Greening India’s Budget: Five suggestions for FM Nirmala Sitharaman

The world today faces an urgent climate crisis, India considering its size, growing economic heft, and rising stature in world affairs decided to assume a leadership role in addressing climate change globally. India has revised its nationally determined contribution (NDC) targets to an ambitious 500 GW non-fossil energy capacity, having 50% of its energy requirements met through renewable energy, reducing total projected carbon emissions by one billion tonnes, and reducing the carbon intensity of its economy by less than 45% by 2030 while moving swiftly towards achieving the target of Net Zero by 2070. India has set ambitious energy savings targets, yielding financial gains for consumers and companies while reducing the national burden of creating clean energy infrastructure.

India’s initiatives towards mitigating climate change are not merely limited to domestic targets, but rather adopting a more globally encompassing approach. This is underscored by its international initiatives such as its vanguard role in establishing the International Solar Alliance (ISA) to mobilize global efforts for the deployment of solar energy solutions against climate change and through the One Sun One World One Grid (OSOWOG) – Green Grids Initiative, envisioning the first international network of global interconnected solar power grids. The program is enabling a faster leap towards globally interconnected renewables that are shared for mutual benefit and global sustainability.

ISA published research estimates that investments of USD 10 trillion would be needed for India to achieve the net zero target by 2070. Achieving the net zero target would require efforts and investments towards multiple ends such as the greening of electricity supply and decarbonization of mobility, and hard-to-abate sectors of manufacturing industries and industrial processes as well as activities like shipping and aviation. To enable the same, investments would be needed to develop the requisite upstream infrastructure for setting up renewable energy capacity, grid infrastructure, deployment of batteries, and green hydrogen technologies.

India’s target of establishing 500 GW non-fossil capacity would require a cumulative investment of INR 22.5 trillion (at INR 4.5 million/MW). The Central Electricity Authority (CEA) estimates an investment requirement of INR 2.44 trillion for the development of grid infrastructure for green power evacuation. Similarly, NITI Aayog estimates that India’s battery potential (stationary and non-stationary applications) would reach 600 GWh by 2030, translating into an investment requirement of INR 5 trillion (at USD 100/kWh).
The Government of India also expects an investment of INR 8 trillion in the green hydrogen sector by 2030. In addition, investments in the development and deployment of innovative downstream technologies would also be critical in the fields of manufacturing, land mobility, long-distance transportation etc.

To meet the climate change commitments and net zero targets, India would need an estimated INR 11 trillion of total green finance flows annually by 2030. This is 3.5 times the current annual green finance flows of INR 309 trillion (FY20), as tracked by CPI’s Green Finance Landscape Report. Currently, the domestic sources account for the bulk of the green finance – 87% and 83% in FY19 and FY20, respectively – while the international green finance flows have contributed only to the balance.

Therefore, in the run-up to the national budget, as India aims to address these challenges and increase green investments, dedicated policy, regulatory and institutional interventions should be explored.

1. Establishing a dedicated and directed financing facility in the form of an Indian Green Bank/Financial Institution. This could be done through an existing or a newly instituted public financial institution having requisite capacities and methodologies in place for evaluation of green investments, expertise to create financing structures suitable for various segments, and an established market renown to tap into global green finance sources
2. Implementation of the amended Energy Conservation Act by expanding the footprint of energy efficiency and ushering in a time-bound manner a domestic cap and trade-based carbon market. The implementation of the Act is expected to provide adequate incentives for lowering the carbon footprint of all economic activities and enabling financial instruments based on underlying carbon prices to effectively become an asset class under appropriate financial market regulations
3. Introduce green budgeting /green tagging of public expenditure heads in central and state-level budgets to track public investments for NDC targets;
4. Facilitate global capital flows earmarked for the green from international banks, and asset owners by relaxing external commercial borrowing restrictions and FPI investment limits for green instruments such as green bonds and by adopting acceptable taxonomy and standards for green investments;
5. Increase domestic financial intermediation to green sectors/businesses by use of directed financing approaches from longer-term sources such as insurance and pension funds

Considering the yawning gap in green financing, it is imperative that India sharply scale up its green investments, in general across various sectors and specifically in the greening of its electricity grid, which is still over 80% carbon-intensive. Increasing green investments by such a multiple would demand directed policy, necessary institutional and regulatory interventions, and mechanisms by the Government to increase public investments – an example is the formulation of the sovereign green bond (SGB) framework and the expected issuance of SGBs as a consequence – and reallocating capital through banks, institutions and capital markets towards green end-uses.