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The long road ahead to meaningful energy transition.

From bringing the power sector under GST with low rates to government support for MSMEs in the renewable energy space, a lot remains to be done

The impact of climate change is unmistakable, as seen in the rising number of heat-related illnesses and deaths in India and other regions across Asia, Europe, and North America, as also the intense rainfall in parts of the country this monsoon over short periods leading to flash floods and landslides.

Green development is not just a necessity but an opportunity for India to lead in the global fight against climate change. By 2030, India has pledged to install 500 GW of renewable energy capacity, produce 50 lakh tonnes of green hydrogen annually, achieve 30% EV sales, and cut CO2 emissions by 1 billion tonnes through enhanced energy efficiency. This year when the finance minister presented the budget, the government faced a critical question: What bold actions to take to meet these ambitious goals?

The government made significantly larger allocations to the ministry of new and renewable energy in the budget for this fiscal, compared to the revised estimates for 2023-24 — ₹19,100 crore versus ₹7,848 crore, respectively. Solar power grid saw a 79% rise in allocation, while the overall solar energy space saw this jump to ₹16,394.75 crore from ₹6,041.56 crore. The focus on energy transition was clear from major budgetary allocations in the clean energy space, as well as policy steps such as expansion of the list of exempted capital goods for the manufacture of solar cells and panels in the country as well as discontinuation of the customs-duty exemption on solar glass and tinned copper interconnects.

Despite the positive developments, there remain critical gaps that need to be addressed. As of now, India’s installed renewable energy capacity stands at approximately 150 GW, well short of the 2022 target of 175 GW. This shortfall indicates a significant lag that must be overcome to meet the 2030 goals.

The government had recently announced ₹7,453 crore in viability gap funding for two large-scale offshore wind projects totalling 1 GW. However, to foster a comprehensive green transition, more extensive support is necessary, especially for MSMEs. Estimates suggest that achieving the 500 GW target will require over ₹30 lakh crore in investment over the next decade. Is the government prepared to mobilise such massive resources?

India’s renewable energy sector has shown positive growth but remains behind the 2030 targets. Successful deployment and integration of renewable energy require a secure supply chain, smart grid infrastructure expansion, flexible generation sources, and innovative market mechanisms. Therefore, the renewable energy ecosystem needs further support, tax breaks, relief in import duties and tariff barriers, or tax credits to expedite development and attract essential investments.

To achieve energy independence and spearhead green development, India must boost R&D investment across all renewable sectors. The need is to incentivise R&D by offering tax rebates to local solar photovoltaic system manufacturers and encouraging significant investments from companies with smaller production capacities. Production-linked incentive schemes have been instrumental in boosting domestic manufacturing of solar modules, battery energy storage systems, EVs, green hydrogen, and electrolyzer manufacturing. These schemes should be delinked and disbursed separately for stage-wise production output and include support for ancillary components and the recycling of secondary materials.

Tax rationalisation is another essential measure. The power sector should be brought under the GST ambit, with a reduced GST rate for wind projects and energy storage infrastructure to promote EV and BESS adoption. Additionally, a five-year custom duty exemption for essential components of BESS and reduced GST for hydropower project components are necessary steps to lower costs and stimulate growth. The current GST rates of 18-28% on these components are excessively high and impede the sector’s growth

To enhance investment, the government must also raise sovereign-linked funds and increase equity infusion in organizations like the Indian Renewable Energy Development Agency. For the PM Suryoday scheme to succeed in expanding rooftop solar panels to 100 lakh homes, a robust credit enhancement scheme for MSME installers is vital. Special incentives for banks and non-banking financial companies offering rooftop solar-focused financing products are needed along with innovative financing structures such as infrastructure investment trusts or aggregated bonds. Moreover, the government must address the policy and regulatory hurdles that have slowed down the transition. Delays in land acquisition, grid. connectivity issues, and the lack of long-term financing options are significant barriers. The support announced is without doubt vital, but the road ahead will be far from smooth if the government doesn’t do a lot more of the heavy-lifting.

Souryabrata Mohapatra is a faculty member at NCAER in New Delhi. The views expressed are personal.

A focus on MSMEs as job creators is needed. Their problems with GST and credit need to resolved.

Recently, Arvind Panagariya, the Chairman of the Finance Commission, expressed his view that employment challenge is on account of the country not being able to generate employment in labor-intensive sectors.

The transition from agriculture to other sectors is slow in India. Besides, unlike other countries, the labour force in India is shifting from agriculture to services sector, rather than to manufacturing sector, the principal hub of jobs in other emerging/developing countries.

Indian manufacturing sector is characterised by the existence of a large informal sector, which operates with low capital. Despite this, these small manufacturing units, provide employment to a large section of population. But historically in India, unorganised sector, on an average, flared a lower growth of total factor productivity as compared to organised manufacturing sector.

Hence, higher growth is witnessed in capital-intensive industries rather than labour-intensive industries, despite the latter’s employment generation potential.

This is also reflected in the low share of labour intensive goods in India’s export basket where India’s competes with countries like Bangladesh and Vietnam. So, the right strategy would have been to concentrate on labour intensive manufacturing. But this has not happened in the past. Majority of the policy level reform initiatives focus on organised sector manufacturing. For example, PLI scheme is largely focused on capital intensive industries.

MSMEs and jobs

MSMEs are the backbone of labour intensive industries. According to PLFS 2022-23 data, 74.3 per cent of workers in non-agricultural sector are engaged in the informal sector. The contribution of the Micro, Small and Medium Enterprises (MSMEs) sector to overall GVA was 26.8 per cent in FY21 and its contribution to the manufacturing sector’s GVA is 36 per cent (Economic Survey 2022-23).

MSME performance is dismal; they suffer from limited and costly access to finance. India’s MSMEs tend to remain as MSMEs unlike in other countries where they mature into large companies.

MSMEs often struggle to secure financing from traditional banks due to stringent lending criteria and a complex regulatory framework. Even when financing is available, the interest rates are very high. High cost of capital plagues MSMEs in India, affecting profitability, and hence, financial viability.

GST burden

Moreover, GST is an added burden on the financial stress faced by the MSMEs. For instance, a study on New Zealand, suggests that nearly 60 per cent of the compliance costs of the GST fell on MSMEs. The benefit by these businesses is felt only over a long period of time if those firms survive.

In case of India, it is often found that MSMEs lack access to finance for working or fixed capital.

Thus, if GST indirectly leads to delay in receiving payments from their customers or receiving refunds from government in respect of input credit resulting from submission of GST returns, it would be fatal for the MSMEs.

MSMEs often pay GST even if there is no receipt from the client — to avoid penal charges and other complications. To do so, MSMEs need to block a part of their working capital, which an MSME is always short of.

The GST system’s efficacy depends on the timely compliance of all players in the chain, even from the government if it is a vendor. Of course, this lacuna also applies to medium and large firms, but because of their financial capacity, this is not a serious concern for them.

The Budget announced credit relief for MSMEs through a number of schemes. But these are not focused on changing the regulatory framework which can provide better access to credit, and reduce compliance cost of GST.

The writers are at NCAER. Views expressed are personal.

Westerners worried about growing disparities at home shouldn’t overlook the transformative effect of liberalization in India and China.

Imagine that across the length and breadth of America, working-class wages grew much faster than the incomes of millionaires. Rustbelt states started catching up with their more prosperous coastal counterparts. But these developments came with a caveat: greater income inequality in Beverly Hills. The pay cheque gap between Leonardo DiCaprio and his supporting cast increased. Superhero sequels crushed indie movies at the box office.

Taken as a whole, these developments would be cause for joyous celebration. Few would shed a tear for the Golden Globe nominees falling further behind their Oscar-winning colleagues.

Something analogous to this happy fiction has been happening at a worldwide level over roughly the past half century. While the public discourse focuses overwhelmingly on rising domestic inequality in western countries, global inequality has fallen sharply, primarily due to the rise of two Asian giants, China and India. In 1980, the two countries accounted for almost 40 per cent of the world population but only 5 per cent of world income. Today they still make up roughly the same share of global population, but account for a much larger 25 per cent of global income. The global income distribution remains unequal, but not nearly as unequal as it used to be.

Since they started liberalising their economies in the late 20th century, both China and India have been utterly transformed from the plodding and insular economies they used to be. In neither country was liberalisation a once-and-for-all event; reforms gathered speed at times and subsided or even went into reverse at others. Nonetheless, the overall trajectory has been unmistakable.

Both countries registered a step-increase in GDP growth post liberalisation compared with previous decades. More important, the new economic dynamism lifted all boats. Although both countries saw an increase in inequality after liberalising, there was nonetheless rapid income growth even at the bottom of the income distribution. The steep fall in the number of people living in absolute poverty in China and India must count as one of the most dramatic improvements in human welfare in the history of the world. Together, the two countries were responsible for lifting an astonishing 1.1bn people above the international poverty line over the past four decades.

Over the same period, income inequality rose sharply in the west, so much so that it now dominates the political discourse and is one of the chief culprits behind a resurgent populism on both sides of the Atlantic. In most OECD countries the labour share of income has declined substantially in recent decades, with the gains from economic growth accruing disproportionately to the owners of capital and the highly educated. A vivid illustration is provided by the US, where GDP per capita has more than doubled since the mid-1980s, but median household income has risen by only about 30 per cent.

These numbers are disturbing and politically consequential. They have fuelled populist attacks on what might be called the liberal economic order: a system of free(ish) trade and cross-border investment, substantial immigration from poor to rich countries, and a rules-based international order adjudicated by institutions such as the World Trade Organization. But they need to be put in perspective. The US and western Europe collectively comprise about 11 per cent of the global population. Their deteriorating domestic income distributions must be set against the gains made by much vaster numbers of much poorer people. The economist Branko Milanovic has pointed out that the Theil index — a standard measure of global income inequality — has shown considerable improvement since the 1980s, with widening within-country inequality more than outweighed by narrowing between-country inequality.

How should a universalist — somebody who holds that human life has equal worth irrespective of location — regard the overall trajectory of the past half century? The philosopher John Rawls suggested that questions about the just ordering of society should be considered from behind a “veil of ignorance”. If you knew nothing about your own attributes — whether you were rich or poor, male or female, Chinese or American — which society would you choose to inhabit: today’s world, or the world of 50 years ago? Given that your chances of being Chinese or Indian are roughly two-fifths, while your chances of being a westerner are about one-tenth, you would almost certainly choose the present. Trouble in Beverly Hills should not obscure the much wider progress of those who live on less elevated ground.

The writer is a Visiting Scholar at Johns Hopkins SAIS, a Non-Resident Fellow at Bruegel and a Visiting Professor at NCAER. He is currently writing a book entitled ‘A Defense of the Liberal Economic Order’.