The topic of sustainability evokes a wide range of reactions from businesses. At one end are proactive, foresight-driven actions by companies that are early movers and wish to remain relevant in the longer term. At the other end are actions reactive in nature to governmental policies, corporate social responsibility (CSR), self-regulation by industry bodies and evolving customer preferences.
Against this backdrop, it is interesting to evaluate how the government's 'Make in India' initiative, focused on making India the next biggest manufacturing hub, is managing the upside and downside of sustainability. In other words, is the campaign enabling and incentivising sustainable market opportunities and simultaneously managing the negative externalities resulting from the proposed manufacturing in the country?
The sustainability framework
A good starting point is India's sustainability obligations under the UN Sustainable Development Goals (SDGs) framework. The SDGs are a basket of 17 social, environmental and economic targets ranging from broad-based ideas such as 'Peace and Justice' to more crystallised concepts like 'Affordable and Clean Energy'. The SDGs, designed to be universal, were adopted by the UN Summit on January 1, 2016, with an aim to achieve the targets by December 2030.
Ideally, these non-binding obligations should be fulfilled by the states, but their limited resources necessitate private sector participation. As per reports, there is an estimated investment requirement of about $3-7 trillion for the SDGs globally. However, the catch-all goals make them rather overarching for the private sector's consideration. For instance, the 'No Poverty' goal appears to be an overwhelming, mammoth-sized task for any company.
Bhaskar Chakravorti, Senior Associate Dean at The Fletcher School, Tufts University, delves deeper into this issue in his HBR article titled 'How Companies Can Champion Sustainable Development'. In the article, he draws upon his learning from an empirical study of 20 MNCs vis-à-vis their plans to integrate sustainable development targets into their businesses. He recommends a three-step approach to managers in deciding 'where to begin' when it comes to contributing towards SDGs. One can start by segmenting the SDGs into buckets concerning people, planet, policy and human conditions. Next comes identifying the SDGs with which the company is most aligned and finally, one should be able to make a business case.
Interestingly, the state can play a pivotal role in unravelling the SDGs for the benefit of the private sector. This can be done by breaking them into actionable business goals and opportunities - thus paving the way for the flow of both domestic capital and foreign direct investment (FDI).
Investment in SDGs: Sustainability upside
The Indian government has been actively directing capital towards what can be termed as the SDG sectors by progressive policymaking. This is in addition to the generic policy shift towards bringing in greater ease of doing business, including allowing 100 per cent FDI in most sectors and dismantling the Foreign Investment Promotion Board (FIPB) over the next few months. It may, therefore, help to take a detailed look at a few SDG sectors.
Renewable energy, for instance, has been a focus sector in the recent years, with an aggressive and revised government target of 175 gigawatt (GW) by 2022. As around 230 million Indians and 19,000 villages still do not have access to electricity, the market size is quite lucrative and attracts a lot of business interest. Moreover, since the launch of the National Solar Mission in 2010, there has been a race to bottom in solar bid prices and around 73 per cent drop in prices. All this can help attain the SDG of 'Clean and Affordable Energy'.
Take another example. The automobile industry ranks fifth in terms of the cumulative quantum of FDI received till December 2016. Plus, there has been a strategic push to electric vehicles and biofuels in the recent years. According to latest reports, the government is eyeing an ambitious transition to e-vehicles by 2030 with a battery leasing strategy. This will lower ownership and transition costs as batteries will be used as 'currency' - they will be leased at a specific cost and swapped with recharged ones at a station. Add to that tax breaks and plans to scale the use of cab aggregators and public transport before moving to individual vehicle ownership. On the whole, the road map for electric vehicles not only lowers entry barriers to adoption, but also makes them affordable, furthering the priorities set under the SDG that promotes 'Sustainable Consumption and Production'.
Sectors like infrastructure, which have traditionally been the stronghold of the government, are also opening up for public-private partnership (PPP) projects. The Ministry of Road Transport and Highways has identified 10 road projects, adding up to 646 km, to be bid out under the toll-operate-transfer (TOT) model. Private sector participation is also forthcoming in infra-ancillary sectors such as cement and heavy industries (capital goods).
This leads us to analyse a few emerging trends. First, besides the direct impact of SDG sector investments, there are positive spillovers in terms of employment generation, technology sharing and push to research-and-development-driven innovations. Second, although the sample space for three indicative sectors is small, the trend that largely remains is businesses are falling short of providing pure public goods such as providing subsistence to fight hunger. Such functions remain under the state's domain with CSR being the sole private sector participation. This throws up multiple questions. Does CSR constitute sufficient business contribution to SDGs? What is the percentage of CSR spent on substantive causes as opposed to Prime Minister's Relief Fund? Are all industries and sectors contributing uniformly under the CSR framework? Answering these questions is important although outside the scope of this piece.
Good governance in business practice: Sustainability downside
Manufacturing in India is likely to bring negative externalities as well. In that case, the government must promote responsible business practices. Without such checks, business activities could be potentially damaging to SDGs.
Roel Nieuwenkamp, Chair of the OECD (Organisation for Economic Co-operation and Development) Working Party on Responsible Business Conduct, summarises the concerns well by saying, "If the Make in India strategy is going to be successful, companies have to take into account corporate responsibility."
On the environment front, over the past decades, the Indian Judiciary and the Indian Legislature have adopted the principle of 'polluter pays' in decisions and policies, respectively. The country's greening intentions are also evident from coal cess, which has steadily increased and is currently pegged at Rs 400 per tonne - one-fifth of the coal mining cost.
The government is also firmly directing industries to innovate and move to cleaner technologies. A case in point is the Bharat Stage (BS) norms for automobile emissions, modelled on European emission standards. Earlier this year, the Supreme Court enforced the compliance deadline for BS IV standards (upgrading those from the prevailing BS III) both for production and vehicle sales. Further, the government is proactively skipping a level as it will move from BS IV (currently in force) to BS VI in 2020 without enforcing the intermediate BS V.
Another instance of managing negative spillovers is ensuring just and fair compensation for people displaced due to land acquisition for businesses. In 2013, India changed its law on land acquisition and added provisions for social impact assessment, consensus to buy the land, rehabilitation of the displaced people and compensation up to four times the market price. This covers the direct impact on livelihood of affected people.
It cannot be disputed that the negative externalities need to be efficiently managed, and underdoing so will have serious SDG repercussions. However, the state actors are treading a tight rope. Overdoing the checks costs the state in business competitiveness and globally understood metrics like Ease of Doing Business rankings.
So far, discussions regarding 'Make in India' have been largely around the quantum of the FDI received, which is arguably a good indicator for the performance of the initiative. But lately, there has been an increasing global consciousness about the quality of FDI.
There is no common agreement on what comprises high-quality FDI and how to measure it, but the OECD associates it with "investment that encourages physical and human capital formation in the host country or has positive spillover effects for the host economy". To this extent, there is arguably a commonality of end goals and measurement metrics for both SDGs and initiatives like 'Make in India'.
At the macro level, two aspects have driven the 'Make in India' initiative - institutionally, the emergence of competitive and cooperative federalism and from the business perspective, a thriving domestic market and demand across all sectors. It remains to be seen if these factors can also ensure higher adoption rates of SDGs. However, the decisive role continues to be that of the government, which must actively help businesses find value in pursuing SDGs.
Swetali Mohapatra is a Manager at Invest India, the national investment promotion and facilitation agency. The views expressed here are those of the author.