Decentralization of environmental regulation in India

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Kattumuri, R. and Lovo, S. (2018) Decentralization of environmental regulation in India. Economic and Political Weekly, 53 (43). pp. 33-38. ISSN 2349-8846 Available at http://centaur.reading.ac.uk/86288/

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DecentralizationofEnvironmentalRegulationinIndiaRuthKattumuriandStefaniaLovo

AbstractOurarticleconsiderstheEnvironmentImpactAssessment(EIA)forcertainsectorsinIndiaandexamines the implications of decentralization. We find that the decentralization of EIAprocesses has improved environmental regulation and been successful in reducing pollutingactivities in India.Ourevidence suggests thatdecentralizationwasassociatedwith relativelyfewer firm births in states with stricter environmental enforcement. Key among ourrecommendationsisthatthedevelopmentofstrongercollaborationsbetweenEIA,SEIAAandState Pollution Control Board would enhance enforcement of environmental regulation andreduce disparities between states, through knowledge-and-resource sharing and improvingtechnical,financialandadministrativecapabilitiesacrossstates.1. Introduction

Environmental protection rights and duties have long been incorporated in the IndianConstitution.ElaboratelawsrelatingtoenvironmentalprotectiondatebacktotheWaterActin1974.Thecentralgovernment,throughtheMinistryofEnvironmentandForests(MOEF)andthe Central Pollution Control Board (CPCB), are responsible for planning and formulatingnational policies and standards. The implementation and enforcement are decentralized andare the responsibilityof theStatePollutionControlBoards.Thedecentralizationprocesshasthe potential to reduce the burden on the central government and accelerate the approvalprocess. On the other hand, the decentralized powers could be futile if state governmentsintend to actively pursue industrialisation for their respective state, or be ineffective if stateauthoritieslacktechnicalandfinancialcapacity.Cistulli (2002) suggests that decentralization of environmental regulation helps with betterunderstandingoflocalenvironmentalproblems,topromotemoretransparentandefficientuseof natural resources, as well as to increase local participation based on homogeneity ofcommongoalsandpriorities.Atthesametime,therecouldbetrade-offsonthesuccessfulnessof any decentralization process such as weak administrative or technical capacity, lack offinancialresources,poorcoordinationbetweennationalandlocalpoliciesandtheriskoflocalelitecapture(BesleyandCoate,2003).Environmentalcomplianceissometimesseenasabarriertobusinesscreationandexpansion.Hence, it is crucial to balance between environmental stringency and excessive bureaucracy(Upadhyay,2017). Indiancitizensalsobenefit fromauniqueapproachtotheenforcementofenvironmental laws by exercising their constitutional right to a healthy environment in theformofPublicInterestLitigations(PILs)beforetheCourtofJustice.PILshaveresultedinsomeenvironmental improvements (Kathuria, 2007) but have also contributed to increase the

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workloadforstateauthoritiesbecauseofcourt-ordereddirectives(OECD,2006).Toovercomechallenges of bureaucracy, some states such as Jharkhand, have proposed exempting certainindustriesfromtherequirementofpollutioncontrolboardclearances,whichcouldpotentiallyhavenegativeconsequencesfortheenvironment.Moreimportantly,severalStatesaremovingtowardscomprehensiveonlinesystemstospeeduptheclearanceprocess(CII-KPMG,2015).In this articlewe discuss the implicationsof decentralization of environmental regulation inIndia.WedrawinsightsfromLovo(2017)whoinvestigatedtheimpactofthe2006EIAreformonthebirthofpolluting firms. Inparticular,weexaminewhetherdifferences inenforcementcapacity across states had produced heterogeneous effects on the birth of polluting firms.Basedonanenvironmental enforcement index constructedbyLovo (2017),weexamineanyvariationsacrossstatesinIndia.2. TheEIAreforms

AllfirmsinIndiaareformallyrequiredtoreceiveclearancethroughanEnvironmentalImpactAssessment (EIA) before they can start operating. EIA also determines the pollution controlmeasurestobemaintainedthroughoutthe lifetimeof the firmsoperations.A2006reformoftheEIAprocessdelegated the responsibilities forenvironmental clearance,previouslyunderthe controlof the central government, tonewlyestablished state-level authorities for certainsectors,names,StateEnvironmentalImpactAssessmentAuthority(SEIAA).TheEIAprocedure, asmodifiedby the2006 reform, is subdivided into four stages.The firststage(Screening)isaimedatdeterminingwhetheraprojectrequiresanEIAreport.Thesecondstage (Scoping) involves the determinants of terms of references covering all relevantenvironmental concerns for the preparation of the EIA. The third stage requires a publicconsultation through both a public hearing in the proximity of the site and invitations ofwritten responses from the concerned stakeholders. The final stage (Appraisal) involves thescrutinyof theEIAapplicationthatcanresultineitherapprovalorrejectionof theproposedproject. Following the2006 reform, the secondand final stagesweredelegated tostate-levelauthoritiesiftheprojectbelongedtospecificsectorsandmetcertaincriteria(Lovo,2017).Firmsincertainsectorsarenolongersubjecttoadecisionfromthecentralauthoritybuthaveto apply for environmental clearance to SEIAAs. Polluting sectors thatwere not affected bydecentralizationandmaintainedacentralizedproceduresareoffshoreandonshoreoilandgasexploration, development and production, petroleum refining, Asbestosmilling and asbestosbased products, Soda ash Industry, Chemical fertilizers, Petrochemical complexes andIntegratedpaintindustry.Theautomobileindustrywasinitiallyincludedamongthepollutingsectorssubjecttostate-levelclearanceinthedraftEIAreform,butwaslaterremovedfromthefinal version of the notification and is currently not subject to EIA 1 , which seemscounterproductivesincethisisknowntobeamongthelargestsourcesofpollution.1TheearlierdraftnotificationoftherevisedenvironmentalclearanceprocessthatcontainstheautomobilesectorcanbefoundontheMinistryofEnvironment,ForestandClimateChangewebsite:http://envfor.nic.in/legis/eia/so1324(e).pdf

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The EIA process was amended further in 2016 to address issues related to specific sectorsthrough a notification. Accordingly, theDistrict Environmental ImpactAssessmentAuthority(DEIAA) andDistrict Level Expert Appraisal Committee (DEAC) are responsible for grantingenvironmental clearance formining ofminorminerals (S.O. 147 (E) of 15th January, 2016).TheMOEFhadpublishedadraftnotification(S.O.1705(E)of10thMay2016),whichprovidedanexceptionforexistingfirmsthatmightbeviolatingenvironmentalnorms.Itsuggestedthatprojects,whichhadinitiatedconstructionactivityandexpansionpriortogoingthroughanEIAprocess,couldcontinuetheiractivitiesbyagreeingtoanEnvironmentSupplementalPlan(ESP)eveniftheymightbeinviolationofEIAcriteria.Thisproposalwasopposedbycivilsocietieswho argued that these proposed changes would allow firms to continue violatingenvironmentallaws.Thisrepresentationledtoarevisednotification(S.O.804(E)tobeissuedby the Environment Ministry on 14.03.2017). According to the 2017 notification, thegovernmenthasestablishedaprocessbywhichanExpertAppraisalCommitteeattheCentrallevelwoulddeterminetheconditionsforafirmscontinuedoperations.Wenotethatwhilethe2006reformallowedforpublicconsultationintheprocedureforevaluationofviolatingfirms,thenewprocessdoesnotspecify thiscategorically.Publicconsultationshaveenabled formalrepresentationof environmental concerns fromcommunities,hence itwouldbebeneficial tomake it mandatory for the Expert Appraisal Committee, within the current framework, toundertakepublicconsultationbeforefinalizingtheirreports.3. Variationsacrossstatesinenvironmentalenforcement

Environmental enforcement varies substantially across Indian states due to variations ingovernance,socio-economicandpoliticalconditionsbutalsoduetostate-specifictechnicalandfinancialabilities(Nandimath,2009). Whileenvironmentalstandards for industrialpollutionaredeterminedbythecentralgovernment,evidencesuggests that thereare largedifferencesacrossstatesintermsofenforcementandcompliance(OECD,2006;WorldBank,2006).

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Figure1–VariationinEnvironmentalenforcementacrossStates

Note: Themapplots the environmental enforcement index for statesbasedonLovo(2017).

Regulatorystringencyisverydifficulttomeasurebecauseitisamultifacetedconceptthatnosingle indicator can fully capture. Lovo (2017) combines five different indicators ofenvironmental enforcement intoa single indexof environmental enforcement.Figure1plotsthe environmental enforcement index across States in India and shows a great degree ofheterogeneityintermsofregulatorystringency. TheindividualindicatorsarereportedinTable1andaimedatcapturingstate-leveldifferencesin institutional capacity, civic participation and institutional quality that are relevant toenvironmental enforcement. The democratic system in India offers the opportunity forengagementand representationby civil societiesandgeneralpublic, a reasonably freepressand an accessible judiciary system. All these factors together with state-level technical andinstitutional capacity play an important role in ensuring that environmental standards andregulationareimplemented.Theselectedindicatorsarehighlycorrelated.Descriptiveevidencesuggest thatstatepollutionauthoritiessuchas theStatePollutionControlBoardssuffer frominadequatetechnicalfacilitiesandskilledpersonnelformonitoringandfillingcharges(OECD,2006).

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Table 1: Environmental enforcement measures and construction of the enforcement index Rank State Index NGOs Judgements Corruption Articles Stations

1 Delhi 2.48 22 2 11 166 112 AndhraPradesh 2.14 29 4 4 213 213 TamilNadu 1.80 29 2 12 443 164 Maharashtra 1.69 26 4 5 165 425 UttarPradesh 0.94 24 4 10 111 356 Gujarat 0.81 7 4 3 146 207 Karnataka 0.66 17 3 17 247 148 Odisha 0.41 17 3 9 8 129 HimachalPradesh 0.26 4 2 2 3 1110 Kerala 0.17 7 0 1 155 1611 WestBengal 0.14 15 2 8 120 2112 MadhyaPradesh -0.06 12 4 18 43 2613 Punjab -0.95 1 1 7 25 1514 Haryana -1.29 3 1 13 21 515 Chhattisgarh -1.31 3 0 6 4 916 Rajasthan -1.33 12 0 16 6 1817 Bihar -1.37 2 3 20 13 218 Assam -1.49 7 0 15 9 1219 Jammu&Kashmir -1.83 6 0 19 3 320 Jharkhand -1.89 2 0 14 5 6- Chandigarh 2 2 4 5- Goa 0 0 13 3- Meghalaya 1 0 0 2- Puducherry 1 0 2 3- Uttarakhand 4 1 2 2

Note:Thecolumnheaderindicatesthenameofthevariable.FortheoriginalsourcesofthedatapleaserefertoLovo (2017). The data refer to pre-reform (2006) conditions. The indexwas computed using all variablesdividedbystatepopulation,exceptcorruption,toaccountfordifferencesinsize.

Datashowthatgreaterjudicialeffortsarefoundinstateswithlowercorruption.Theyarealsoinlinewitheffectivegovernancebeingmoreconducivetobuildingpublicawarenessabouttheenvironment as shown in Lal and Jha (1999). On the other hand, the legal system can takeseveralyearstosettleadisputeandimposepenalties(Breton,2008).Thethreatoflonglastingcourtdisputescanfosterrent-seekingactivities.Dufloetal(2013)suggestthatconsultantsforEIAsandtheregulator’sownstaffmayhaveincentivestounderreportpollution.Theyobservethat independent verification of pollution reports through overlapping monitoring regimes,may have similar effects, based on environmental audits. Further, in weaker enforcementregimecollusionbetweenstate-levelauthoritiesandregulatedfirmscanalsobecomeanissue.

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4. TheimpactonthebirthofnewpollutingfirmsIn India, only registered formal sector firms are subject to environmental clearance sincesmallerinformalfirmstendtooperateoutsidethecontrolofpollutioncontrolauthorities.Thehighlighted differences in regulatory capacity across states is likely to produce notabledifferences in compliance costs between locations and can, therefore, affect a firm’s entrydecisionand,ultimately,thedistributionofnewpollutingfirmsbetweenstates.

Figure2–Impactofthereformonthenumberofnewpollutingfirms

Note: Authors’ calculation based on the registrar of Companies of the Indian Ministry of Corporate Affairs. The plots are based on 3-year moving averages. The number of new firms is divided based on 2006 values so that a value of 1.3, for example, indicates an increase in firm births of 30% with respect to 2006. The shaded area indicates that SEIAA were progressively created in different states after 2006, mostly within 2 years from the reform. The first SEIAA was created in West Bengal in April 2007 and the last was instituted in December 2012 in the state of Jharkhand.

Dataonfirms’incorporationintotheRegistrarofCompanies(RoCs)2showastrikingdifferenceinthepatternsoffirmbirthsbetweenhighandlowenforcingstatesinthepost-reformperiod.Figure 2 shows the evolution in the number of new polluting firms over time by level ofenforcement. ThisanalysisincludesallsectorsforwhichtheEIAwasdecentralizedeitherforallfirmsorforfirmssatisfyingcertaincriteria.

2AvailableatIndianMinistryofCorporateAffairs:http://www.mca.gov.in/MinistryV2/master+details.html

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The data show that while firm births in low enforcing states followed pre-reform trends, aslowdowninbirthsisobservedinhighenforcingstates(greenline).Thiscompellingpatterninthe data suggests that decentralization was associated with relatively fewer firm births instateswithstricterenvironmentalenforcement.Regressionresultsconfirmthenegativeimpactof state-level enforcement on firm births in stateswith stricter environmental enforcement.Empirical results by Lovo (2017) shows that the overall impact is large - close to an overall12% reduction in the number of new polluting firms. This is because the decrease in thenumber of polluting firms in high-enforcing states has been substantially larger versus theincreaseexperiencedbylowenforcingstates,duetotheirlowereconomiccapabilities.Theeffectisconsistentwithanincreaseinaverageregulatorystringencydrivenbystateswithhigherlevelsofenforcement.Thepre-reformEIAwasconsideredtoberelatively lax in India(Jha-Thakur, 2011) and given the anecdotal evidence on the proliferation of uncheckedpollutingfirms,theresultsshowthatthereformhasbeensuccessfulinlimitingthecreationofnewpollutingactivities.Theresultsarealsosuggestiveofanactualdecreaseinthenumberofnewpolluting firmsratherthanaswitchto informality thatwould, instead, implynogains intermsofenvironmentalbenefits(Lovo,2017).5. DiscussionandRecommendations

India’s commitment to environmental protection and regulatory enforcement has grownincrementally in the last ten years (Kini et. al. 2017). Our findings indicate that thedecentralization processhas led to an increase in the average regulatory stringency and hasbeensuccessfulinreducingthenumberofpollutingactivities.Theeffectsarevariedbetweenstates,whereinthemajorityof thehighenforcingstateshaveaccruedenvironmentalbenefits,whilemoreneedstobedoneinotherstates.Iftheregulatorygap between low and high enforcing states is maintained, the reform could, however,potentially trigger an opportunistic behaviour by states with lower economic developmentwhere lower regulatory enforcement could be aimed at attracting new polluting industries(Figure 3). While the economic gains could be substantial, the health and environmentalconsequence could also be considerable (Graff Zivin and Neidell (2013). This has importantimplications for EIA regulation, which should take into consideration the disparities inenvironmentalenforcementacrossstatesinanyfutureamendments.TheCentrecouldalsobeinvolvedinenablingknowledgesharingofbestpracticesbetweenstates,aswellasincapacitybuilding for resource constrained states to develop technical, financial and administrativeperformance.Withoutaddressingthetechnical,financialandadministrativeneedsofdifferentStates,increasedenvironmentalstringencycouldtranslateintoexcessivebureaucraticburdentofirms.FindingsfromEnterpriseSurveybytheWorldBank(2014)suggestthatabout12%offirmsalreadyreporttaxadministrationandbusinesslicensingandpermitsasamajorobstaclestobusiness,precededbycorruption(20%)andinadequateelectricitysupply(15%).

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Figure3–Environmentalenforcementandstate-levelGDPpercapita.

Note: the graph shows the relationship between the environmental index in Table 1 and residual air quality,obtainedbycomputingtheresidualsofaregressionofRespirableSuspendedParticulateMatter(RSPM)(source:https://data.gov.in/)withGDPpercapita.Theultimategoal forstricterEIAandenvironmentalenforcementthroughrigorouspollutioncontrol is improving environmental quality. Our analysis of the relationship betweenenvironmental enforcement index and environmental quality in Figure 4 clearly shows that,stateswithstricterenforcementenjoybetterairquality(top-rightpanel).Ouranalysisshowsthatinspiteofahighenforcingindex,Delhi(withhighestGDPpercapitainIndia)haslowairquality(itisrankedamongWHO’s20mostpollutedcitiesintheworld).Thereasonsforlowairquality in Delhi include automobile emissions, industrial pollution and garbage dumps,inadequate infrastructure, geographic location including pollution from burning agriculturalwaste and forest in nearby regions. Environmental decentralization could play a key role informing regulations tailored according to the requirements and conditions of specific statesand cities. Collaborations betweenprivate and public sector can also play an important role(KattumuriandKurian,2017).TheEIAandSEIAAtogetherwithStatePollutionControlBoardcoulddomoretoregulatepollutioninDelhiandothereightIndiancitieswhichareamong20mostpollutedcitiesintheworldbasedonPM2.5levelsaccordingtoWHO.

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Figure4–Environmentalenforcementandairpollutionbystate

Note:TheenvironmentalenforcementindexisfromTable1andresidualairqualitywasobtainedbycomputingtheresidualsofaregressionofRespirableSuspendedParticulateMatter(RSPM)(source:https://data.gov.in/)onGDPpercapitaandpopulation.Recommendations

1. The decentralization of EIA processes have improved environmental regulation andbeen successful in reducing polluting activities in India. The evidence suggests thatdecentralizationwasassociatedwithrelativelyfewerfirmbirthsinstateswithstricterenvironmental enforcement.TheEIA, SEIAAandStatePollutionControlBoard shouldcollaborateandenhanceenforcementofenvironmentalregulationtoreducedisparitiesbetween states. Developing stronger centre-state, intra- and inter-state collaborationswould be beneficial for knowledge-and-resource sharing and improving technical,financialandadministrativecapabilitiesacrossstates.

2. Acriticalevaluationofallhighpollutingfirmsshouldbeundertakeninordertoassessand accordingly include all relevant firms into the regulatory process. With anincreasingupwardeconomicallymobilepopulationandgrowingconsumptionlevels,it

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is essential to reassess the inclusion of all relevant industries, including automobileindustry,forEIAprocess.Regularmonitoringandreportingshouldbemandatory.

3. Havingprogressed30places for ‘EaseofDoingBusiness’, India isranked100thamong190 countries by World Bank’s Doing Business Report 2018. The country shouldimprove its ease of doing business further together with enhancing environmentalstringencyofcompanies.

4. Enhance responsible and effective governance and judicial processes to be moreconducivetoimproveimplementationofregulations.

5. Ensuringpublicconsultationsandrepresentationsandengagementwithcivilsocietieswouldbebeneficialforenforcementofenvironmentalcompliance.

6. Inany futurereformsitwouldbebeneficial toconsiderextendingEIAprocessestobeapplicable to SMEs, as it can contribute greatly toward achieving India’s goals forenvironmentalsustainability.

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