India’s federal budget, presented earlier this week, is both a presentation of the national accounts and the only statement of government policy that we get all year. This year, the accounts made for worrying reading. The government is short of money and the economy is short of momentum. As a statement of policy, however, the budget is far more promising.
The federal borrowing program, at over $200 billion in the coming financial year (which starts on April 1 in India), is likely to strain financial markets. Meanwhile, debt has soared since the pandemic began and now hovers at around 90% of GDP. Next year’s fiscal deficit is going to be 6.4% of GDP, much higher than expected. The interest burden has grown almost 40% in just two years; about half of India’s taxes now go to paying off interest on the government’s debt.
The government’s response? Squeeze spending on everything except infrastructure. There’s a clear and coherent principle behind this strategy, one that India’s Finance Minister Nirmala Sitharaman spelled out in her speech to Parliament. The private sector is not investing, so the public sector has to do so and hope that “crowds in” a virtuous cycle of investment and growth. The only problem is that the government has been trying this very trick for over five years and it still hasn’t worked.
Big public works won’t revive private-sector enthusiasm. What’s really needed are new ideas, investable projects, policy continuity — and guaranteed demand. That’s where the budget offered more heartening news.
A large proportion of Sitharaman’s speech was dedicated to climate action and the energy transition. She quoted Prime Minister Narendra Modi just once, to make the point that he had committed India at the COP26 conference in Glasgow last year to a low-carbon development path. To start down that road, the budget announced a slew of green incentives, policies and instruments.
More money was thrown at solar panel manufacturing. A policy was announced to set standards for EV battery-swapping. Fuel used in older (and more polluting cars) was made more expensive. Grid-linked battery farms will receive preferential debt finance. A “climate action” fund is to be set up to blend public and private finance.
The money set aside for metro system and public transport in India’s fast-growing cities was increased, while “zero-emissions zones” in those same cities were proposed. Finally, to help pay for all this, the government announced it would be issuing sovereign green bonds some time during the coming year.
India’s leaders have been flailing about for awhile, searching for a new narrative that might enthuse the private sector and help undergird Indian growth. They tried promoting export-oriented manufacturing but undercut their pitch by issuing protectionist policies and dragging their feet on reform. They tried touting a “Digital India” but haven’t built the skilled workforce such a vision would require.
Now — perhaps as a result of a process of elimination — the government has settled on something that might work. For India, climate change isn’t just an existential threat but the impetus it needs to retool its economy — to create those investable projects and guaranteed demand that private capital so craves. When you combine the global ESG boom with India’s efforts to create specialized funds and a new development finance institution to channel finance to sustainable projects, it’s easy to see how India’s green turn might also ease its capital crunch a bit.
Most importantly, the government’s commitment to supporting low-carbon sectors — from batteries to solar panel manufacturing, electric vehicles to renewable energy generation – is now unquestionable. In a country where the biggest concern for private investors is that a sudden shift in state policy will cause you to lose everything, policy commitment is the only signal that works.
Of course, policy direction and policy action aren’t the same thing. If sovereign green bonds are to help fill India’s fiscal gap, then the government will have to be absolutely clear about where the money is going and what the impact of each dollar raised will be on mitigating emissions. Incentives for battery farms are all very well but protectionist policies have swelled tariffs on battery storage systems to about 40%, according to the Financial Times. India’s powerful legacy automakers have undercut every attempt so far to mandate more zero-emissions transport and they might do so again.
Still, when the possibility of a new, low-carbon growth path is discussed here in Delhi, it is now possible to detect a note of optimism — an emotion which has been thin on the ground in this city for some years. India’s government may be short of money. At least it’s not yet short of ideas. – Bloomberg.