India: Comply or close

Regulation, enforcement and community pressure are forcing businesses in India to confront their environmental impacts, explain Pranav Sinha and Sanjukta Biswas

As we approach the end of 2019, India's story of industrial growth and urbanisation progresses – albeit with a few hiccups along the way. India in 2019 remains the fastest-growing major economy globally (6.8% growth in 2018-19), and both the IMF's World Economic Outlook 2019 and the Asian Development Bank's Asian Development Outlook 2019 project its growth to be more than 7%.

However, concerns around the environment loom large over the India story. The World Bank has reported that India's growth is clouded by a degrading environment and growing scarcity of natural resources, and that Indian environmental degradation costs the country approximately US$80bn per year – 5.7% of its GDP. India ranked 177th out of 180 countries surveyed for the 2018 Environmental Performance Index, and a 2016 WHO survey showed that 14 of the world's 20 most-polluted cities were in India .

Various interventions by the executive, legislature and judiciary in India indicate a paradigm shift in environmental governance. A recent example of this was the National Green Tribunal's (NGT) 10 July 2019 ruling, which ordered federal and state regulators to:

  • Shut down all polluting industries in 69 industrial estates within three months
  • Estimate total compensation to be recovered for pollution during the past five years
  • Collect interim compensation in advance from industries, ranging from US$35,000 to US$150,000
  • Halt the setting up of new or expanded industrial operations in these estates.

It is clear, then, that the future will not be anything like the past.

A rapidly evolving regulatory regime

Since April 2016, 30 new or amended regulations have come into force in India – the same number as were issued previously between 1972 and 2015 (see Figure 1). The rapidly changing regulatory landscape limits corporations' ability to predict the future compliance burden, as there can be significant shifts in regulatory requirements within relatively short periods.

Enhanced regulatory enforcement

Since 2016, India has witnessed an upswing in enforcement actions taken by federal and state agencies. The regulators at federal and state levels have proactively identified, investigated and prosecuted errant corporations.

For example, data obtained from Uttarakhand Environment Protection and Pollution Control Board (UEPPCB) shows an upward trend in the number of closure directions issued to errant industries (see Figure 2).

A hardening judicial stance

A series of court rulings in 2018-19 indicate a further hardening of the judicial stance. Examples include:

  • August 2018: Supreme Court ordered Goel Ganga Developers to pay approximately US$15m for environmental damages
  • March 2019: NGT fined Volkswagen nearly US$70m for violating Indian emission norms and using 'deceit devices' that masked NOx emissions
  • January 2019: NGT fined the Government of Meghalaya an initial amount of US$14m towards interim compensation, while ordering it to estimate total compensation due in case of environmental degradation due to illegal coal mining
  • The NGT in its 10 July 2019 order directed the shutting down of all polluting industries in 69 industrial clusters that were critically or severely polluted. This was, by far, the largest number of industries ever shut down under a single order.

Since 2018, the NGT has delivered around 50 orders under the polluter pays principle. Of these 50 orders, 15 have carried a penalty of between US$700,000 and US$10m. Between January 2019 and 7 April 2019, the NGT levied penalties of approximately US$123m – double the penalties levied in all of 2018 (US$67m).

“Since April 2016, 30 new or amended regulations have come into force in India – the same number as were issued previously between 1972 and 2015“

Environmental issues now pose risks

Environmental performance has evolved from being a technical issue and an externality to a material business risk.

Regional carrying capacity

Regional carrying capacity is now limiting scope for industrial expansion. The Indian government has initiated the assessment of the carrying capacity of the 69 critically and severely polluted industrial estates.

Resource scarcity

Existing operations are facing scarce resources. World Resources Institute's research shows that growing water scarcity forced 14 of the country's 20 largest thermal utilities to shut down at least once between 2013 and 2016 (causing losses of US$1.4bn).

Social licence to operate

Social licence to operate (SLO) is among the most significant risks faced by corporations. Even if an entity holds all required governmental approvals, it cannot hope to survive if it does not win over the community that accords it the SLO. Factories have been forced to relocate, mines lie unused and millions of dollars lie locked in half-constructed units across the country where the community does not grant SLO to corporations.

A new paradigm

It is clear that India is undergoing a significant shift. The Indian populace, regulatory authorities and judiciary are no longer condoning environmental harm as the price of economic growth.

Environmental and social issues pose material risks to business success and longevity in India. Industry leaders must step up efforts to truly integrate these considerations into their long-term strategies and business models.

Pranav Sinha is global technical community leader – audits at ERM.

Sanjukta Biswas is a sustainability consultant at ERM.

Read the longer version of this article at bit.ly/31WqkRd

Image credit: iStock

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