Boost Green Capex With 'Climate Deficit' to Reverse India's GDP Slowdown

Can we look at increased govt borrowings and a tweak-up in the fiscal deficit target to fund a "climate deficit"?

Image used for representation only. PM Modi speaking at COP28.

(Photo: PTI)

When two problems occur together, can one help us resolve the other? That could well be the question after a week in which two seemingly unconnected events threw an unexpected googly at India's economic administrators. With the Union budget only two months away, and with the bulk of politically crucial elections out of the way, this may be the time for smart thinking with the long term in mind.

The latest quarterly estimate of GDP at 5.4 percent year-on-year growth is not flattering for an economy that put behind the woes related to the COVID-19 pandemic and a general election year in quick succession to eye an aspirational growth path of seven percent per annum.

While policymakers are forever in a talk-up mood and see the latest slowdown only as a blip, data shows that sluggish capital expenditure is the culprit, resulting in a demand slump in the economy and causing a decline in overall growth.

The slump in the July-September fiscal second quarter's growth to the lowest in seven quarters is way below independent projections and the Reserve Bank of India's rosy estimate of seven percent. Independent economists by and large estimated the figure to be closer to 6.5 percent.

RBI governor Shaktikanta Das has understandably been an inflation hawk, pointing time and again to hitherto unbridled food prices as a reason he is in no hurry to slash interest rates. Optimists expect him to take the risk of lowering rates to kick up growth, but central banks are usually known to follow data, not gut feeling or government pressures. We also need to bear in mind that some of the promised and/or delivered increases in the minimum support prices for farm goods in this year's non-stop election season may also have a knock-on effect on inflation.

Are we in a situation that economists call "stagflation" where stagnation meets inflation? Not yet, but there is cause for caution.

The government is in a damned-if-we-do-damned-if-we-don't kind of situation as it is not easy to choose between a potentially inflationary path for growth and inaction that might worsen a slowdown. There is double trouble here. Inflation stemming from increased demand may in the mind of optimists be only temporary until the supply side catches up in a fairy tale sequence.

However, in terms of social or political outcomes, inflation is not a statistical idea based on indices rising up from a base year but a lived experience called price rise. If there is no upward movement in incomes or jobs, the folks in the Finance Ministry at North Block might face tough questions from all quarters.

Is there a way out? There could be, if one stretches one's horizon to include what happened at Baku in Azerbaijan -- or did not. Developing countries, especially India, saw a grand failure in the inability of developed countries to sufficiently increase the funding to decelerate climate change.

While the COP29 (Conference of Parties) attended by delegates from 198 nations agreed on a deal to provide $300 billion in annual climate finance by 2035, India described it as only an optical illusion though the agreement is a jump from the previous commitment of developed countries to provide $100 billion per year by 2020. The current goal was met only in 2022 and ends next year. The $300-billion figure was less than a quarter of the $1.3 trillion annual goal by 2030 that developing countries were seeking. It doesn't help that climate change sceptics or deniers are at the forefront of the economic thought process in US President-elect Donald Trump's administration set to take charge in January.

Where exactly does that leave India?

One cannot say, but there is a case for being a little lax in fiscal spending by gently linking increased expenditure to climate justice. In fact, there is now a clear case emerging for what one might call a "climate deficit" in the Union budget that would identify a portion of the fiscal deficit as one arising from increased expenditure to meet climate goals.

As frequent cyclones sweep various parts of the Bay of Bengal coast, there is a case to see deficit outcomes not just in terms of economic variables such as growth, inflation, and interest rates, but also in terms of the prevention of adverse climate events that have a long-term impact on the economy.

Officially, fiscal deficit includes state borrowings. Can India look at increased government borrowings and a tweak-up in the fiscal deficit target to fund a "climate deficit"? The rationale for such a deficit is that the positive effects of climate management outweigh negative effects such as high inflation.

A smarter way to do the deficit act would be to stagger climate-linked expenditure so that inflation sees a gradual uptick rather than a jump. From the RBI's point of view, this is "out of syllabus" as its mandate is essentially for orderly growth and management of inflation and currency expectations. It may be wiser to delay an interest rate cut as rate cuts only affect overall demand and not the pattern of demand. A "climate deficit" clearly identified as part of the Union budget will address the pattern of demand as well.

In the current global context, there is a case for India to adopt the high moral ground with increased capital expenditure on emissions-fighting technologies or other green initiatives including innovative financing to cut back existing carbon footprints. Why not become a Vishwaguru in climate-related expenditure?

A big positive outcome of this could be that bank finance will increasingly follow government expenditure. The "crowding in" of private expenditure on climate-linked projects can actually have a positive impact on both climate justice and overall GDP growth. If done prudently, a healthy "climate deficit" can lead to a win-win combination. There is a case for the RBI and the government to have a dialogue on this.

A planned climate deficit would be like a "good deficit" if one were to use the analogy of good and bad cholesterol. National Statistical Office data suggests that at both central and state levels, there has been a slowdown in capital expenditures, causing a deceleration in growth.

Gross fixed capital formation (GFCF), which is often a proxy for infrastructure investment, accounted for 30.8 percent of the GDP in the July-September quarter, down from 31.3 percent in the previous quarter. Capex utilisation, as per the Controller General of Accounts, was only 37.3 percent in Q2, down from 49 percent in the year-ago quarter. In rupee terms, that is a drop of as much as Rs 76,000 crore.

Data from October shows a contraction in capital expenditure in the current fiscal year. Estimates suggest the government needs to spend Rs 130,000 crore per month until March to meet its budget target of Rs 11.1 lakh crore.

A blip in the growth rate is not a cause for worry if expenditure, not just in quantity but in flow and focus, arrives at a healthy balance between social, environmental, and growth objectives. My quick calculation shows that 10 of the UN's 17 sustainable development goals can be addressed with climate deficit as a fiscal tool.

As talks begin for the Union budget due in February, the climate is just right to think out of the usual fiscal box.

(The writer is a senior journalist and commentator who has worked for Reuters, Economic Times, Business Standard, and Hindustan Times. He can be reached on Twitter @madversity. This is an opinion article and the views expressed are the author’s own. The Quint neither endorses nor is responsible for them.)