Expert Speak Terra Nova
Published on Feb 01, 2021
Decoding Budget 2021: Infrastructure, innovation and clean energy transition

Source Image: Getty

As India’s first post-COVID financial roadmap—apart from the inevitable emphasis on healthcare—the Union Budget 2021-22 was expected to focus on economic revival, growth and job creation. The announcements were in line with these expectations, with a sharp increase in infrastructure expenditure, a focus on domestic manufacturing and job creation, and an ongoing emphasis on self-reliance. The government continued to prioritise the clean energy transition, with increased allocations to renewable energy generation, investments in grid infrastructure and support to domestic solar and battery manufacturing.

New funding mechanisms for infrastructure and innovation

The Finance Minister (FM) introduced a bill to set up a new Development Financial institution (DFI) with a financial outlay of INR 20,000 crore and a lending portfolio of INR 5 lakh crore. In addition, there are plans to expand the National Infrastructure Pipeline, and expand the scope and use of instruments like Infrastructure Investment Trusts and Debt Funds. The government also plans to raise funds by monetising existing infrastructure assets. A National Research Foundation (NRF) is to be set up, with an outlay of INR 50,000 crores, to strengthen the research ecosystem. While the structure of the DFI and NRF have not been detailed yet, India has much to gain if the key priorities of these new institutions can be aligned with the country’s green growth agenda. Besides supporting the achievement of climate targets, this could help the government mobilise global sustainable finance flows for both initiatives, as we show in recent research.

Strong emphasis on clean energy generation

Renewable energy remains in focus, with FM Sitharaman announcing additional capital infusions of INR 1,000 crore in the Solar Energy Corporation of India (SECI), and INR 1,500 crore in the Indian Renewable Energy Development Agency (IREDA). She also announced the launch of a ‘Hydrogen Energy Mission’ for generating hydrogen from green sources. This will have massive implications for industrial emissions, especially in ‘hard-to-abate’ sectors like steel, cement and fertilisers, which account for 11 per cent of India’s carbon emissions. It also provides a clean alternative for transportation, particularly at long distances. While details are not yet to notified, the announcement suggests that India is looking at clean energy alternatives across a range of uses.

Investment in energy transmission 

Budget announcements also focused on upgrading India’s grid infrastructure, which is lagging in its renewable energy ambitions. The Power Grid Corporation of India (PGCIL) is the first Indian public company to raise money through an Infrastructure Investment Trust (InvIT), filing an IPO worth US $ 1.1 bn. This includes monetising existing assets worth INR 7,000 crore. IEEFA analysis shows that India needs to invest US $ 60-80 bn in grid infrastructure to ensure absorption capacity for renewable energy. India also has ambitions for international grid connectivity, with PM Modi announcing the One World, One Sun, One Grid project last year. The budget also focused on distribution infrastructure like smart meters feeder upgradation, which will increase distributed energy generation from rooftop solar and solar irrigation pumps. 

In keeping with its emphasis on self-reliance, the government is also supporting domestic manufacturers of solar PV components and batteries

Domestic manufacturing for energy security

In keeping with its emphasis on self-reliance, the government is also supporting domestic manufacturers of solar PV components and batteries. Building local capacity is crucial for India’s energy security, as we currently import 92%<1> of solar panel components and are completely dependent on imports for lithium-ion batteries. While India has always been dependent on energy imports, it has managed to maintain a reasonably diversified supply chain for oil and natural gas. The shift to green energy, however, will lead to a concentration of dependence on China, which in 2019 accounted for 70% of imports for critical sectors .

Note: Country-wise imports of solar cells and modules, wind turbines, permanent magnets, rare earths, lithium-ion batteries, crude oil and liquefied natural gas from April-Dec 2019 in USD million. Calculations: Author’s own
Source: Tradestat database of the Department of Commerce

Both solar PV and batteries will get subsidies through the government’s Production Linked Incentives scheme, announced in November last year, and investors are already showing interest in expanding solar manufacturing. The FM also mentioned that a phased manufacturing plan for solar cells and modules would be announced soon. A more misguided attempt at supporting domestic manufacturing is the imposition of higher import duties on solar lanterns, inverters and lithium-ion batteries in this budget. Besides making domestic producers less competitive, the imposition of duties before sufficient manufacturing capacity is created locally could impact the renewable energy sector negatively.

Increased focus on air quality and urban mobility

INR 2,217 crores was allocated to improve air quality across 42 urban centres with a million-plus population. For rural India, the FM announced the addition of one crore beneficiaries and 100 districts under the Ujjwala Yojana, promoting clean fuels by distributing free and subsidised LPG connections.

To target mobility-related emissions in urban areas, the FM proposed voluntary scrapping of old, fuel-inefficient vehicles. This could boost demand for electric vehicles if it is accompanied by a scheme that offers additional incentives to customers for replacing old vehicles with EVs. Coupled with complementary measures for improving public transport, urban infrastructure, and waste management, these steps can go a long way in creating greener cities by harmonising energy, mobility, and urban transformations.

To target mobility-related emissions in urban areas, the FM proposed voluntary scrapping of old, fuel-inefficient vehicles.

While the budget emphasised both the infrastructure and manufacturing aspects of the clean energy transition, much remains to be done. Details on the new infrastructure DFI and the research fund are not available yet, but it is to be hoped that the government will have a green tilt on both. A new industrial policy is to be announced this year, which should include strategies for low-carbon, environmentally sustainable industry. India’s agricultural workers remain highly vulnerable to climate change, and a number of climate-smart interventions can be adopted. India’s urban transition will require planning beyond the allocations for air quality. This year’s focus was, naturally, on containing health risks. But climate risk looms on the horizon, and this decade is the last one we have to contain it.

<1>Lok Sabha Unstarred Question No. 397, dated 19.07.2018

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Annapurna Mitra

Annapurna Mitra

Annapurna Mitra was Fellow at ORF. She led the Green Transitions Initiative at ORFs Centre for New Economic Diplomacy.

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Tanushree Chandra

Tanushree Chandra

Tanushree Chandra was a Junior Fellow with ORFs Economy and Growth Programme. She works at the intersection of economic research project management and policy implementation. ...

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