Allowing private sector greater role in the renewable energy sector will be a major step forward, says a noted analyst
The year 2015 will see global leaders make some critical decisions for the world economy and the environment, impacting the future of current and future generations. India’s government has a unique opportunity to make such decisions. The country’s economy, now valued at $2.1 trillion, needs to follow a trajectory of robust, equitable and sustainable growth that includes all of its 1.25 billion citizens.
All eyes have been on India as it announced its union budget for 2015-16, an important vehicle for transporting millions of its citizens out of poverty. Being the new government’s first full budget, it brings into focus how its policies will be implemented. Budget makers were tasked with finding a good balance between fiscal prudence, reviving growth and delivering on India’s global commitments on the social and environmental front.
Fiscal devolution – an overarching theme
Following a finance commission recommendation, over 40% of central tax revenues have been passed on to state governments to administer. This means that state governments in India – who occupy a federated structure – will soon have much more money (up by 10%) than in previous years to meet their development targets.
There is a downside to the fiscal devolution, however. Given that states have a poor record of not fully spending their annual budgets, will they be able to absorb the extra funds and deliver as envisaged? Development agencies will have an increased role to play to assist state governments to build the technical and leadership capacity needed henceforth at state levels.
Provisioning for clean energy
The government targets completing the electrification of 20,000-odd villages in time for the Amrut Mahotsav in 2022, India’s 75th year of Independence. This year, a much needed Rs. 4,230 crore ($675 million) has been allocated for this purpose. Off-grid solar power generation forms a part of this plan. The railway budget – so large that it needs its own presentation – proposes viability gap-funding to make the transition to clean energy sources.
Thus, the emphasis on clean energy is clear. However, whether or not private players will be allowed to participate in the generation of clean energy remains a question. Opening the sector up to competition and private investment, including innovative financing and bankable power purchase agreements, is necessary to reduce prices and make clean energy more freely available. Without leveraging private sector interest, the budget allocations do not catalyse real change, as in the case of last year’s budget, where the Ministry of Renewable Energy was allocated Rs. 1,349 crore, but only 28% was actually spent.
On the revenue side, the increment in the clean energy cess from Rs. 100 to Rs. 200 per metric tonne of coal is expected to generate Rs. 13,118 crore. The national clean energy fund aggregates Rs. 4,000 crore each year and only 13-14% has been utilised to finance clean environment initiatives. The modalities of utilising the clean energy fund need to be explicitly spelt out soon if the government intends to meet its revised target of installing renewable energy capacity of 1,75,000 MW by 2022.
Growing Indian cities sustainably
The Prime Minister’s ambitious plans for developing 100 smart cities as satellite towns of larger cities and by modernising the existing mid-sized cities surprisingly found no separate mention in the budget speech. However, the programme was allocated Rs.7,060 crore in the previous budget presentation and another Rs. 6,082 crore in the current budget. The allocation does not match stated ambitious targets per se, and there is no clarity about how it will be spent, although a vision for employing public-private partnerships to develop smart cities has previously been articulated in policy conversations.
The budget provides Rs. 24,316 crore to metro rail transport projects in India and Rs. 75 crore for Faster Adoption and Manufacturing of Electric Vehicles (FAME). However, petroleum subsidies continue to be provisioned for, though it has been halved to Rs. 30,000 crore for 2015-16 from an estimated Rs. 60,270 crore in the current fiscal year 2014-15. Under the now popular ‘Make in India’ slogan, car and motorbike manufacture continues to be encouraged.
Reducing dependence on private motorized transport and simultaneously increasing investments in mass public transit systems are central to building efficient cities. Investing in energy and building efficiency and low impact infrastructure to reduce the choking traffic is also more cost-effective than the business-as-usual approach to urban development, which the World Bank estimates to cost the nation a whopping 5.7% of the GDP largely from air pollution. Thus, a clearer road map for the funding of smart urban development along these lines must be laid out in future budgets.
Restoration of natural resources
The Ministry of Environment’s allocation of Rs. 1,681 crore is 37% lower compared to the amount budgeted in 2014-15. While alarming at first sight, this figure needs to be viewed in the context of fiscal devolution. State governments will now have an increased capacity to spend on core activities such as forest conservation, regeneration and protection activities, or to hire the desperately needed staff to implement the work on the ground. And, central ministries will be divested of funds they cannot spend, reflecting the government’s preference for action and a shot across the bow for lackadaisical ministries. For instance, the Ministry of Water Resources is allocated Rs. 4,232 crore this year, but actuals last year stand at a fourth of that value: Rs. 1,057 crore.
Large-scale forest degradation and loss of biodiversity is an economic and social cost to the country. It also endangers the livelihood of forest dependent communities. Yet, forests have traditionally got less than 1% of GDP as outlay, and past budgets have rarely been well spent. The government would be well advised to recognise the value of ecosystem services, estimated conservatively by the World Bank to be 3.6% of the GDP. With an allocation to states of just Rs. 450 crore for the environment, there is clearly some thinking needed on the extent to which an increase in funding can be allocated effectively to conserve and restore the natural assets of the nation.
Adaptation to climate change
An increased allocation of Rs. 39,699 crore to the Mahatma Gandhi National Rural Employment Guarantee Scheme (MGNREGS) is an opportunity to adopt large-scale climate resilient infrastructure development to protect the vulnerable population from the catastrophic impact of climate change. Activities such as bunding and damming are often undertaken by the programme, which not only help build community resilience to climate change, but also provide farming communities with livelihood options in lean periods.
The expansion of farm credit to Rs. 850,000 crore and the allocation of Rs. 5,300 crore for micro-irrigation also go a long way to build resilience. The budget also allocates Rs. 707 crore to support soil and water conservation, and another Rs. 160 crore for the mission on climate change and adaptation. Taking cognizance of India’s 7,500 km coastline, provisions for water logging, flood management strategies and drought proofing are reflected in the budget. Current allocations for flood control stand at Rs. 245 crore and Rs. 100 crores towards the controversial and risky plan for interlinking rivers.
Together, these developments significantly boost the opportunity to integrate climate change adaptation strategies into ongoing development initiatives.
Nitin Pandit is CEO of the World Resources Institute in India.