IIT-M study suggests solutions to manufacturing firms on tackling productivity and pollution

A green domestic policy mapped with Foreign Direct Investment (FDI) and trade, one-to-one correspondence and linkages between tax and energy intensity, providing tax credit or exemption as rewards for firms that improve energy efficiency.

These are some of the recommendations made by a team of researchers from the prestigious Indian Institute of Technology-Madras (IIT-M) and international institutes in a study to find possible solutions to productivity and pollution problems of manufacturing firms in India.

The team studied the country’s manufacturing sector using data from the ‘Prowess IQ’ database of the Centre for Monitoring the Indian Economy from 2001 to 2015.

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Based on the econometric analysis, the research suggested a green domestic policy mapped with FDI and trade to increase productivity and energy efficiency for the manufacturing sector in India.

Other key findings include one-to-one correspondence and linkages between tax and energy intensity will promote renewable energy, firms that are improving energy efficiency can be either given tax credit or tax exemption as rewards, and the need to replace vintage capital and adopt new technology.

The study also has important policy implications with regard to global climate change regulations as an increasing number of cap-and-trade emission trading systems are also being implemented around the globe, the IIT-M said.

The researchers further concluded that the positive spillovers from export participation and foreign direct investments could help the Indian economy and increase energy efficiency in the manufacturing sector. “A sustainable energy policy targeting the manufacturing industry is essential for the Indian economy to contribute to green and sustainable development,” the institute said.

The research was led by Dr. Santosh Kumar Sahu, Assistant Professor of Economics, Department of Humanities and Social Sciences, IIT-M, while the international research partners include Prof. Ajay Kumar from EMLYON Business School, Ecully, France, and Prof. Kim Hua Tan from Nottingham University Business School, UK.

The findings of this study were published in the reputed, peer-reviewed journal Annals of Operations Research.

“Economic profit maximization is one of the main objectives of any industry or firm. But with global climate change, does a firm look towards reducing carbon emissions and pollution at the cost of lower productivity? Is it right to levy more taxes on firms to reduce greenhouse emissions? Does one target economic development or become more eco-friendly? These are questions we set out to find answers to,” Dr Sahu asked.

He also said the research can be used as the basis for redesigning future PAT schemes and energy policies for pollution-intensive firms to achieve energy efficiency. “We are also now working on estimating carbon productivity for the firms in India's manufacturing sector to link innovation, R&D, energy efficiency and carbon productivity. These results will be beneficial for better energy and climate policy for India,” he added.

The researchers feel that more recent data, including information on the stages of research and development, patents, and environmental expenses at the firm level for manufacturing industries, would be highly beneficial to explain India’s energy consumption and emission structure.