India is contemplating Free Trade Agreements (FTAs) with the UK and the European Union. This, along with the recent scrapping of retrospective tax laws, may well be a gamechanger. Currently, all manufacturing value chains radiate out of China, but now there is widespread alarm regarding China’s intentions and non-China options are being evaluated. Vietnam has already entered into an FTA and an investment protection pact with the EU. India moving along similar lines would be of great interest to the huge list of EU companies presently solely dependent on China.
However, signing FTAs in the backdrop of concerns about climate change could create problems for Indian companies. To place matters in context, Indian exporters always speak of encountering ‘non-tariff barriers’ in the EU. These basically are ‘quality, social and environmental protection standards’ imposed on goods wanting to enter EU markets. Illustratively, for chemicals, compliance with REACH regulatory systems is required. For textiles, social and sustainability issues crop up. The list goes on.
While these are not insurmountable and many Indian corporates are in full compliance, it is not true for the average Indian company. The bulk of Indian companies are MSMEs, and Indian MSMEs are tiny in comparison to their global peers. Only about 2-3% of Indian factories have ‘annual value added’ of Rs 50 crore (about $8 million) or more. They find it impossibly expensive to install equipment, processes and systems to meet EU/US quality standards. The Indian market has relatively fewer quality standards, and companies mostly compete on price here. The complexity of operating in two differently focused markets has kept the Indian market share in the EU below 1.8%, keeping us a lowly 10th in that market. But this relative non-performance did not really disturb the Indian operations of our corporates. Post-FTA, and common standards, however, it would.
Till now, India was sanguine about the climate agenda. Our per capita emissions are only 1.8 tons, compared to the US’ 15 tons, EU’s 9 tons and China’s 7 tons. We have argued that our low income levels force us to balance growth and climate commitments. The Indian commitment under the Paris Accord of 2016 was to reduce emissions or energy intensity of GDP by 35%, from the 2005 level of 0.98 kg/$ of GDP. We are already down to 0.84 kg and are on track to overachieving efficiency targets by a wide margin.
However, the EU has recently upped the ante, announcing additional green legislation to make the bloc “fit for 55%” by 2030 -- as the first part of its measures to achieve its Paris Accord target of net-zero emissions by 2050. These new laws will revise EU emission targets in many areas. They are being hailed as part of a ‘European Green Deal’ to define an industrial policy to revive the economy post-pandemic, implying that climate agenda could start driving product choices. Basically, a shifting of goal posts is occurring, with the focus moving beyond national emissions to product-specific emissions.
Currently, the absolute and relative CO2 emissions of Indian industrial processes are significantly higher than even those of the US. The US has an industrial GDP (constant 2015 prices) of $3.8 trillion and industrial CO2 emission of 462 million tons (9.4% of its national emission). India, with a much lower industrial GDP of $756.1 billion has almost 20% higher industrial CO2 emission of 588 million tons per year (25.5% of our total). The gaps between Indian and EU efficiencies are even wider. Germany’s industrial GDP is $963.3 billion, but its industrial CO2 emission is only 100 million tons (14.4% of its total).
Most of our current successes in emission reduction have happened through investments in renewable energy, shift to usage of LED bulbs, fuel quality, etc., but not in manufacturing processes. While individual success stories of emission efficiencies do exist in Indian manufacturing, it is not the norm. There is currently no focus on benchmarking Indian industrial emissions standards against global norms. The current focus is more on promoting industrial equity using capital employed, to distinguish between priority and other sectors. Perhaps we should now think about changing our stance and start using CO2 emissions to distinguish between manufacturing units. We should also evaluate how to assist our entrepreneurs to catch up with EU efficiencies.
In the past, the lack of prior State signalling regarding the Azo Dyes ban or adaption of REACH guidelines resulted in our entrepreneurs getting caught off guard in a fast-changing global environment. This then resulted in a mass of bad loans (NPAs). We should not repeat such errors this time around.
Advance signalling of concerns could be accompanied by other measures. Clustering could be made mandatory for emission-generating sectors. Also, just as there is currently an announced intent to solarise cities and agricultural feeders and install green hydrogen plants, etc., schemes for facilitating technological upgradations through a one-time capital subsidy scheme, combined with a pre-announced intent to restrict future State benefits/concessions to globally efficient units in emission-oriented sectors could all be contemplated.
Just as vaccination often results in some bodily reaction but is otherwise beneficial for long-term safety, timely emission consciousness must be injected into our entrepreneurial reflexes, much before signing on to FTAs.