If the Cabinet clearing the decks for the Rs 19,744 crore National Green Hydrogen Mission at the dawn of the new year is anything to go by, we could expect more than the standard fare on climate change in this year’s budget.
But with climate risks growing bigger, and the window to prevent catastrophic consequences shrinking, it is perhaps time that climate change imperatives become even more integral to the annual budgeting exercise from hereon.
This would only be logical, with India increasingly taking more serious action around climate concerns — from pioneering the International Solar Alliance in 2015, to announcing a 2070 Net Zero target in 2021, giving its long-term low-carbon development strategy, and putting climate change in the spotlight of priorities after assuming G20 presidency recently.
Even so, the measures are in the right direction but have not been nearly enough to meet the growing challenges and international commitments.
In last year’s budget, the central government enhanced budget allocations in solar and hydro power projects and introduced sovereign green bonds for funding green infrastructure projects. In line with this announcement, sovereign green bonds worth Rs 16,000 crore are being issued by the government in this month and the next. Among other announcements, incentives for the private sector ranged from the Production-Linked Incentive (PLI) scheme for solar power components, to reduction in Goods and Services Tax (GST) rates on electric vehicles (EVs) and their parts. Other measures taken in previous budgets include air pollution mitigation, vehicle scrappage policy, and promotion of renewable energy in the agriculture sector, and the use of LEDs.
The budget exercise must, however, start systematically factoring in the two major types of risks unfolding around climate change: physical risks — such as the direct and indirect impact of weather disruptions on economic and financial parameters; and transition risks, i.e., the effects of actions taken to reduce greenhouse gas emissions and adopt new technologies.
India is among the most vulnerable countries in Asia to physical risks, according to the Intergovernmental Panel on Climate Change. The agriculture sector is particularly vulnerable, given its greater dependence on weather and natural resources. Extreme weather events make budgeting for damages difficult, but they nevertheless need to be factored in.
The Ministry of Agriculture expects demand for crop insurance under the Pradhan Mantri Fasal Bima Yojana only to increase in the coming years. It has announced its readiness to tweak the existing scheme. Enhancing social safety nets such as food subsidies and expanding the Mahatma Gandhi National Rural Employment Guarantee Act become necessary during the course of a year as weather disruptions threaten income prospects and raise the cost of living for vulnerable sections of the society. This can put the annual fiscal math off track or divert spending from capex. In 2022, consequent to extreme weather events, hit to production and hence prices of staples (rice and wheat), the government extended its free foodgrain program beyond the pre-designated period. Our estimates suggest that this program cost the government about Rs 1.3-1.5 lakh crore during April to December 2022.
While the government cannot control the physical risks to the sector, it can speed up other efficiency improvements, such as reducing crop wastage, improving irrigation, setting up warehousing facilities, promoting research and development, and introducing weather-resilient, high yielding varieties of crops.
Transition risks will need a big allocation. And it will require both public and private participation.
India is a signatory to the Paris Agreement and has submitted its Nationally Determined Contributions (NDCs) under it. To achieve Net Zero by 2070, India has committed to have 50 per cent of installed power capacity from non-fossil-based fuels by 2030, reduce emissions intensity of GDP by 45 per cent by 2030 over 2005 level, create a carbon sink of 2.5-3.0 billion tonne by 2030 through enhanced forest cover, and invest in sectors vulnerable to climate change.
We expect this budget to scale up measures in these areas. Direct intervention and investment by the government aside, subsidies to incentivise green transition and taxes to discourage emissions are fiscal tools the government could use judiciously to involve the private sector.
Expansion of the PLI scheme to attract private investment in climate friendly technologies is one way to go about it.
All this, of course, has fiscal implications. For fiscal 2023, the central government’s capex was budgeted to rise 27 per cent on-year, while the food subsidy bill was revised up to address the sharp rise in inflation. Increasingly, the government will need to prepare for spending more on account of climate change, including subsidies to adopt green technologies and developing supportive infrastructure in certain sectors. Over time, it could balance it with taxes, particularly on climate-negative activities.
Emerging country peers like Indonesia and Philippines are already tracking climate change-related measures in their budgets.
The Centre could also take a leaf out of pioneering states’ initiatives in this regard. Odisha became the first Indian state to report a ‘climate budget’ that tags climate-change related measures in its budget exercise. A climate budget helps countries/states identify how much of the spending each year is towards climate change mitigation and adaption related actions. Some other states have also taken measures to support investments and provide subsidies towards green transition.
The United Nations has recognised how transition to a Net Zero world could be one of the greatest challenges of our times.
But it is becoming equally clear that sooner the climate risks are addressed, lower will be the costs incurred on the transition and mitigation. The International Monetary Fund, in its October 2022 World Economic Outlook report, shows how costs to gross domestic product and inflation are lesser if green transition is fast-tracked over the next eight years, as opposed to taking a gradual long-term approach.
Fiscal policy will need to take the lead in this mission.
Dipti Deshpande is Principal Economist and Pankhuri Tandon is Economist at CRISIL. Views expressed are personal.