Evaluating green industrial policies in India

Assessing the impact of environmental regulations on firm production and investment decisions

Environmental regulations, while intended to curb pollution and mitigate environmental damage, can also effect a change in economic choices of firms. This study seeks to understand the impact of environmental regulations concerning pollution on firms’ business decisions such as product mix and input sources. These insights shall allow policymakers to make informed policy design choices that balance the trade-off between economic growth and environmental protection.




The challenge

It has been well documented in the literature that, in general, firms tailor their product mix and scope of offerings to market conditions and regulations. These effects can be more pronounced in emerging markets where poor air quality and health issues are prevalent and regulations concerning pollution, emissions, and waste disposal can have a marked impact on firms’ input and output mix. Therefore, it is critical to understand how environmental regulations affect firm choices and how such regulations can be designed to meet their intended objectives without hampering development goals.

The intervention

The project aims to analyse variations in firm choices caused as a result of differences in policy rules in India. These rules have led to the creation of comparison groups that vary in regulatory costs imposed due to the scale of pollution. Using a cross-sectional and time-series quasi-experimental approach, changes in firm- and product-level outcomes in a ‘difference-in-differences’ and ‘differences-in-discontinuities’ framework will be studied. A wide range of sources – satellite readings, pollution monitors, and the Indian census, amongst others – across all the 29 Indian states for the period 2006 to 2020 will be referred to for data collection.

The potential impact

This project will provide a better understanding of how environmental regulations and economic development, measured by firm choices, interact with each other in India, which is a particularly good representative of an emerging country facing environmental challenges. The authors hope to shed light on the long-term effects of environmental regulations and how they interact with local institutions. Eventually, the results of this study will provide useful insights to policymakers, who need to balance development needs with designing regulations aligned with climate goals.