Macroeconomic policies that manage the consequences of green transition and support from the Global North are essential to India’s future as a green economy
Image Source: Getty
The shift towards a green economy, popularly known as ‘green transition", has emerged as a global imperative to fight climate change. India is recalibrating its economic policies and energy strategies to integrate ‘green’ into its energy system and associated industries by shifting to electric vehicles, embracing green hydrogen, and changing its industrial processes. This transition is not merely an environmental necessity but an economic transformation with significant macroeconomic and social implications. The green transition is fundamentally altering the structure of the Indian economy. Investment in green infrastructure and technology can create a multiplier effect that can boost sectors like manufacturing, services, and agriculture. However, a rapid green economic transition is also associated with risks and challenges that warrant smart policy and regulatory interventions that can balance economic growth and stability without derailing India’s green goals. In addition, the Global North must act more vigorously and accelerate funding and grants, at a concessional rate, to developing countries, including India, to smoothen the transition.
India is recalibrating its economic policies and energy strategies to integrate ‘green’ into its energy system and associated industries by shifting to electric vehicles, embracing green hydrogen, and changing its industrial processes.
The initial investment required to deploy green energy and its associated industries is substantial. Estimates by various agencies suggest India needs to invest an average of US$200 billion per annum for the next 25-45 years to reach net zero. As India reallocates financial resources towards green technologies, other critical sectors important for economic growth and job creation may struggle to raise capital for expansion. This shift in capital allocation from non-green (not necessarily carbon-intensive) to green could lead to short-term employment and gross domestic product (GDP) growth disruptions.
One of the critical challenges is the lives and livelihoods of people, particularly unskilled labourers, who are directly or indirectly engaged in carbon-intensive sectors. They have limited financial and social capital to migrate from one carbon-intensive industry (like coal) to clean energy (renewable energy). States, particularly where coal is a major contributor to states’ revenue, will financially struggle to support the massive number of workers and communities who are left behind in this transition. Here, the Global North must provide financial support to India for a ‘just transition’.
The country’s rush towards adopting renewable energy and electric vehicles (EVs) could initially raise energy and transportation costs in the short term. India will rely on imported technology (e.g., batteries, solar panels) and raw materials like lithium to grow its clean energy and EV sector in the short term till domestic manufacturers are ready to supply these components at a competitive price. Any increase in cost, either due to an increase in raw material cost, rupee evaluation, or higher manufacturing costs, will increase the adoption cost significantly, increasing the burden on the economy. The potential introduction of carbon taxes may further increase the cost of goods manufactured by carbon-intensive but essential industries such as steel, cement, and automobiles. Here, it is important to design policies that can support the reduction of the additional cost burden to the economy. For example, the government can use carbon taxes to incentivise consumers to adopt low-carbon technologies instead of using carbon taxes for other activities.
India will rely on imported technology (e.g., batteries, solar panels) and raw materials like lithium to grow its clean energy and EV sector in the short term till domestic manufacturers are ready to supply these components at a competitive price.
From a fiscal perspective, India’s government will need to strike a firm balance. On the one hand, substantial public investment is required in sectors that cannot attract adequate private capital but are required to meet India’s green transition goals, which will end up straining the budget. On the other hand, the fiscal burden could increase, impacting India’s fiscal deficit and public debt levels. Public capital must be invested judiciously to attract private capital through innovative financial instruments, such as blended financing, which will not increase the public debt burden and allow the government to allocate its budget to other important activities. Also, the Global North must provide concessional capital, grants, and risky and patient capital that can also be used smartly to attract private capital. Grant and concessional capital can be used to reduce the riskiness of projects to attract private capital. Risky and patient capital can be used for low-carbon technologies, which can take a longer time to attract meaningful private investment.
The green transition is expected to influence India’s exchange market. India’s currency value has historically been closely linked to its trade balance, particularly its energy imports. The country is heavily reliant on oil imports, and fluctuations in global oil prices have directly impacted the rupee’s value. Similarly, importing renewable technology components and rare minerals like lithium and cobalt could temporarily increase the current account deficit, exerting downward pressure on the rupee. However, the transition to green energy will help India reduce its reliance on imported oil and gas, which will help the country reduce its current account deficit and manage the exchange rate more effectively. Here, central banks need to balance sudden inflows of foreign capital for the green sector and reduce regular foreign capital outflows for oil and gas.
Another critical challenge is making the benefits of the green transition more symmetrical among states and people. While some states are taking proactive measures to attract green investment, states that are still reliant on carbon-intensive industries and not taking adequate measures to attract green sectors may lag. There are also social implications—a large section of vulnerable individuals who rely on carbon-intensive industries may lose their livelihoods if they are not supported financially and technically to transition to a green economy smoothly. A poorly managed shift could lead to economic volatility, job losses in carbon-intensive sectors, and short-term inflationary spikes. Here, governments can make the green transition just and equitable by supporting vulnerable segments of society in embracing a green economy. While the central government can help states with limited ability to spend on just transition, state governments should design policies and regulations to build an ecosystem in their respective states to make them attractive for green investment.
Policymakers can implement a phased approach, providing a clear roadmap for industries and workers transitioning to green sectors. Investments in skill development and education will be crucial to mitigate job losses and equip the workforce for new opportunities in the renewable technology industries. Further, flexible monetary policies and a responsive fiscal strategy, possibly supported by international climate finance, will maintain macroeconomic stability during this transition period.
India’s green transition presents both challenges and opportunities for its macroeconomic landscape. The short-term impacts may include inflationary pressures and exchange rate fluctuations. The government’s ability to manage this transformation effectively by balancing investment, regulation, and social support measures will be critical in ensuring that India emerges as a resilient and prosperous green economy.
Chinmaya Behera is an Associate Professor at the Goa Institute of Management, and Labanya Prakash Jena is a Sustainable Finance Specialist.
The views expressed above belong to the author(s). ORF research and analyses now available on Telegram! Click here to access our curated content — blogs, longforms and interviews.
Chinmaya Behera is an Associate Professor at Goa Institute of Management. ...
Read More +
Labanya Prakash Jena is working as a sustainable finance specialist at the Institute for Energy Economics and Financial Analysis (IEEFA) and is an advisor at the ...
Read More +
PREV
