Covid-19: India needs a green economic stimulus | Opinion
Review the approach to the power sector; focus on electrification of transport; invest in tier-2 cities
The economic impact of the coronavirus disease (Covid-19) is likely to be steep. This comes on the heels of a broader economic slowdown in the country over the last three years. Reviving growth will require an unprecedented stimulus package to address the collapse in aggregate household demand and resulting shocks to supply. In India, this stimulus should be “green” — addressing the risks of the climate crisis while also tackling the economic fallout of the virus. Continuing with business-as-usual at this juncture will compromise future economic growth, as we fall behind in cheaper and cleaner technologies, investors divest from fossil fuels, and countries consider climate-related trade barriers. The government can start with steps in three key areas — electricity, transport, and the urban economy — to deliver broad-based growth and improve environmental outcomes.
Even before Covid-19 struck, power demand, a good proxy for economic activity, grew at its slowest pace in six years. The fall in electricity consumption due to the shutdown will further stress distribution companies (discoms), which remain in precarious financial shape and contribute to systemic risks across the financial ecosystem. The government’s move to allow discoms to suspend payments as temporary relief will create downstream problems of lower renewable energy deployment and worsening the financial health of coal plants. For the latter, a long suggested path should be considered seriously with the creation of a power-sector specific “bad bank”, a dedicated holding agency to own and manage the problematic coal fleet. This move would free up ~2.5 trillion from the books and accelerate lending to the post-Covid-19 economy. It also allows the government to set the pace to phase out older and more polluting coal power plants. With power demand stagnant, there is also no economic justification for new coal plants, particularly as the government encourages ambitious capacity targets of renewable energy (RE), which is increasingly dispatchable (with storage) and competitive. Instead, the focus ought to be on improving the utilisation of the stranded lower carbon and more flexible gas fleet, that can help integrate higher shares of renewables on the grid. Overall, improving the finances of discoms will also require creating new forms of electricity demand in urban areas, through related sectors such as transport.
The lockdown has led to clean air and clear skies in cities, highlighting how much vehicles contribute to air quality. Electrification of transport is yet to take off as the Government of India’s electric vehicle (EV) policy has been inconsistent. India’s EV trajectory need not replicate the rest of the world — most of the potential lies with two- and three-wheelers which make up a sizeable chunk of transportation in cities. An analysis by Carnegie Mellon with NITI Aayog shows how high upfront costs for electric two-wheelers due to the cost of battery packs can be reduced by domestic manufacturing of lithium-ion batteries, under the Make in India initiative. Electrification of transport can be a positive for discoms with an increase in revenue and potential to manage charging infrastructure. Utilities and discoms should proactively strategise on how urban electric mobility can help diversify ancillary sources of revenues and integrate charging infrastructure development with urban planning.
Future urban planning in India will contend with choices to grow outwardly or vertically with a collective memory of the pandemic in the background. Indian cities fare poorly on all metrics of resiliency — be it as a response to climate, public health, or economic shocks, which often share common stressors. We will reach, if we haven’t already, decreasing returns on the expansion of megacities, and should instead focus on tier-2 cities with investments in human and physical infrastructure. New Indian cities should adopt transit-oriented, mixed-use urban planning with accessible public transit and EVs that expand the economic radius, free up productive hours stuck in worsening traffic, and reduce emissions and criteria pollutants. Services are easier to supply and monitor as opposed to the ad hoc development that usually takes place. Top-down projects pushed by the Centre and states remain short-term, narrowly-focused, five-year spurts rather than holistic plans with immediate accountability in the local government. Public-private partnerships (PPP) will be strained, especially in the post-Covid-19 economy with public spending having to do the heavy lifting. Once the economy stabilises, a concerted push is needed to clean up the bad debts of banks, redesign PPP, and create a robust municipal bond market.
As governments around the world move to restart economies, capital adequacy requirements — which became more stringent in the aftermath of the financial crises and hurt developing countries like India — are being relaxed and guidelines suspended. A wave of new capital is expected. The pandemic exposed many of the world’s faultlines, but this can also be a fresh start for decarbonisation. Tools exist; technologies have not only broken even, but have become cheaper; and people around the world appreciate the importance of resilience needed to tackle this complex crises.