Special country risk survey: India after COP26

Workers unload coal from a supply truck at a yard on the outskirts of Ahmedabad. Photo: Reuters

Among the various pledges made by countries attending the COP26 summit in Glasgow, the Indian authorities made five new interrelated commitments.

The country plans to achieve net-carbon neutrality by 2070, missing the goal of the summit for countries to reach it by 2050, but with four other targets to be achieved by 2030.

They are to reduce emissions by 45% from 2005 levels, reduce one billion tonnes of projected emissions, install 500GW of non-fossil fuel electricity capacity and source 50% of energy from renewables.

The targets go further than anything India has set out before – previously, it had not outlined a net-carbon neutrality commitment.

They are also hugely ambitious and if the headline commitment means total greenhouse gases, and not just carbon dioxide, it would imply India contributing more than its fair share of the global effort to restrict global warming to 1.5 degrees Celsius.

China, meanwhile, committed to net-carbon neutrality by 2060, with the US and EU committing to 2050.

The UK had already committed to the target and passed a law to that effect in 2019.

After the COP26 summit, Euromoney asked its country risk expert panel for their thoughts and how it will impact on India’s investor prospects.

Most of the respondents are optimistic that the country will meet its commitments and that it is fair to target India as key to achieving the 1.5 degrees Celsius of warming – though no doubt expecting China, Russia, the US and other large emitters to also step up.

Similarly, there are more respondents than not that believe the outcome of the COP26 summit will improve the perception of India as an investment location.

It will have to make a substantial change in energy dependence as coal power plants produce 70% of the electricity in India 

 - Pankaj Nishad, Moody’s Investor Services

One of them is Pankaj Nishad, senior economist at Moody’s Investor Services, who believes that this will create new renewable-energy projects.

“India will reduce the use of coal to achieve the target, and therefore it will have to make a substantial change in energy dependence as coal power plants produce 70% of the electricity in India,” he says.

This is just as well, bearing in mind the many obstacles to weaning off coal, given that India’s country risk score has been worsening, not improving over time.

Ranked 94th out of 174 countries in Euromoney’s country risk survey, India is not much safer than South Africa, and is worse off than China and Russia among the large emerging markets.

Having fallen 37 places in the rankings during the past five years, including a seven-place drop in 2021, India is on a par with Albania and Montenegro in comparative risk terms.

This is despite the huge labour force, which is helping India to recover swiftly from Covid-19 and grow at around 8% to 9% in real terms in the 2021 and 2022 fiscal years, according to the IMF’s latest projections.

With investors now looking to countries embracing their environmental and social responsibilities, for these analysts the commitments are a step in the right direction and will certainly offer up business opportunities.

Prachi Gupta is another member of Euromoney’s expert panel, and an adjunct professor at Temple University in Japan, who notes that India is already close to meeting its targets under the Paris Agreement adopted in 2015.

“With its high climate-change risk profile [seventh in the Global Climate Risk Index 2021] and young population, the focus on climate change and sustainability are pertinent in the case of India,” she says.

“Investment in green finance has been rising and there are early signs of decoupling of carbon emissions and GDP growth.”

Still, not everyone agrees that India will meet its targets or that it will improve India’s risk profile.

The issue of not liaising with and convincing key stakeholders proved to be detrimental for the government 

 - Prachi Gupta, Temple University

One of those dissenting voices is Miguel Chanco, senior Asia economist at Pantheon Macroeconomics, who believes COP26 will be quickly forgotten in India and have no real impact on the economic risk profile during the next three to five years.

“India is still a very poor and under-developed country, by most metrics, and I expect the current government – or any administration for that matter – to continue prioritizing economic growth, even if it comes at the expense of environmental targets,” he says.

Even Temple University’s Gupta admits that phasing out coal usage is a formidable challenge, given India’s dependency on fossil fuels. The “target is laudable”, she says, “but the policy roadmap for it is not clear yet”.

In the meantime, the economy is growing and the government has strong approval ratings. Nevertheless, India faces numerous challenges, not least of which is the rise in inflation associated with the global economy recovering from the pandemic.

“Not only will the rise in global oil prices put the brakes on India’s fuel-starved economy, but it is also worth noting that the investment pipeline remains extremely dry,” says Pantheon’s Chanco.

He goes on to say that households are not sitting on piles of savings that can be unleashed when the coronavirus clears and that consumer confidence has yet to show any signs of recovering.

Cost increases will be eventually passed on to consumers in 2022, “resulting in an acceleration in already-high core inflation”, adds Chanco.

Structural reforms in the agricultural, banking and industrial sectors are also required.

Gupta also mentions the government repealing contentious farm laws that were passed last year after substantial opposition. The reforms were backed by economists and policy experts, but “the issue of not liaising with and convincing key stakeholders proved to be detrimental for the government”, she says.

Growing discontent among the farming community, comprising around half of total employment, and upcoming elections in key states such as Uttar Pradesh – in February-March – appear to have been the reason for repealing the laws.

Some of India’s economic risks are improving, but policymaking has been affected by the repeal of the laws. There are qualms about corruption, too, and public debt is expected to rise.

India remains an attractive market, with huge potential, but only time will tell if it can reform and restructure to capitalize.

Climate change offers an opportunity.