Inflexion Points: A macro conversation about a mega transformation

It has been three months since the prime minister outlined the panchamrit, committing India to net-zero greenhouse gas emissions, and nearly three weeks since the finance minister announced energy transition and climate action as a key pillar of the Budget. They deserve much credit for according such importance to climate action, something leaders in far richer countries failed to do for decades.

For these political statements to convert into action on the ground, three mega paradigmatic shifts will be needed: Aligning growth, climate and politics; secondly, internalising climate risks for business and economy; and kickstarting a green economic transformation.

In short, we need a meeting of minds. Imagine a ministry of finance macroeconomist (ME), the chief economist (CE) of a large corporate house, and a strategic environmental economist (EE). To complete the cast, we request a fictional senior editor (SE) to moderate a conversation.

SE: What keeps you up at night?
ME: Jobs. As we emerge from the pandemic, I am worried about jobs on two counts. Can we absorb millions of entrants into the labour market? But also, will we face a labour crunch to build infrastructure that can ease our supply-side bottlenecks?

CE: Related to the supply side, my worry is inflation. Supply chains are disrupted and wage inflation is rising. The Ukraine crisis and surge in oil prices are not helping. We see inflation rising rapidly in many developing countries where we have business interests. When developed countries’ central banks raise interest rates, it becomes harder for me to access foreign capital.

EE: Extreme weather. Natural disasters caused $343 billion in damages in 2021. But the “protection gap” (difference between economic losses and what’s insured) is 69% for weather and climate disasters. I would imagine that the number would be even higher for India, where three-quarters of districts have become hotspots for extreme weather events. The pandemic shock is nothing compared to the economic shocks that the climate crisis will bring.

SE: So, it looks like extreme weather could compound the bottlenecks and inflationary pressures. What about growth? What will be the new drivers?
ME: India, of course, is doing very well. It is expected to grow faster than any major economy. At the same time, we should not be sanguine. As the Financial Times reported recently, emerging markets, overall, are not exactly shining beacons. In just half a decade, the difference between their growth rates and that of advanced economies has dropped by half, from 2.73 percentage points in 2016 to 1.35 forecast for 2022. India is an outlier, for now.

CE: I agree, but we should also celebrate the dynamism that the Indian economy is showing. It is a deep market, its startup ecosystem is on steroids, and like it did with IT and ITES in the 1990s and 2000s, now there are major growth opportunities in fintech, EdTech, AgTech. Our conglomerate is constantly looking out for acquisitions. Potential for productivity growth (notice the surge in patent filings) should not underestimated either.

EE: You forgot cleantech! I think the finance minister did the right thing by repeatedly highlighting the “sunrise sectors” that can drive growth. We are relying on a lot of publicly-funded capital investment in FY23. But in the medium term, substantial growth potential lies in renewable energy (including green hydrogen), plus electric mobility, batteries and charging stations. Moreover, this isn’t just a big infra story. From upper middle-class households, there will be a demand boost for efficient appliances and sustainable food (India is promoting 2023 as the International Year of Millets). With right incentives (GST rates), lower middle income families could also make more sustainable choices—and deepen the markets.

SE: I have heard this before but experience says investment doesn’t flow at breathtaking pace into relatively new, risky sectors.
EE: It is abundantly clear that without de-risking and subsidised credit enhancement, equity investments and debt will not be adequate. But it is worth keeping an eye on renewed interest in voluntary carbon markets and how a new market emerges under Article 6 of the Paris Agreement.

SE: Suppose we can get a growth surge out of sustainability. Are there enough investable projects? Can we service the debt?
CE: As you know, we have been steadily building our renewable energy business and are increasingly looking at the mobility transition as well. We’ve seen the numbers (at least $400 billion of investment opportunity until 2030 alone). But when I pitch this to our Executive Council, I get pushback on two fronts. First, are we going to get paid by cash-strapped utilities? Secondly, if the Fed raises rates, my Board gets jittery about dollar-denominated bonds. Masala bonds are preferred but that restricts my access to capital. On both fronts, I am getting squeezed. Can the government help please?
ME: If you ask government for more money, it is not going to come! The best de-risking is policy reform and stronger regulatory institutions. If we can’t get those right, it will be harder to sustain fiscally-driven de-risking. That said, there is value in sovereign guarantees. We see sovereign green bonds as a way to jumpstart the investment cycle in these emerging sectors.

EE: Remember to weigh the risk of giving first-loss guarantees on debt-servicing against the risk of high economy-wide costs of extreme weather, public health impacts and crop loss.

SE: Will the unemployed millions buy this narrative?
ME: We need net new jobs. It is not a choice between manufacturing jobs, service sector jobs and jobs in, say, renewables or EVs. India needs them all. Trade-offs emerge depending on the strategy we adopt. Foreign investment into renewables could increase RE jobs but the upward pressure on the rupee could impact manufacturing jobs elsewhere.

EE: That is if you are banking primarily on exports. We must tap the consumer potential, even in the rural economy. The government has just announced a policy for distributed renewable energy livelihoods, which is itself a $50 billion market. Rather than pit a textile worker against a renewable energy technician, can we not have RE-powered textile factories become more competitive as energy costs drop and jobs in both sectors rise?
CE: Yes, but I can’t get enough skilled or semi-skilled labour. If we don’t skill, reskill and upskill rapidly, we’ll have wage inflation and unemployment simultaneously.

SE: Jobs, growth and sustainability. You’ve given me a lot to think about. Clearly, the hesitancy in some sectors and the backlash in others is real. The underlying reason is not lack of potential. It is whether the state and the market (ideally in sync) can create opportunities fast enough. Cities, states and countries that get that right will capture and maintain an edge in a brave new world, pursuing both macroeconomic sustainability and a sustainability-driven macroeconomy.

ME, CE, EE: On that, we can all agree!

The author is CEO, Council on Energy, Environment and Water Twitter: @GhoshArunabha