This post presents our monthly curation of developments in the Indian policy landscape – highlighting I4I content pertaining to the effectiveness of the ban on crop residue burning in certain North Indian states; the 2025 Nobel Prize in Economics and the matter of incentivising private investment in R&D; and the role of foreign investment in the Indian banking sector and its implications.

North India’s seasonal air pollution problem  

Once again, Diwali in Delhi was accompanied by a spike in PM2.5 levels – the highest recording since 2021. Besides fireworks and greater vehicular congestion during the festive season, the problem of poor air quality in the region is often attributed to crop residue burning (CRB) in the nearby agricultural fields. Yet, this year, a 72% decline was reported in farm fires, relative to the same period in 2024. Along with weather-related factors such as rains delaying the harvest of paddy, this positive development is being credited to stricter monitoring by the concerned authorities. In December 2015, the National Green Tribunal instituted a ban on crop residue burning in the states of Punjab, Haryana, Rajasthan, Uttar Pradesh, and Delhi. In new research, Khanna, Mahajan and Sudarshan (2024) utilise satellite data on crop fires and administrative data on fines levied for CRB following the ban, to assess the impact of the policy. Encouragingly, they find a 30% decline in the number of fire incidents over the period 2016-2019, as compared to 2011-2015. Almost all of the reduction took place in 2017 and 2018, that is, with a lag of a year, and was regionally concentrated in Punjab and Haryana. However, the gains dissipated immediately after this period. The authors explain that the imposition of fines did not scale well over time. Further, the efficacy of the ban is seen to be higher in regions closer to Delhi, given the public scrutiny and media attention on air quality in the capital city. Based on the study, the authors contend that sustained success from such bans may be attained by consistent commitment to enforcement via scale-up of monitoring or the levying of meaningful fines. Such measures can lend credibility and ensure that positive behavioural change lasts longer.

Based on the study, the authors contend that sustained success from such bans may be attained by consistent commitment to enforcement via scale-up of monitoring or the levying of meaningful fines. Such measures can lend credibility and ensure that positive behavioural change lasts longer. Further, regulation ought to be complemented with support for use of residue management technologies and raising public awareness.

Nobel Prize for explaining innovation-driven economic growth  

The 2025 Nobel Prize in Economic Sciences has been awarded to Joel Mokyr “for having identified the prerequisites for sustained growth through technological progress” and to Philippe Aghion and Peter Howitt “for the theory of sustained growth through creative destruction”. Mokyr received half the prize for showing how scientific discoveries and practical inventions feed into each other, creating a cycle of growth – contingent on a society that is open to new ideas and change even if vested interests are challenged. Aghion and Howitt share the other half of the prize for their mathematical model of creative destruction¹, outlining how innovation creates and destroys value at the same time.

Writing in the Indian Express, Udit Misra contends that this work is at the heart of several current policy debates, including whether government should subsidise R&D in companies, and who would benefit from that. One way in which governments incentivise private investment in R&D is tax credits. In their 2023 paper, Jain and Singh study India’s R&D tax credit scheme to assess how the gains from innovation are shared between producers and consumers. In 1998, there was a change in policy whereby firms with registered in-house R&D units became eligible for 125% tax deduction on qualifying current and capital R&D expenditures – up from 100%. 

The researchers find that the policy measure was effective in stimulating R&D spending among eligible firms in the targeted industries. The response is stronger among younger firms and those that are more reliant on external finance, implying that access to finance acts as a constraint on innovating firms in India. In terms of firm-product level prices, there is a decline for both eligible and ineligible firms, driving primarily by reduced markup (conditional on cost) rather than passthrough of cost savings to prices. Thus, it appears that R&D tax credits raise competition within targeted industries.

Potential hike in FDI limit for public sector banks

Recent media reports suggest that India is planning to increase the limit on foreign direct investment (FDI) in public sector undertaking (PSU) banks to up to 49% (the current limit stands at 20%). While the proposal is still being discussed by the Ministry of Finance and the Reserve Bank of India (RBI), it is believed that this is a part of efforts to reduce the gap between the regulation of banks across the private and public sectors.

In his I4I post, Sunil Mani traces the evolution of RBI’s stance on FDI in private banks in the country. Historically, the Central Bank had a very cautious approach given the sector’s systemic importance and the need to prioritise financial stability. Indeed, the limited financial exposure insulated Indian banks during the Global Financial Crisis of 2007-2008. However, in recent years, there has been a shift towards “calibrated pragmatism” allowing for higher foreign stakes on a case-by-case basis. An example is the approval of SMBC’s (Sumitomo Mitsui Banking Corporation) proposal to acquire up to 24.99% stake in Yes Bank, by the Competition Commission of India last month. While this makes the Japanese lender the single-largest stakeholder of Yes Bank, it does not have “promoter” status. Mani notes that this strategy recognises foreign capital as a resource for recapitalisation, modernisation and growth, albeit balanced with risk mitigation and regulatory control.

However, he raises concern around the goal of financial inclusion, involving government schemes such as Pradhan Mantri Jan Dhan Yojana (seeking to being more unbanked people into the formal banking system via no-frills, minimum balance savings accounts) and Pradhan Mantri Mudra Yojana (providing financial support to small and micro enterprises that traditional banks may not adequately serve). While private banks are less obligated than PSUs to support social schemes, they do participate in some of these for fee-based income. Hence, the dominance of private banks and their focus on affluent clients, risks exacerbating financial inequality. 

As India mulls a move towards a more open public banking sector, it ought to keep sight of the implications for broad-based financial development.

Note:

1. The term was coined by economist Joseph Schumpeter in 1942, describing the process of new innovations replacing existing ones.