Honorable ministers, distinguished economists, senior officers, bankers, industry leaders, colleagues and friends, a very warm welcome to the 109th Summit being organized at the India Habitat Centre today at New Delhi.

The paper we present to you today is Growth First: Foundations Priced Right. I remember the year was 2013. I was a research assistant at the Planning Commission of India. We have Dr. Swetha Narayan with us today.

There was a proposal at that time by a professor from Cambridge to attach shadow prices to India's natural assets and we thought that this is quite a strange idea at the time. But 13 years hence, in 2026, that might actually not have been a very strange idea.

The title is deliberately sequenced because it says growth first. It does not dilute the centrality of growth.

India's public finances for a generation have been organized around one conception of growth, which is infrastructure, roads, railways, power, industrial corridors and digital public systems.

Union capital expenditure, for instance, rose from 3.36 lakh crores in 2019-20 to a budgeted 11.21 lakh crore in 2025-26. This choice was in some sense indefensible because connectivity and energy are conditions of a modern economy.

But the paper argues that the next stage requires a second set of foundations, which are clean air, safe water, sanitation, waste management, resilient cities, sustainable agriculture, climate adaptation and ecological security.

The claim is not environmentalist, it is economic. And we are so delighted that Dr. Sanjay Kumar and Mr. Bharat Lal are here with us today because even their subjects form essential pillars for these growth foundations, for instance, water, air and pollution.

We have consistently missed targets that the United Nations has set out for expenditure as a percentage of GDP on education and healthcare. But going forward, these might actually be the growth foundations that India needs.

And these foundations belong inside India's growth strategy.

Our core proposition in the paper today is this: that while growth has been the principal driver of India's reduction in poverty, whether growth becomes spatially dispersed, job-generative, equitable and sustainable depends on foundations that India's fiscal architecture was not built to finance.

The paper makes three contributions. First, it sets out a public finance logic for environmental goods. These goods suffer from a twin failure: underpricing and underfinancing.

Second, it quantifies the institutional gap. The governments constitutionally closest to delivery command a small fraction of India's public resources and often lack borrowing capacity and execution capacity.

And thirdly, we propose an agenda for green federalism: ecological criteria and transfers, municipal green finance, outcome-linked instruments and accountability systems that connect money to measured improvements.

Therefore, the policy mechanism is: price private services properly, finance genuine public goods adequately, place authority closer to delivery and make money follow verified improvement.

If we look at the growth evidence, ladies and gentlemen, between 2011-12 and 2022-23, the share of Indians below the World Bank's $3 poverty line fell from 27.1% to 5.3%.

But over the same period, real rural mean consumption increased by about 40% and real urban mean consumption by about 33%. And that is growth doing most of the work.

Our paper does not ignore the transfers that arise from growth. Bhalla, Basin and Birmani in 2022 show that food subsidies protected the consumption floor during the pandemic.

Raviyon and Murgai in 2020 show that the post-91 growth became more pro-poor over time. Bhagwati and Panagaria in 2013 make the broader case that redistribution without growth will not reduce poverty at scale.

Therefore, the correct policy frame is complementarity. Growth expands the mean. Targeted support protects vulnerable households against shocks.

But for growth to become inclusive, the foundations must work geographically, occupationally, socially and environmentally.

Ladies and gentlemen, the productivity case for environmental foundations is as follows. We look at health, productivity, livelihoods and avoided fiscal shocks.

Let's look at health first. The India State-Level Disease Burden Initiative estimated that 1.6 million air pollution deaths arose in 2019, equal to 17.8% of all deaths nationally, with an economic loss of 1.36% of GDP.

The Lancet Countdown data for 2025 places anthropogenic fine particulate deaths at 1.72 million in 2022, and that's a 38% increase since 2010.

I believe there was one estimate which said that if you achieve the PM 2.5 targets set out by the United Nations, the average life expectancy of an Indian citizen can increase by 5.3 years and that of a New Delhi resident can increase by 8.2 years.

The second impact of this, ladies and gentlemen, is productivity of labour. The Lancet Countdown 2025 also estimates that 247 billion potential labour hours were lost to heat exposure in 2024, with an associated income loss of 194 billion US dollars.

The third is livelihoods. Poor workers were almost always more exposed to heat, air pollution, unsafe water and flood risk.

The fourth, ladies and gentlemen, is fiscal risk. The RBI's Report on Currency and Finance 2022-23 estimates that green finance means at least 2.5% of GDP annually to 2030.

Therefore, prevention competes directly with relief and reconstruction. The point is simple: these foundations protect labour productivity, livelihoods and fiscal space.

The public finance diagnosis of this, as I mentioned earlier, is that the goods are underpriced and underfinanced.

If a service is priced below cost, own-source revenue remains weak. If budgets are then also below the service benchmark, maintenance suffers. Poor service follows.

The service has no borrowing base and the system becomes dependent on grants.

The line on this slide is the important one: a service that can survive low prices with adequate budgets or low budgets with cost recovery cannot survive both.

This applies also to urban water, sewerage, waste management, groundwater and many local services. The consequence is therefore not only poor service, it is also fiscal non-viability.

And once a service becomes fiscally non-viable, it cannot borrow, maintain assets and cannot credibly improve.

The foundations, ladies and gentlemen, that we describe in this paper receive a grand total of 4.2% of Union spending.

If we count the full budgets of the three foundation ministries, Environment, Drug Safety, Housing and Urban Affairs, it is a total of 1.84 lakh crore rupees in the Union Budget.

That is 4.2% of Union spending and less than 0.5% of the gross domestic product. We set that against the food subsidy of 2.28 lakh crore rupees and fertilizer subsidy of 1.71 lakh crore rupees.

The comparison is not to say that those subsidies are irrelevant. It is to show the shape of the state's fiscal commitments.

The Environment Ministry, for instance, receives 3,759 crore rupees or about 0.1% of Union spending.

Urban water and sewerage utilities recover only 55% of operating costs and non-revenue water was about 38% in 2019. By comparison, Singapore is at around 5%.

So there are two problems operating together. The first is underfunding. The foundations are not funded well and their economic importance requires more money.

And the second is underpricing. Since the services are priced below cost, this weakens maintenance, which destroys the quality of service on the ground.

Distorted pricing is therefore the subsidy to reform.

The subsidy question has to be handled very carefully. This paper doesn't argue against subsidies. It distinguishes between three very different things: merit subsidies, redistributive transfers and distorted pricing.

The Swachh Bharat evidence shows why this distinction matters. Districts that crossed 30% toilet coverage saw 5.3 fewer infant deaths per 1,000 live births, 6.8 fewer under-five deaths and an estimated 60,000 to 70,000 infant deaths averted annually.

That is a merit subsidy with clear positive externalities and measurable public benefit.

So the reform principle is not remove subsidy. It is: keep merit subsidies for public goods, use transfers for redistribution and convert distorted prices into transparent compensation.

And that, ladies and gentlemen, is the difference between a subsidy that builds capability and a subsidy that erodes the service it is meant to provide.

If we look at the distributional lags, degradation behaves like a regressive tax in some sense. Households without means cannot exit. They pay more per unit or they go without the service.

They face greater exposure at home and work, they lose income and they incur medical care.

It is not only that the poor receive worse services, it is that they pay for failures through illness, lost work, lower school performance and higher vulnerability to external shocks.

That is why universal underpricing is not necessarily progressive. If the service system itself collapses, the better off buy their way out while poorer households remain trapped in a degraded public system.

The progressive design, therefore, is more precise. You protect a lifeline for basic use, but recover the full cost from those who can pay, and therefore cross-subsidize the whole thing.

That protects the poor without destroying the financial basis of the service itself.

Let's look at how pollution markets operate when the state measures.

Our theory is rather familiar. Samuelson, in 1954, gave us the public goods problem. Coase, in 1960, showed us that externalities are problems of rights and transaction costs.

Ostrom, in 1990, shows that commons can be governed under clearer rules, monitoring and graduated sanctions.

India now has evidence of its own. Greenstone, Pandey, Ryan and Sudarshan, as recently as 2025, evaluated Surat Particulate Emissions Trading Schemes through a randomized trial.

Plants in the market cut particulate emissions by 20-30% relative to controls, and they abated at 11-14% lower costs. Benefits exceeded costs by at least 25 times.

It worked because measurement existed. What doesn't get measured doesn't get changed.

Continuous emissions monitoring costs roughly US$5,000 per plant per year. India monitors ambient air in only 583 of 7,935 cities and towns, with 1,035 manual and 562 continuous stations.

One third of sanctioned CPCB posts were vacant. So the sequence is important.

We do monitoring first, verification second and market third. A market without measurement is not reform. It is accounting fiction.

If we look at the institutional gap, local service duties exceed local fiscal power, but the fiscal power itself is not local.

Municipal revenue receipts are only 0.6% of GDP, compared with 9.2% for the Centre and 14.6% for the states. Panchayats raise only 1.1% of their own revenue from local taxes and fees.

Municipal bonds have so far raised Rs. 6,084 crore by 25 cities over a time frame of nearly three decades.

The Constitution itself creates a framework for devolution, but the effective assignment still depends on state law and practice.

Water boards, development authorities and borrowing powers often remain above the municipal tier.

This paper therefore frames the problem precisely. Fiscal decentralization without functional decentralization produces accounting entries.

Functional decentralization without fiscal power produces state boards.

The tier closest to service delivery is often held responsible for outcomes without controlling the funds, the staff, the assets or borrowing authority needed to deliver them.

This is why the paper does not call for new grants. It calls for changing who raises, who borrows, who is rewarded and who is held to account.

If we look at the federal platform, ladies and gentlemen, the 16th Finance Commission gives us a useful starting point.

The 2026-31 award includes 7.91 lakh crores in local body grants, divided between rural and urban local bodies. The design is 80% basic and 20% performance-based.

There is also 56,100 crores allocated for special urban infrastructure and another 10,000 crores as an urbanization premium.

So therefore, we retain fiscal effort incentives, but also add ecological and service outcomes to state-to-local transfers.

In the Finance Commission framework, this is not an alien idea. The Forest and Ecology Criterion already recognizes that some jurisdictions provide ecological services whose benefits spread beyond their borders.

The paper's point is that the same principle should extend to river water quality, sewage treatment before rivers cross borders, groundwater balance and air quality outcomes.

The principle that we present, ladies and gentlemen, is that transfers should compensate ecological services and reward verified improvement. That is green federalism in fiscal reform.

The four pillars, ladies and gentlemen, of green federalism are firstly transfers, secondly local revenue, thirdly municipal finance and fourthly accountability.

This is the institutional structure required for this argument. We're not simply saying, give local bodies more money.

We're saying: first create credible accounts, then create own-source revenue, then create bankable cash flows, then permit borrowing, and finally link grants and credit to verified improvement.

That sequence matters because if money is devolved without measurement, it will not change end behavior.

If borrowing is expanded without accounts and default rules, the market will not trust it. If performance grants are not tied to outcomes, they will become entitlements.

And therefore the architecture maximizes credibility.

A resolution is needed, ladies and gentlemen, if we look at municipal default before borrowing expands. Municipal finance requires a hard question: what happens if a city defaults? What if a city fails?

In the United States, Detroit reorganized about 18 billion US dollars of obligations under Chapter 9 in 2013-14, while water, police and fire services continued.

India has no equivalent municipal resolution framework. That matters because a municipal bond market cannot rely solely on optimism.

A default in India today would likely mean one of two things.

Either the state rescues the municipality, in which case the no-bailout rule is empty, or the lender is left with an unenforceable claim against a body that cannot be liquidated, in which case the market closes.

The paper therefore proposes four elements of statutory procedure.

First, a state-appointed administrator runs revenue and spending, but cannot suspend essential services.

Second, an escrowed revenue account goes first to sectoral lenders, so the pledge is honored.

Thirdly, unsecured claims wait while a court or state tribunal approves a repayment plan.

And fourthly, the state may not assume the debt, so the resolution happens merely at the municipal level.

With this, no bailout becomes a commitment that lenders can price for, and without it, it is merely a slogan.

The sequence is also important. Create the resolution framework before expanding municipal borrowing, and not after.

Farm reform, ladies and gentlemen, in agriculture, must be cash-positive from day one.

This is perhaps the most politically difficult part of this paper because the diagnosis is clear, but the execution is hard. The farmer, ladies and gentlemen, is the fulcrum.

He is responding rationally to prices. Free or near-free farm power makes it rational to pump groundwater beyond recharge.

A urea-diluted fertilizer subsidy makes it rational to overuse nitrogen. Open-ended paddy procurement makes it rational to grow a water-intensive crop in water-scarce regions and then burn residue.

So the remedy cannot be framed as a withdrawal. It has to be framed as a better payment.

And the sequence we propose is as follows. Number one, meter the feeder, set up our entitlement per farmer, pay cash for the unused balance, shift to per hectare cash in place of the urea subsidy, and reform procurement at the very last.

The paper therefore also identifies four constraints that must be solved for this to work.

The first is transition costs. The second is tenant farmers will not have their own land. The third is land reforms. And the fourth is political acceptability of this reform.

A reform that is cash-positive from the first year changes the politics of the equation and becomes an addition to income, not a subtraction from entitlement.

Therefore, ladies and gentlemen, as far as execution is concerned, credibility must precede the capital.

Because before capital is scaled, the credibility has to be built. We first measure. We measure accounts, meters and monetary coverage.

Secondly, we price and protect. We price and protect cost recovery with lifelines and cash compensation.

Thirdly, we devolve functions, revenue and accountability at the delivery tier.

Fourthly, we resolve and pool. We resolve and pool default resources, pooled vehicles and commercial guarantees.

And fifthly, we pay for outcomes, transfers and credit links to verified improvements.

This is also where the fiscal bridge sits.

Reform the universal underpricing of electricity, fertilizer and urban services. Reallocate the public money to measurement, enforcement, transition support, adaptation and local capacity.

The net fiscal effect is not that the state itself disappears. The state has only become differently shaped.

It spends less on making private goods artificially cheap for everyone, and more on things that only the state can do, which is measurement, enforcement, adjudication, transition protection and local capacity.

That, ladies and gentlemen, is the fiscal architecture that this paper proposes.

And what we have as a result, therefore, is a differently shaped state. So as I mentioned at the beginning of the presentation, growth remains the main objective.

The question is: what kind of fiscal architecture allows for growth to remain inclusive and durable?

And our answer is a differently shaped state.

First, we price private services with protection for basic use.

Second, we finance public goods with measurement and enforcement.

Thirdly, we match local functions with funds and borrowing capacity.

And fourth, we link transfers and capital to verified improvement.

This is the through line of the paper.

Clean air, safe water, sanitation, resilient cities, sustainable agriculture and ecological security are not outside the growth strategy.

They are the conditions under which growth protects labour productivity, preserves livelihoods, avoids fiscal shocks, becomes spatially dispersed, job-generative, inclusive and sustainable.

And therefore, ladies and gentlemen, these foundations keep the ladder standing, and growth remains the key objective.

Thank you all very much for giving me a patient hearing.

And I'd like to invite Mr. Sameer Kochar, Chairman of SKOCH Group.