Do macroeconomic policies drive environmental sustainability? Empirical insights from India

Although fiscal and monetary instruments are calibrated for economic stabilisation rather than for environmental ends, they act directly upon the volume and composition of the activity that generates environmental pressure, and the literature has largely assessed their consequences on the implicit assumption that expansions and contractions are reflection of one another. Relaxing that assumption for India over 1971–2021, this study analyse the association through the nonlinear autoregressive distributed lag model in which government expenditure, broad money, foreign direct investment inflows and energy efficiency are decomposed into cumulative increases and decreases, and traces the resulting multipliers across per-capita carbon dioxide emissions, greenhouse gas emissions and the ecological footprint. Fiscal expansion raises environmental pressure, with long-run elasticities of 0.865, 0.585 and 0.450, yet an equivalent contraction lowers it far more sharply, by 2.53 for carbon dioxide and 2.15 for the footprint. Monetary expansion is associated with improvement across indicators, whereas the effect of contraction differs in sign according to the pollutant considered. Deterioration in energy efficiency proves more damaging than an equivalent improvement is beneficial, as the rebound effect implies, while foreign direct investment inflows, though favourable, is economically slight. The findings suggest that monetary policy should account for pollutant-specific and asymmetric environmental effects, while environmental policy should prioritise energy efficiency rather than relying primarily on FDI inflows.