Foreign Direct Investment, Income Inequality and Pollution Reduction: Policy Trilemma for India

Abstract

India, the third largest carbon-emitting country currently faces a three-dimensional policy challenge on one hand enhancing economic growth through foreign direct investment (FDI) and reducing income inequality and on the other hand complying with its intended nationally determined contributions (INDC) commitment to reducing carbon emissions. This study aims to contribute to the current policy discourse of India by examining the asymmetric and symmetric effects of income inequality and FDI on carbon emissions with the augmentation of non-linear and linear autoregressive distributive lag model technique and using time series data from 1990 to 2021. Findings indicate that positive shock on income inequality reduces emissions, while the same on FDI increases emissions. Further, negative shock on both income inequality and FDI shows an insignificant influence on carbon dioxide emissions. The study not only confirms the presence of the pollution haven hypothesis for India but also provides evidence of conflict between the sustainable development goal (SDG-10) of reducing income inequality and the goal of climate change mitigation (SDG-13). In addition, the human development index has been found to aggravate carbon emissions. The study highlights the policy challenges of harmonizing India's SDGs with its economic growth. It suggests significant policy changes to strategically prioritize foreign direct investment projects that are in line with SDG13.