable finance is an opportunity, not a limitation.
Also Read
India is in a unique position to turn the sustainability challenge into a growth opportunity since many of the investments we will be making for growth involve enhancing efficiency. Take the case of coal. Our coal mines and thermal power stations are appallingly dirty. The vintage technologies used in both result in abysmally low productivity of both coal and thermal energy. Deploying modern technology to improve productivity will automatically provide a low-carbon dividend. Conversely, anything we do to reduce carbon emissions, will significantly improve the productivity of our coal-based energy ecosystem.
Likewise, India's urbanisation and agriculture challenges require improvements in production efficiency to utilise scarce resources better. We need cities that are energy efficient, public transport networks that enable efficient movement of people, goods and services, and buildings, workspaces and irrigation systems that use energy and water efficiently. We need our demographic dividend to be healthier and not prematurely sickened by water and air pollution if our investments in human capital are to be optimised. Thus, in India, investments in efficiency are also investments in sustainability, unlike in China and the West, which have to replace their existing infrastructure with sustainable alternatives.
This means that our financial architecture can best serve growth by financing efficient and sustainability enhancing investments. This is the focus of the report. It recommends expanding the green bond market to supplement debt resources available from banking and development finance institutions which are already at their prudential sectoral limits. It explores the possibilities for municipal bonds, yieldcos, green IPOs, etc to enhance debt and equity finance for infrastructure. It proposes prudential and risk evaluation procedures that prioritise investments that maximise sustainability and efficiency gains. It draws on international examples from UNEP's global enquiry on how such a focus can increase access to finance for growth enhancing investment by drawing on initiatives in emerging economies like China, Brazil and Bangladesh.
Environmentalists traditionally look to the public exchequer to fund sustainability, viewing environmental "bads" as externalities. This report explicitly acknowledges that public finance cannot be the main instrument to address India's multi-trillion dollar infrastructure and human development challenges. Public finance can incentivise private actions and, where there are market failures, provide finance at the margin to enhance access to credit and mitigate risk perception. The emphasis is on the government getting its regulatory and financial architecture in order so that a demonstrably sustainable financial architecture brings synergy between long term-investors such as pension and sovereign wealth funds - who have, to date, been shy of investing here - and the long-term projects that are key to India's growth strategy. Public finance is used to leverage and incentivise this, to add flavour and whet appetites, much as saffron is used in an exquisite Indian dessert.
With respect to the second challenge, the report provides a base from which India can argue against the current global theology which chokes finance for investments in fossil fuels and nuclear power. It makes clear that Indian stakeholders are well aware that a financial architecture conducive to sustainable development is in the national interest. It highlights the historically unprecedented journey that India has embarked on in this context: heavily taxing fossil fuel consumption, rewarding states committed to afforestation, focusing intensively on energy efficiency, embarking on a huge expansion in renewable energy production and providing global leadership through the International Solar Alliance. It argues that while the West is fixated on prudential measures that restrict financial flows in the name of climate risk, in India, the opportunity is to deliver higher growth by financing an expansion in efficient and high yield assets.
For India, therefore, sustainability is about creative construction - expanding by increasing the stock of efficient green assets - unlike in China and the West, where it is about creative destruction - replacing old assets with new ones that are environmentally friendly. This will be essentially a market-driven, private sector led, process, since we are talking about growing the economy by adding value through sustainable efficient investments, not about alternative sustainable pathways to providing the same value. A financial system complemented by a regulatory framework that rewards efficiency and sustainability, and incentivised by judicious but limited use of taxpayer resources, is the key to capitalising on this value proposition unique to the poorest, but fastest growing, emerging economy in contemporary times.
The writer is director, National Institute of Public Finance and Policy
rr1@nipfp.org.in
Disclaimer: These are personal views of the writer. They do not necessarily reflect the opinion of www.business-standard.com or the Business Standard newspaper
