How forward-looking is the Union Budget for 2021-22? Let’s evaluate it from three different perspectives.
First, will it increase the amount of money available for the long-term, transformational projects that will underlie India’s transition to a greener and more inclusive economy?
Second, does it help prepare India for the adoption of frontier technologies?
Third, will it speed up or slow down India’s decarbonisation process?
On the whole, it gets two out of three. I’ll let you decide for yourself if that’s not bad.
First, long-term finance. This is the Budget’s strong point. Indeed, it has done better on this front than pretty much any other Budget in recent memory. There are attempts, big and small, to make it easier for long-term capital. The Finance Minister, for example, announced that a new development finance institution (DFI) would be set up that would focus long-term finance on infrastructure projects in India. We don’t know enough yet about the structure of this DFI. All we know is that the government will invest INR 20,000 crore as seed capital this year, and it intends the DFI to lend INR 5 lakh crore in three years. That is a pretty tall ask in terms of leveraging private capital. But at least the right formula has been found and its implementation is being attempted. We need to now ask how this investment will be structured and directed. Which sectors will the DFI focus on? Will it be used as a mechanism to push private capital towards old, dying sectors—a DFI that tries to recapitalise coal-fired thermal power plants, for example, the domestic equivalent of Beijing’s fossil fuel-intensive BRI? That would be tempting. But it should be avoided. We have an opportunity, given the amount of private capital the government hopes to catalyse, to ensure this money finds the best possible return. A private sector-led DFI will, if it responds to the needs of long-term capital, inevitably look for projects in forward-looking sectors that minimise climate, social and governance risk. Clearly, they’ve got the answer to the first of our three questions right.
Second, preparing India for frontier technologies: There’s a lot here as well, if you look. Often it isn’t the big money claims that make the difference, but the real allocations. Consider the power sector. The Budget promised to put INR 3 lakh crore—US $42 billion—into India’s power sector, specifically its decaying distribution companies. That might hog the headlines. But it isn’t really news; every few years the government has to recapitalise the DISCOMS, which are sinks of public money. Instead, consider a line item that’s smaller by a couple of degrees of magnitude: An INR 7,000 crore allocation to a new investment trust for the power grid. This is, once again, a way to create a way for public and private capital to co-operate. And what it will do, if the trust is properly constructed and designed, will ensure that we get private capital—and therefore private know-how and competence—into the crucial task of upgrading India’s electricity network to deal with the renewable energy generation revolution. That’s the next bottleneck in India’s transition to renewables, and it won’t be overcome with public money alone. Again, the government is on the right track here. Nor is this the only such item in the Budget. For another example, look at the promise of a “hydrogen mission”. For good reason, a lot of people are excited about the possibilities for electric mobility in India. But we can and should also explore other routes to zero emissions — such as, for example, hydrogen fuel cells, which its proponents claim would be more cost effective, less environmentally impactful overall, and easier to transition into. What I saw there was a government that, when it comes to new technologies, is willing to listen to multiple voices and hedge its bets. Another tick, this time on the second of our three questions.
So what of India’s climate ambitions—specifically, the speed at which we move towards decarbonising our economy? Here I think we have to recognise that the Budget, when set alongside several other recent developments, is a bit of a step back. In some sense, the government seems to believe that India’s green transition must take a back seat to its own “self-reliance” slogan. That’s why we see another set of tariffs being put on products relevant to the green transition—solar lanterns, in this case. The government’s argument is that the solar revolution must be indigenously produced. My question: Why? There is so much else that could be produced domestically: Why attack those items essential for climate change? Making solar cells and so on more expensive will inevitably delay India’s decarbonisation, and we should own it. So, no tick on this last question, I’m afraid. Those who care about climate change did not speak out to the government in opposition to such protectionism, so the government went ahead—and India’s battle against climate change will suffer as a result.
The broader lesson is this: We know very little about how the government is going to actually implement many of the recovery and growth-focused schemes announced in this Budget. That means they could screw it up, but it also means that we have a chance to get it right. When it comes to future-proofing India’s economy, the Budget was only the start of the fight.
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Mihir Swarup Sharma is the Director Centre for Economy and Growth Programme at the Observer Research Foundation. He was trained as an economist and political scientist ...
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