Delhi's smog conundrum: A suffocating mystery in CNBC's Inside India newsletter.

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The big story

Since the end of October, Sheetal Sharma, a resident of Delhi, has been experiencing a putrid burning smell, difficulty breathing, and chest congestion due to the toxic air surrounding India's National Capital Region (NCR).

The air quality in Delhi rapidly worsened from poor to severe after Diwali, and has remained that way, according to Sharma, who made the comparison to a dystopian movie on CNBC's Inside India.

The air quality index (AQI) has increased significantly in recent months, with the metric reaching a peak of 478 in the National Capital Territory of Delhi (NCT) on Thursday. Despite decreasing slightly in November, the reading remains in the hazardous range as classified by India's Central Pollution Control Board.

The government classifies AQI readings between 200 and 400 as "poor" or "very poor," while anything above 500 is considered "severe," as it can have a serious impact on people with pre-existing health conditions.

The government has directed schools to move to hybrid mode for some grades and stagger the working hours of civil servants due to high AQI readings. Additionally, restrictions on vehicle usage have been imposed in Delhi and adjoining regions to reduce emissions.

Despite taking medication and undergoing treatment, Sharma had no respite from the toll Delhi's prolonged high AQI reading had taken on her nasal passageways.

Sharma, who works at a tech company, said that relief only came when she "escaped" to a village near Nainital, some 300 kilometers away from Delhi. The AQI reading was just 65 there, allowing her "cough and cold to disappear within hours, without medical aid."

Unlike Sharma, many in Delhi, particularly those in labor-intensive roles, have not been able to escape the pollution.

Dinesh Kumar, a 37-year-old auto-rickshaw driver from Patna in Bihar, relocated to Delhi to secure higher-paying work to support his elderly parents and school-going children.

Despite the increased pollution levels and people staying indoors during winter months, Kumar cannot relocate to another city for work due to financial constraints.

He laments that his auto, a three-wheeled vehicle, is mostly empty during this time, with only one or two passengers at most, compared to around 20 passengers during other times of the year.

He told CNBC's Inside India that he feels like there's chili in his eyes because he's constantly tearing and cannot see. If he stops working, his family will have no money.

The smog issue in Delhi is an annual problem that affects the Indo-Gangetic plains, particularly the northern states of India, from October to December.

A geographical disadvantage

The assumption is that the lower temperatures and agricultural stubble burning activities during winter contribute significantly to Delhi's smog problem.

The increase in air quality metrics is not due to a sudden surge in pollution-related activities during this season, according to Anumita Roychowdhury, executive director of research and advocacy at the Centre for Science and Environment.

Pollution levels in the Indo-Gangetic plains remain high year-round due to adverse meteorological conditions that trap pollutants in the air and prevent them from being blown away by wind.

Roychowdhury stated that Delhi, along with other northern Indian states, is particularly vulnerable due to its "geographical disadvantages."

"Both Mumbai and Chennai have better natural ventilation due to their proximity to the open sea. As a result, despite high pollution levels in Mumbai, it does not accumulate as much as in northern India, thanks to the natural ventilation index," she stated.

The Delhi government has taken steps to reduce pollution, including experimenting with limiting vehicle numbers based on license plates. However, Roychowdhury emphasizes that other northern Indian states must increase their efforts to address this issue.

According to the Indian Institute of Tropical Meteorology, 70% of particulate matter 2.5 originates from the larger region beyond Delhi, and pollution does not adhere to boundaries.

Particulate matter with a diameter of 2.5 micrometers, similar to smoke, soot, bacteria, and pollen, is present in the air.

A $95 billion cost

The long-term effects of Delhi's poor air quality go beyond just affecting residents' health and well-being, and also have a negative impact on the economy.

According to data from Dalberg Advisors, Clean Air Fund, Blue Sky Analytics, and trade body CII, New Delhi, which is part of NCR, loses 6% of its annual Gross Domestic Product (GDP) due to air pollution.

The same report published in 2021 revealed that air pollution costs Indian businesses $95 billion or around 3% of India's Gross Domestic Product (GDP) annually.

Those in the middle and lower-income groups are often the worst hit.

According to Sumedha Dasgupta, senior analyst at the Economist Intelligence Unit (EIU), the smog disproportionately affects the poor because the government is temporarily shutting down or phasing out polluting industries which absorb a significant number of semi-skilled and unskilled labor on daily wages.

The wedding industry in India has been affected by consumers postponing their celebrations due to poor weather, just as retailers have felt the pinch from people shifting towards online shopping.

The economic downturn in Delhi may have a ripple effect on other cities in India.

According to Dasgupta, a domino effect would occur in many areas if activities in Delhi were halted. This would lead to a stop in the purchase of sand from Bihar, cement, and raw materials from another part of India. This, in turn, would affect labor and efficiency levels in those states.

Dasgupta explained that in the long run, you are slowing down the economies of those regions.

What is needed?

To minimize the yearly recurrence of seasonal smog in Delhi and the wider north India region, it is crucial to develop strategies even though the smog is expected to decrease by the end of winter in January.

The highly-polluted areas may push people and investments out of these areas and into other parts of India.

The migration of people from Delhi to other major metros like Mumbai, Bangalore, or Hyderabad will create a "migration burden" and put pressure on the infrastructure in these cities, according to Dasgupta.

"It can certainly cause numerous problems on a national scale, including decreased productivity and industry momentum," she stated.

Instead of focusing on "middle-class environmentalism," Roychowdhury proposes a more practical approach to tackle the issue. At the consumer level, this entails cutting back on car usage and choosing public transport whenever feasible.

She suggests that businesses consider sustainable financing strategies that minimize private transportation use, such as investing in infrastructure.

Instead of investing in car-centric infrastructure, we should allocate that funding towards building infrastructure for walking, cycling, and public transport, which will provide a greater return on investment and help us control pollution more effectively, according to Roychowdhury.

Agricultural waste and crop residue can be repurposed by businesses, as biomass-based fuels have already been used in Delhi and the NCR for industrial purposes instead of natural gas.

The solution to a significant issue in India involves a gradual process of addressing it, which, if executed effectively, can lead to businesses thriving in Delhi and residents, such as Sharma and Kumar, staying healthy, thereby contributing to their income and the country's economic growth.

Need to know

India's finance minister Nirmala Sitharaman has stated that the lower-than-expected economic growth in the country's fiscal second quarter is a "temporary blip." She explained that this situation is similar to the earlier years when Lok Sabha elections were conducted. Sitharaman also pointed out that government capital expenditure has increased by 6.7% year on year.

India's trade deficit in November was unexpectedly wider than anticipated, with imports rising 8.35% and exports growing only 2.17%, resulting in a trade deficit of $37.84 billion, higher than the $23 billion predicted by a Bloomberg survey. This was a significant increase from the $27.1 billion recorded in October.

Recently, earnings growth in India has been hindered by disruptions caused by the monsoon and elections. However, Rohit Shimpi, Fund Manager at SBI Mutual Fund, believes that the economy will recover as companies and the government increase their capital expenditure.

The iShares MSCI ACWI ex U.S. ETF has risen 3.17% year to date, compared to the S&P 500's 23.87% increase. Despite this, strategists predict more bumps in 2025 for global markets. One strategist said, "India is still the market to beat."

What happened in the markets?

This week, Indian stocks experienced a decline, with the Nifty 50 index falling 3.3% since the previous week's close. Despite this, the index has still risen 10.2% since the beginning of the year.

Since the end of last week, the Indian government bond yield has increased by more than 5 basis points, reaching 6.786%.

According to Carl Ashton, an investment counselor at Citi Private Bank, the bank is keeping an overweight stance on India. Despite stock prices being around 20- to 22-times earnings, corporate earnings are growing at high double-digits in the region. India's projected 7% growth in gross domestic product next year may help recover corporate earnings, making the valuation of Indian equities "reasonable," Ashton said.

Puneet Gupta of S&P Global Mobility stated that India and Tesla have a mutually beneficial relationship. India requires Tesla's expertise to manufacture electric vehicles and establish a domestic EV industry, while Tesla needs India because the country is the third-largest market in the world, and middle-class individuals in India are actively seeking EVs, particularly in the luxury segment.

What's happening next week?

Economic calendar next week will be dominated by interest rate decisions and inflation readings. Indian IPOs are scarce due to the end-of-the-year lull.

The Bank of Japan and the Bank of England will announce their interest rate decisions on December 19, along with the final GDP figures for the third quarter of the United States.

The U.S. personal consumption expenditures price index for November, India's monetary policy meeting minutes, Japan's inflation rate for November, and Euro zone's consumer confidence flash data for December are all important economic indicators.