Can Decentralisation Be a Force for Bad? New Evidence from Decentralising Environmental Clearances in India

Abstract

We exploit India s 2006 reform of Environmental Impact Assessment (EIA) regulations to assess whether decentralising environmental regulations improve firms pollution abatement behaviours and their impacts on firm performance. Using a nationally representative panel of registered manufacturing firms from 2002 to 2018, we exploit temporal and industry-level variation using a difference-in-differences strategy to estimate impacts of decentralisation at the firm, industry-state and district levels. We then explore heterogeneous effects of decentralisation by regulatory stringency, prior regulatory compliance, and construction of local regulatory authorities at the state level. For formal sector firms, we find that decentralisation reduced the likelihood of installing pollution control machineries, led to large and persistent reductions in investments and employment, but also reduced fuel intensity. We further examine spillover effects of decentralisation on unregistered firms in the informal sector, finding that districts more exposed to decentralisation saw faster informal sector employment and output growth. Overall, these results suggest India s decentralisation of environmental clearance was not effective at improving firm pollution control and brought with it economic costs.