Previous Quarterly Editions
Expropriation Risk: 52 52 52 53 ► Political Violence Risk: 57 57 57 57 ► Terrorism Risk: 69 69 69 69 ► Exchange Transfer and Trade Sanction Risk: 35 35 35 35 ► Sovereign Default Risk: 57 57 57 37 ▼
TREND ▼
Government's commitment on climate policy Weakest 1 2 3 4 5 Strongest
At the November 2021 COP26 international climate summit, Prime Minister Narendra Modi significantly hiked India’s originally committed Nationally Determined Contribution (NDC) under the Paris Agreement on climate policy. He spelt out five new targets for the country’s climate policy: India will increase its non-fossil energy capacity to 500 gigawatts (GW) by 2030; will meet 50% of its energy requirements from renewable energy by 2030; will reduce total projected carbon emissions by 1 billion tonnes between 2022 and 2030; will reduce the carbon intensity of its economy by 45% relative to 2005 levels by 2030; and commits to achieving net-zero emissions by 2070.
However, as the summit ended, India joined China in opposing the wording in the declaration calling for the phasing out of coal and insisting that the commitment must only be to “phase down” coal, angering some participants. Coal currently accounts for around 70% of India’s power generation.
India has a long-held view that focusing on net-zero emissions targets would hinder its efforts to foster rapid gross domestic product (GDP) growth and graduate from lower-middle-income status.
The country would have quickly to give up cheap energy sources such as coal and invest in high-cost energy infrastructure. This, despite the fact India’s per capita carbon dioxide emissions in 2018 were just 1.8 tonnes, compared with a global average of 4.5 tonnes, and that measured by cumulative carbon emissions, the developed countries have taken up a disproportionate share of the ‘carbon budget’ available under 1.5-2 degrees Celsius global warming scenarios. India also criticises developed countries for not fulfilling their pledge to deliver USD100 billion of climate finance per year by 2020, as well as not shouldering their fair share of the burden regarding emissions reduction.
This ambivalence in India’s position on global climate cooperation is reflected in its implementation of policies needed to pursue climate goals. On the one hand, India is well on its way to achieving the NDC it committed to as part of the Paris Agreement. This included reducing emissions intensity by 33-35% relative to 2005 levels by 2030; increasing the non-fossil fuel share of its power generation capacity to 40% by 2030; generating an additional carbon sink of 2.5-3 gigatonnes of carbon dioxide equivalent by 2030; and installing 175 GW of renewable energy capacity by 2022, increasing to 450 GW by 2030.
Simultaneously, India is pursuing strategies, even outside of coal, that are not environment or climate-friendly. Delhi has, for example, attracted criticism for its plans to increase domestic production of palm oil, given the potential environmental fallout. India is the largest importer of vegetable oils, taking in more than 13 million tonnes to meet demand of around 25 million tonnes between November 2019 and October 2020. Around 55% of that was palm oil.
To reduce this dependence government has announced a plan to invest more than INR110 billion (USD1.45 billion) in raising domestic oilseed production and supporting the programme with subsidies and incentives. Much of this palm oil cultivation would occur in the ecologically sensitive north-east regions and the Andaman and Nicobar Islands. Areas climatically suited to palm oil production are also rich in biodiversity. They tend to be occupied by tropical forests. Environmental experts have therefore questioned the wisdom of the government’s agenda, highlighting the threat of excessive deforestation and water shortages.
India’s palm oil policy clearly prioritises short-term economic objectives over environmental sustainability. This suggests the government’s position on emissions, while emphasising fairness, is above all about its GDP goals. This attitude is ill-suited to making an adequate net contribution to emissions reduction.
TREND ►
India seems to have put the COVID-19-induced recession behind it, with official figures estimating GDP to grow by 8.9% in 2021-22 (April to March) as compared with the contraction of 6.6% experienced in 2020-21. This has raised confidence in official circles and, despite reiterating its ‘Make in India’ and ‘self-reliant India’ slogans that point to a protectionist stance, the government has worked to attract foreign investment and plans to allow foreigners to acquire a stake when it divests a part of the public equity held in public sector giant Life Insurance Corporation. The government has also signed no-contestation agreements with, and returned sums extracted as tax under retrospective tax law amendments from, large foreign firms. These are all signs non-resident firms and investors face little expropriation risk under this government.
Other than for some dispersed incidents of violence and allegations of rigging during the campaign for and conduct of elections to legislatures in five states (Goa, Manipur, Punjab, Uttar Pradesh and Uttarakhand), the process has been completed successfully. However, given the continued reliance of the governing Bharatiya Janata Party and related organisations on a divisive communal platform aimed at winning over the Hindu majority, the potential for violence remains.
Incidents such as vigilante action to prevent Muslim girls wearing the hijab and scarves to enter schools and colleges in the state of Karnataka highlight the dangers involved and the potential for violence. There are credible allegations that in the face of such violence the government either remains indifferent or provides covert and overt support to the perpetrators of violence.
Terrorism risk derives from at least three sources in India. The first is the risk from extreme left-wing movements, especially in the east of the country, reflected in sporadic incidents of violence and killings. In April 2021, an attack by left-wing insurgents on security forces in the state of Chhattisgarh resulted in the killing of 22 security personnel and 9 ‘naxalites’. Around 162 security personnel and 460 civilians had been killed in around 2,150 incidents of left-wing extremist violence between 2018 and 2020.
The second threat comes from the growing incidence of Islamic fundamentalism, spurred in part by the anti-Muslim stance of the ruling dispensation. The third source is the militancy that has been intensified by the Modi government’s policies in Kashmir after abrogation of the area’s special status, with periodic reports of the killing of militants and security forces. Put together, these sources of terrorist violence raise the terrorism risk in India significantly.
With more than USD600 billion in foreign reserves and exports rebounding with the waning of the COVID-19 pandemic and rising exports of vaccines, there is little fear of a balance of payments crisis in India soon. However, the rupee has been faring poorly, depreciating significantly because of two principal drivers. One is the rise in the oil import bill as international oil prices spike, a factor that has become even more relevant after the Ukraine and Russia conflict starting in February 2022. The second is the outflow of foreign financial investments, as tighter monetary conditions and rising interest rates in the advanced economies encourage foreign investors to withdraw. If these movements are amplified, there is a risk of imposition of some controls on capital flows in the medium term.
Though Budget 2022 signalled that the government would stick to its conservative fiscal stance, the government seems committed to a large-scale capital expenditure programme in the last two years of its five-year term that ends in May 2024. One difficulty is that the public debt-to-GDP ratio has risen significantly from its pre-pandemic levels because government revenues have fallen sharply. Therefore, it is likely off-budget borrowing by public sector firms and agencies would be nedded to finance the infrastructure push.
However, since much of the borrowing is in the domestic currency, the probability of default is low. On the other hand, encouraged by external financial liberalisation and the low interest rates in global markets in the last few years, the corporate sector’s exposure to foreign debt has risen considerably, as has its rupee debt exposure. With the rupee depreciating, the domestic currency cost of servicing international debt is rising. This could result in financial difficulties for many firms and even bankruptcy. Therefore, the risk of foreign debt default, even if not of sovereign debt, is significant.
Return to contents Next Chapter
