| May 31, 2017 | News Article


This article was first published in Business Today.

Naina Lal Kidwai is a member of the Global Commission on the Economy and Climate and Sustainability Chair and Past President of the Federation of Indian Chambers of Commerce & Industry

India is on the threshold of a decisive moment in its growth path. It is on the cusp of major change. As it rapidly urbanises, improves the quantity and quality of energy for all its citizens, and manages the natural resources that underpin lives and livelihoods, the possibility of sustained and sustainable growth is within its grasp.

The world's most populous democracy, home to 1.2 billion people, is also one of the fastest growing economies. Its GDP is the 7th largest globally and is set to overtake the United Kingdom's by 2020, although recent estimates suggest it has already done so.

But benefits of faster GDP growth in recent years are being undermined by harmful spillovers from the current growth model. These include severe local air pollution and its damage to health, rising energy insecurity due to an increasing share of coal and other energy imports, excessive drawdown of groundwater in agriculture, and the costs of rapid but problematic urbanisation.

Thankfully, the negative consequences of our current growth model are avoidable. If we build our cities, farms, and energy systems right, we don't have to choose between continued economic growth and other priorities like health or the environment. In fact, the steps we can take to protect nature are some of the best ways to ensure that the economy keeps its strength.

The right kind of economic growth is ongoing, inclusive, and sustainable. That means ensuring that our cities are those where people can breathe, move and be productive, that the energy that powers industries and homes comes from cleaner, cheaper sources, and that our natural assets can continue providing resources and environmental services on which the well-being of present and future generations depends. The policy decisions we take today can secure this more sustainable growth path. So what are they? Which sectors will they impact? And what other opportunities might prevail if we choose a smarter model of development?

Our cities are already home to over 420 million people, and India's urban population is expected to double to almost 800 million people by 2050. In the next 15 years, 75 per cent of India's national income will come from cities, and that's also where most new jobs will be created. Research has shown that better, smarter urban growth could be an economic opportunity for India worth up to 6 per cent of GDP by mid-century, with significant savings at the household level. But anyone who lives in an Indian city today can already see where the challenges lie in getting us from where we are today to how we fully realise our urban potential.

For one, severe air pollution is a significant burden. A recent study found that poor air quality causes around 1.1 million premature deaths every year in India, overtaking China, where deaths linked to air pollution, although still numerous, have plateaued in the last few years. Ten of the world's 20 most polluted cities are in India. In Delhi, local air pollution was so severe in 2015 that doctors were prescribing patients with serious respiratory problems to simply move out of the city. The recent Supreme Court ruling obliging manufacturers to abide by the new vehicular emission control norms is a positive step. A push to take electric vehicles mainstream would also be welcome, as would better data about traffic and air quality, so that solutions can be tailored for specifics. While Delhi has dropped out of the top 10 to 11th place in global rankings for poor air quality, it still has a long way to go if it is to be a vibrant megacity of the future.

Congestion and traffic are also hindering urban development. Traffic congestion costs in Delhi averaged almost Rs5 per kilometre for cars and Rs10 per kilometre for buses during peak periods. The capital already has over seven million cars, well over 300 cars per 1,000 people. And India is already home to the largest number of total traffic deaths of any country: 137,572 were officially reported in 2013.

All of this adds up. If we continue our current unconnected and poorly planned patterns of urbanisation, we are looking at a cost of between Rs2-12 lakh crore ($330 billion to $1.8 trillion) by 2050, or even higher. This would include the increased costs of providing public infrastructure and services to dispersed urban areas, traffic congestion, air pollution, traffic casualties and health risks. Factoring in increased road and parking capital requirements would drive costs up even higher, upwards of Rs4 lakh crore ($600 billion) per annum by 2050, plus other costs such as the value of displaced agricultural farmland. And providing public infrastructure and services to more sprawled or car-dependent neighborhoods could be as much as 30 per cent higher compared with more compact, connected locations.

There are three main policy actions that could help us more fully harness the potential of our cities and deliver economic, environmental and social benefits. These are: ~ Reforming land regulations to manage urban expansion to improve efficiency and effectiveness of land use. This would cover reform of regulations, including overly restrictive floor space indexes, maximum building heights, setback requirements, plot-coverage ratios, and parking space requirements; strengthening systems for the appraisal of land values, the determination of property rights, and land registration; and conducting public land acquisitions.

~ Expanding sustainable urban infrastructure to encourage appropriately compact, connected, and coordinated cities. This includes enhancing centrally supported urban infrastructure programmes, with a focus on multi-modal transport planning, encouraging innovation in service provision, and ensuring that urban service and user fees reflect the full social costs of services provided.

~ And finally, introducing reforms to strengthen urban local government, including their financing capabilities, and improving governance and accountability. This will include clarifying the growing responsibilities of urban governments, strengthening their administrative capacity, and expanding their fiscal resources.

The second area to focus on is our energy systems. Energy is at the heart of our development ambitions, not only supporting a growing 21st century economy but also bringing light and opportunity to the approximately 240 million people who currently lack it.

Our consumption of energy - although still small per capita - almost doubled between 2000 and 2015. Looking forward, we are set to contribute more than any other country to the projected rise in global energy demand, around one-quarter of the total. This demand will be met from a combination of investing in energy supply, ramping up efforts to improve energy efficiency, and where needed, introducing pricing reform. The 2012 power outage, which lasted about two days and affected almost 700 million people, should also be a reminder that in addition to improving and updating our energy grid we need to look at systemic governance issues across the energy sector. For each of these there are promising signs about the direction of travel but more is possible.

Our current plans for the future of energy are ambitious, but achievable. In addition to the government's goal of achieving 175 GW of total capacity by 2022, our most recent energy draft plan has forecast that 57 per cent of our total electricity capacity will come from non-fossil fuel sources by 2027: that is three years ahead of the schedule we set ourselves as part of the Paris Agreement on global climate. Much of this is thanks to the plummeting prices of solar energy, down by 80 per cent in the last five years, with a recent auction of solar power in India coming in at below Rs3 per kilowatt hour, nearly the lowest in the world. The government's plan also appears to have found favour with major Indian companies that are responding to its signal: Adani, for instance, unveiled the world's largest solar plant in Tamil Nadu, and Tata recently announced plans to generate as much as 40 per cent of its energy from renewable sources by 2025.

The Indian Railways - which transports about 23 million people, roughly the population of Australia, around the country daily and is the single-largest consumer of electricity in the country - is also planning for an exciting low-carbon future.

Transitioning from the current, largely fossil-fuel based energy mix to clean energy like solar and wind power could have multiple benefits ranging from reducing its own operating costs to enhancing India's overall energy security and helping achieve clean energy targets. The cost of 100 per cent decarbonisation could be 26-28 per cent cheaper than a fossil fuel-based business-as-usual pathway by 2030 largely due to the expected continuing decrease of renewable energy costs.

In another encouraging move, India has been phasing out subsidies on diesel and petrol. And in March 2016, the government doubled its coal cess from Rs200 to Rs400 per tonne, the third time it has been increased since it was introduced.

The scope for improving efficiency standards is also significant. If we develop on a low-efficiency pathway, our overall energy demand would be 40 per cent higher by 2030, a difference equivalent to our entire current usage. A 2010 study by McKinsey found that 70-80 per cent of India's infrastructure of 2030 is yet to be built. Therefore, as future demand for energy services grows, incorporating efficiency measures into our upcoming infrastructure could provide a great economic and environmental win-win.

We already have several successful initiatives under our belt. For instance, we have seen a major programme to replace old, inefficient light bulbs with LEDs at the household level, as well as citywide projects to convert street lights to their more efficient LED counterparts. Over 100 cities have signed up. A recent drive to replace over 200,000 street lights in Delhi was billed as the world's largest such exercise. Also, India's Perform, Achieve and Trade Scheme is the first of its kind in the world - a market-based approach to enhancing energy efficiency for the most intensive sectors.

But there is scope to do much more. For instance, there are major efficiency gains to be made from shifting freight transport from road to rail while also decarbonising the railways sector. These actions could deliver substantial savings for the Indian Railways by reducing cash outflows to power rail networks and supporting infrastructure.

At the heart of securing better growth in our cities and our energy systems is the very real challenge of finance. Our renewable energy target, for instance, would require about $189 billion of investment, but if we were to depend only on traditional sources of finance we would face a shortfall of roughly 30 per cent. This gap could be met by institutional investors, such as pension funds, insurance companies, and sovereign wealth funds, but for that to happen there needs to be greater clarity on the business propositions and investable pathways, as well as on currency and offtake risks. There's simply no real option to miss out on these kinds of investors going forward; given the scale of the investments needed and the competing demand on public resources, we will need to be smart about bolstering private investment and finance to help bridge the existing infrastructure investment gap.

Well-designed financial instruments that are a better match with private investors' requirements are a crucial piece of this. Initiatives like the India Innovation Lab for Green Finance are a welcome development in this space, helping to identify, design and accelerate the pick-up of financial instruments. They can include elements like a currency hedging mechanism for foreign investment, an online peer-to-peer lending platform to connect lenders with small renewable energy developers, and a financing facility for rooftop solar power, elements that can help drive needed private investment into renewable energy.

Engaging the public sector at the right time is critical. Given the higher risks associated with earlier phases of infrastructure development, public finance and support can play a key role. A clear and stable policy environment and better management of the risks associated with this phase are essential. The construction phase, which is considered the riskiest, would also benefit from targeted public support. For example, loan guarantees, currency or first-loss insurance can mitigate risks and attract co-financing to get infrastructure built.

Development banks can also play a key role at the table as they bring not only concessional finance technical expertise but also a higher risk appetite, which comes in handy for reducing the cost of capital for newer technologies like solar or wind that may lack a proven track record for traditional investors. India is playing a strong role in creating new banks - the Asian Infrastr- ucture Investment Bank and the New Development Bank - and is a significant shareholder in both the Asian Development Bank and the World Bank. Expanding and enhancing the role of these institutions could provide significant benefits for India.

Institutions like these are especially well placed to work as a bridge between governments and private investors, and to use public finance to catalyse private financing. For instance, once an infrastructure project such as a solar plant or a public transit system reaches the operational phase, its costs and revenues are more certain and stable, which reduces default risk and makes refinancing possible. At that point, ownership can shift from governments, banks and construction companies to investors with specialised expertise in operating and managing the asset. The asset should itself be securitised and sold as bonds to the private sector with the capital then ideally recycled back to finance new infrastructure investments.

Our maiden sovereign wealth fund, the National Investment and Infrastructure Fund, could provide an excellent opportunity to boost capital market financing for infrastructure projects. And our green bond market, which started in 2015, is already the seventh-largest in the world, having raised $2.7 billion. This could be encouraged further as an instrument to enhance liquidity in financial markets and unlock capital for investment, including through agreeing on common standards for them. There are also exciting financing innovations being piloted that we should exploit. For example, mobile phones have made pay-as-you-go solar home systems a reality, as rural users can make their payments through their phone without ever going to the bank. An estimated five million solar home systems will be sold between 2014 and 2018.

India is stepping up as a leader on the global stage on climate action and sustainable development. Today, we have a unique opportunity to prepare and build for a future that is low-carbon and climate-resilient. If we do it right, we will gain economically from livable and productive cities and from clean sources of energy powering our homes and industries. We will avoid incurring later costs from climate change, which the UN estimates could reach $500 billion per year globally by 2050, with potentially even higher costs later in the century. From heat and rising sea levels to drought and food security, India is especially vulnerable and, our poorest fellow citizens, even more so.

But it is within our reach to get this right for ourselves and future generations. As part of our national climate pledge for the landmark Paris Agreement, we quoted Mahatma Gandhi: "One must care about the world one will not see." Our future - the world we are yet to build - depends on it. 

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