India isn't anywhere near a middle income trap, says Nicholas Stern

The Russian invasion of Ukraine may accelerate the case for moving away from fossil fuel even as the world has to struggle to streamline fossil fuel supplies in the next two-three years, NICHOLAS STERN, professor of economics at the London School of Economics and a prominent environmental economist, tells Asit Ranjan Mishra in an interview. Stern, also a former World Bank chief economist, says he is hopeful of India’s growth potential for the next couple of decades. Edited excerpts: 

What do you think should be the focus areas and reforms that India should undertake to become a developed economy? 

The whole environment for investment is very important. We know India has grown the fastest when it has invested strongly. I would focus on the conditions for private investment and how confident people are getting things done and realising returns from their investments. Clarity in the tax system is another one and I do think that GST is a very important step in a good direction. So building on that is the basis for taxation. India needs to increase the share of taxation to GDP. It is perhaps 3 or 4 percentage points below what you would expect on income per capita basis. Now you have the tools to do that. But it is important to use it in a simple and transparent way so that it doesn’t complicate people’s lives too much.

Some experts have expressed concern that India may be caught in a middle income trap. Your thoughts. 

I don’t think India is in anyway nearer to a middle income trap. The policies that we have been discussing about sustainable infrastructure, creating new, clean cities, electrification of transport and particularly the energy transition in power invokes strong investment and will drive India’s growth. I am very hopeful of India’s growth in the next couple of decades. India will work out its production, investment, and trade policies. We have to see how that develops.

You met Prime Minister Narendra Modi on Saturday. What was the nature of the discussion? 

It was a private discussion, so I don’t want to get into too much detail. We discussed ideas in his Glasgow speech setting out a new clean, sustainable growth model for India. We discussed the inclusiveness ideas and governance ideas in his speech on Friday night. We also discussed India’s presidency of G20 and what could be the big themes. We were talking about how development, human welfare, resilience, sustainability, inclusion could be the overarching theme for India’s G20 presidency. He indicated that in his view G20 can be a turning point in the sense that it will not simply be narrowly economic and financial.

How badly the Russia-Ukraine war has affected the global efforts to decarbonize? Does it have the potential to delay the net-zero emission targets? 

In fuel, fertiliser, and finance, the Russia-Ukraine war will make life pretty difficult for the next two-three years. In that time, we will need some alternative sources of fossil fuels. We may have to extract from oil fields a little longer in my own country, the UK. We have to be as sufficient as can be in usage of energy, be careful on the demand side. We should be planning for greater storage than we had in the past in gas and oil. We should be planning for better links in electricity grid structures. So when the sun is shining in Spain, you can send electricity to Poland. So those are the dimensions on which we should be managing the shorter run. But I think over eight-nine years, we will be using less fossil fuels as a result of this because after all the problem lies in the volatility of supply of fossil fuel. So this will accelerate the case for moving away from fossil fuel. For example, to get revenue from exploration of oil and gas, it takes seven years or even much more. So it makes no sense for any exploration for new oil and gas.

How do you rate India’s climate actions towards building a green economy and its intention to achieve net zero by 2070?  

I have been to all the COPs since 2006 and I have been coming to India since 1974. If you look at the Paris agreement, India was very important, prime minister Modi was very active in those discussions. We would not have got a Paris agreement without the enthusiastic participation of India. In the Glasgow agreement which was the next big one last November, prime minister Modi in his speech, set out a new path for India through Panchamrit (five milestones) that included net zero by 2070 and a lot of action by 2030 which were very important.

After India’s promises at COP 26, you had said India’s annual emissions of greenhouse gases could peak by 2030. Do you think that is still achievable? 

I said “could”. It won’t be easy given the existing structure of energy supply but that’s a useful target. India is not committed to that. But India has exceeded targets in the past few years. Its growth of renewables has been faster than anticipated. But I won’t pretend it is easy to do.   

Do you support the EU proposal of a carbon Border Adjustment Mechanism, which will introduce a carbon price on certain products imported into the EU? 

It has some logic in a limited form. There is some energy intensive trade exposed sectors such as steel, aluminium, and cement to some extent as it is heavy and does not move around much. In some focus sectors, there is an argument that if you are pushing very hard inside your own country, particularly the EU, to take into account those internal policies when those goods are being imported. I think they will move in that direction. But it is very important to keep it transparent so that it is not a mechanism for protectionism. For similar reasons, just to keep it focused on just very few industries where it matters. There is logic there. But at the same time, what we need is collaboration to decarbonise those industries. If we are talking about steel, we would like to see as a world get together to see how we can move towards green steel and we are moving quite quickly actually. The richer countries should also come up to finance that transition in poorer countries.