Financing India’s green structural transformation

While India has launched an ambitious green structural transformation programme – with some initial successes to its credit – it is still nascent and there is a need to mobilise more resources. In this post, Ejaz Ghani outlines how global risk pooling, fiscal reforms, public-private partnerships and innovative financial instruments can help finance green growth – thereby enabling India to achieve both poverty reduction and climate risk mitigation.

India is among the top 10 countries in the world that are most adversely affected by climate change. Over 80% of its population lives in districts at risk from climate-induced disasters (World Bank, 2023). The adverse impact of climate change can be felt every day in extreme heat, changing rainfall patterns, droughts, falling groundwater levels, rising food prices, increases in child malnutrition, migration, and much more.

However, India is not entirely at fault. Developed nations bear a greater historical responsibility for climate change, as they heavily contributed to the generation of carbon emissions while building their economies. Nevertheless, India is making an effort to tackle climate change in a serious manner. The country has launched a big green structural transformation programme based on three pillars – energy efficiency, renewable energy, and green urbanisation.

A promising start, but more resources are needed

India is still in the early stages of green structural transformation. Yet, some results have been remarkable. India’s manufacturing sector has improved energy efficiency in the urban areas, producing more output with less energy input (Ghani and Goswami 2014). Prime Minister Narendra Modi has set a target to install 500 gigawatts (GW) of renewable energy capacity by 2030, which would be a five-fold increase in the country's overall renewable energy production capacity. India has experienced the world's largest expansion in renewable energy (Kumar and Majid 2020). According to a 2024 report by the International Trade Administration, India's installed capacity for renewable energy has increased by more than 400 GW over the past decade – spurred by government policies, industrial growth, urbanisation, and favourable geopolitics. As of March 2024, India's non-fossil fuel capacity exceeds 198.75 GW, constituting about 45% of the country's total capacity. In 2022, India saw its highest year-on-year growth in renewable energy additions at 9.83%. The budget for the Ministry of New and Renewable Energy allocates some resources towards green urbanisation and green farming through lower taxes for green products, use of electric vehicles, and water-based transport. India is also focused on reducing plastic use, switching to clean cooking fuel, making the railway system sustainable, and protecting regional glaciers.

While India is on track to achieve its goal of reducing emissions by one billion tonnes by 2030, and reaching net zero emissions by 2070, its progress can be derailed by inadequate resources to finance its green structural transformation. How India mobilises the financing needs for green growth will not only determine its own future but also influence the fate of our planet – if India does not meet its climate goals and continues to contribute to global greenhouse gas (GHG) emissions, it will be harder to reach the goal of limiting global warming to 1.5°C.

India needs US$10.1 trillion between 2020 and 2070 to achieve its net-zero target – however, conventional sources of capital are expected to provide only US$6.6 trillion (Singh and Sidhu 2021). What can be done to overcome the huge financing gap that India faces? There are many paths to scaling up financing for green structural transformation, but all paths have four common elements: (i) scaling up the role of international institutions and partnerships; (ii) fiscal reforms; (iii) private sector mobilisation; and (iv) using innovative financing instruments. India needs to scale up investments to promote green structural transformation. It is estimated that nearly 80% of the country’s infrastructure is yet to be built, if the goal of reaching net zero emissions is to be met by 2070 (Chateau et al. 2023).

Global risk pooling and fiscal reforms

India lacks the monetary and fiscal space to finance the investments needed to implement the green structural transformation. For India and other developing countries, mitigating climate risks often comes at the expense of reducing poverty and achieving high economic growth. Resources ought to be enhanced to fund the required infrastructure investments, such that India does not have to choose between the goals of reducing poverty and addressing climate change.

However, the World Bank and the International Monetary Fund (IMF) are yet to fully mobilise the resources needed to meet the needs of climate change. There is scope for them to take more risks to scale up the financing needs of India. Establishing multi-sovereign loan guarantees can be explored to improve the creditworthiness of climate-related infrastructure projects (see, for example, Vikas et al. (2021), Neunuebel et al. (2023), and Lazard (2024) for more detail on this). Global risk pooling will lower the cost of financing such projects, as pooling mechanisms can aggregate risks across a portfolio of projects, cities, and countries. Global risk pooling can dissect risk information and provide tools to identify and manage risks. This will diversify the investor base and bargaining power for the insured.

India’s fiscal reforms can also create more room to align government expenditures with environmental goals. There is room for modernising the tax system to raise revenue and increase taxes on emissions. Given India’s experience with implicit taxation, India can introduce an explicit carbon tax by simply updating its implicit tax schemes. Inefficient support for fossil fuels can be gradually eliminated and combined with subsidies for renewables, and support can be increased for research and development in climate-smart technologies. Smart fiscal management can make developmental priorities more attractive to the private sector.

Public-private partnerships and innovative financial instruments

The private sector has a big role to play in closing India’s financing gap, through public-private partnerships (PPPs). It is estimated that rates of return on infrastrcuture projects are four times higher in India as compared to the US (Ghani et al. 2014) India's increased focus on scaling up domestic manufacturing presents a significant opportunity for green growth. PPPs can provide well-informed risk allocation between public and private stakeholders, offering long-term visibility and stability, and promoting green growth. India can also promote community-based PPPs to promote local economic development and social benefits associated with large-scale green infrastructure investments, such as those pertaining to stormwater. Green infrastructure investments will also have huge economic benefits including boosting growth, creating jobs, and building resilience against climate shocks and other disruptions. However, to scale up PPPs to promote green structural transformation, the institutional and regulatory framework will need to be made more robust.

India experience with PPPs can be further developed to make them more sector-specific, with appropriate institutional frameworks with independent regulators. Besides transport and power, there is a need to focus on urbanisation, and customise the PPP architecture to suit each sector. The private sector has the knowledge and experience to assess growth potential in different sectors and industries, and it can play a critical role by investing in low-carbon technologies and promoting more environment-friendly behaviour across supply chains. The Climate Finance Leadership Initiative (CFLI) is a positive step, as it brings together financial institutions, corporates, policymakers, and international firms to mobilise private capital into sectors that align with the government's climate priorities.

Innovative financial instruments can also be scaled up as a vital instrument in promoting green structural transformation. India has recently issued its first green sovereign bond, and this can be expanded by developing a sustainable capital markets strategy, strengthening key financial institutions, and building products for take-out, guarantees, and loan-life extension. The Reserve Bank of India (RBI) has announced that it will be issuing new guidelines on climate stress testing, climate disclosure and green deposits at banks, and large corporates will have to disclose a ‘Business Responsibility and Sustainability Report’.

There is a lot of room for green sovereign bonds to grow in India. First, foreign participation can be encouraged, as it is currently dominated by domestic investors. The bonds should be easy to settle through international clearing houses like Euroclear, there should be clarity on taxation, and investment caps on foreign investors should be removed. Further, inclusion in bond indexes commonly used as benchmarks would likely attract international private capital. Second, sovereign green bonds provide a local currency benchmark for domestic companies and agencies, and India’s national framework provides a template for these entities to follow. There is a need to develop a comprehensive green taxonomy and help enterprises and investors meet the sustainability criteria. Third, there is huge potential for India to catch up with some of its peers if it increases the share of green bonds denominated in the local currency.

This is the decade for India to accelerate decarbonisation as well as pursue economic growth. The country is experiencing the most rapid urbanisation in the world, and it is also the fastest growing major economy. As a result, it is well-positioned to implement a faster pace of green structural transformation to reduce poverty and climate risks.

The views expressed in this post are solely those of the author, and do not necessarily reflect those of the I4I Editorial Board.

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