Pollution is Not Just a Health Crisis but an Economic Crisis

Even as the country goes back and forth on its status as the 4th largest economy in the world, India’s declining air quality continues to raise concerns over basic livability across many states. While economic growth is often viewed from the narrow lens of GDP, rather than quality of life, the air crisis has direct implications for India’s economy — blunting growth prospects, burdening key sectors, and threatening long-term development. The impact is most visible in healthcare expenditures, agricultural output, labour productivity, and tourism revenues. Persistently high pollution levels undermine India’s much-celebrated demographic dividend.

This concern is not new. Almost a decade old study by the Indian Council of Medical Research and Public Health Foundation of India had concluded that pollution is costing the nation approximately $36.8 billion annually – about 1.4% of its GDP. Not surprisingly, another study by Dalberg published only a few years later in 2021 showed even more alarming estimates — air pollution has cost Indian businesses about USD $95 billion every year, around 3% of the total GDP. While the latest estimates remain unpublished, the progressively worsening air quality does not leave much to speculate.

Direct Economic Costs of Pollution

Mechanisms of economic harm caused by pollution are straightforward and compounding. The World Bank estimates that around 90% of the world population is hit by either air, water pollution or land degradation. In broader terms, this impact could be seen through the lens of – labour productivity, sectoral output and the consequent fiscal burden.

First, ill health reduces labour supply and productivity: workers with pollution-related respiratory and cardiovascular disease miss days of work, perform less effectively, and may retire early. A 2025 OECD cross-country analyses over Europe finds measurable, causal reductions in labour productivity on high-pollution days, particularly for outdoor and heat-exposed occupations that constitute a sizable share of Indian employment. This loss is not transient — childhood exposure to fine particulate matter (PM2.5) impairs cognitive development and school attainment, lowering lifetime earnings and the quality of the future workforce.

Second, pollution reduces sectoral output. Agriculture is sensitive to airborne pollutants: empirical work from 2024 shows that yields of major staples (rice, wheat, maize) can be several percent lower under higher pollution regimes, due to reduced photosynthesis and plant stress — a meaningful effect for the Indian economy that still relies heavily on agriculture. A 2019 report by the World Bank estimates water pollution reducing agricultural productivity by 9%, lowering crop yields and incomes for millions of farmers around the world. These problems amplify for countries like India that are already juggling with depleting watertables and waterborne diseases.

Third, pollution imposes fiscal and private costs through healthcare expenditure and foregone investment. Manufacturing and construction suffer from accelerated equipment depreciation; tourism declines when cities are repeatedly cloaked in smog and visibility-dependent attractions lose appeal. Real-estate values fall in chronically polluted zones as households and firms consider health and quality-of-life in location choice. Public health systems treating chronic pollution-related illness divert resources from other priorities; households facing high out-of-pocket expenditures reduce savings and consumption, which in turn affects domestic demand and capital accumulation. Internationally, reputational effects (perceptions of unhealthy cities) can deter foreign investment in services and talent-intensive industries, altering the composition of India’s growth.

It is also worth noting that even those sectors that are predominantly indoors and deskwork-oriented, like the IT sector will suffer in the long run. The most polluted cities in India continue to be metros, which are often the hub for the country’s brains. Neurologists have already warned of declining cognitive abilities, increased migraines, and slow increase of dementia as a result of consistently poor air quality. In the larger scheme of things, no sector will remain immune to the long-term effects of pollution.

For the retail sector, that is already competing with the digital markets, pollution is an additional penalty. High pollution episodes, like those triggering the Graded Response Action Plan (GRAP) in Delhi NCR, force market shutdowns and discourage citizens from venturing outdoors. This leads to a sharp decline in consumer footfall and discretionary spending in segments like apparel, dining, and entertainment, mimicking the consumption drop seen during the COVID-19 lockdowns.

Tackling the Problem on All Fronts

Countries like the US, UK, and Japan overcame crisis-level pollution through integrated policy packages: strict regulatory enforcement, market-based instruments (cap-and-trade), public transparency in emissions data, and subsidies for clean technologies. India should expand international cooperation, seeking technical know-how and investments for clean air, waste management, and river revival projects.

1. China’s national Clean Air Action (2013–2017) demonstrates that aggressive, centrally coordinated emission controls, targeted industrial relocation, fuel switching and investments in monitoring and enforcement can cut PM2.5 substantially within a few years — particularly when coupled with local accountability and measurable targets.
2. Sweden’s long-standing carbon/energy tax framework shows how price signals can encourage fuel switching, energy efficiency and innovation. India can expand and harmonize pollution pricing — for example, by strengthening and widening incentives for clean fuels, accelerating electricity sector reforms to displace coal with renewables, and using targeted charges on high-emission industrial clusters while protecting low-income households.
3. Learning from India’s own success, the National Clean Air Programme (NCAP) and leapfrogging to BS-VI fuel standards are important steps. Cities like Varanasi and Kolkata have shown that decisive interventions (industrial regulation, public transport improvements) can sharply reduce pollution. Policy actions should expand real-time monitoring, enforce compliance, strengthen emission standards, and maintain the “polluter pays principle” for accountability. Nationally, a credible inter-ministerial implementation cell with state performance metrics and finance tied to outcomes would reduce policy fragmentation.
4. To combat water pollution, the core focus must be on upgrading Sewage Treatment Plants (STPs). A significant number of projects have been launched or completed to tap untreated sewage drains and divert wastewater for treatment. The use of the Hybrid Annuity Model (HAM) (PPP with 40% government funding) can ensure long-term performance and maintenance of STPs. India must also push for decentralisation through adoption of community-scale and building-level systems to reduce load on central systems. Moreover, state-level bans like those by Sikkim (fully organic) and Kerala (strong pesticide restrictions) have demonstrated how stricter regulatory intervention can deliver results and preserve water quality.
5. Finally, investments in human capital — expanded healthcare access, school-based nutrition and remediation programs for pollution-exposed children — reduce the irreversible damage to productivity.

These policies represent a multi-pronged strategy encompassing public health, infrastructure investment, and strict enforcement, reflecting a growing recognition that environmental protection is indispensable for sustainable economic development.

Today’s GDP Growth Does Not Guarantee Tomorrow’s economic output

Pollution is an economic growth tax. Tackling it requires a blend of enforcement, market incentives, public investment and human-capital protection — policies that pay for themselves over time by restoring productive capacity, protecting children’s futures, and making Indian cities attractive places to live and invest.

Unchecked pollution jeopardises sustainable development goals by making economic progress costly and environmentally unsustainable. There is an urgent need to look at economic growth beyond immediate GDP numbers and assess human capital along with long-term output.