Climate Finance And Viksit Bharat: Key To Bridging India’s Net Zero Ambition

Transition financing is crucial, necessitating innovative mechanisms such as green bonds, blended finance, and public-private partnerships to mobilise both domestic and international investments.

Additionally, robust policy frameworks, regulatory clarity, and institutional support are essential to mitigate risks, attract private capital, and ensure a smooth transition towards a sustainable, low-carbon economy.

India’s economic growth and its environmental sustainability are two sides of the same coin. The path to a developed India, or Viksit Bharat, demands a comprehensive approach that integrates sustainable practices at its core.

As India industrialises and urbanises at an unprecedented pace, the demand for energy will surge. To meet this demand without exacerbating climate change, India must pivot towards renewable energy sources, energy efficiency, and sustainable infrastructure—efforts that require substantial financial investment. 

India's ambitious goal of achieving Viksit Bharat, or a developed India, must be aligned with its climate action financing needs, which are estimated to require US$10-12 trillion. This substantial investment is essential not only for mitigating and adapting to the impacts of climate change but also for ensuring sustainable economic growth and development.

Role of Financial Services In Climate Finance

Financial services are pivotal for realising the vision of Viksit Bharat, as they form the backbone of economic development and sustainable growth. A well-developed financial sector facilitates efficient allocation of resources, supports entrepreneurship, and fosters innovation.

By providing access to capital, financial services enable businesses to expand, create jobs, and contribute to economic prosperity. Furthermore, robust financial institutions can offer tailored solutions for climate finance, helping to mobilise the significant investments required for renewable energy projects, infrastructure development, and resilience against climate impacts.

Through mechanisms like blended finance, green bonds, and climate insurance, the financial sector can attract both domestic and international investments, ensuring that India’s journey towards a developed nation is inclusive, sustainable, and resilient.

To achieve Viksit Bharat, India must leverage innovative financing mechanisms that attract both domestic and international investments without leading to excessive indebtedness.

A robust climate finance framework can attract private investments, utilise blended finance, and promote public-private partnerships, ensuring that the journey towards a net-zero future is financially sustainable and resilient.

Enhancing the mobilisation of funds through financial instruments requires innovation in debt and equity instruments, coupled with the development of risk mitigation tools such as insurance and guarantees.

Also Read: Urgent Call To Scale Clean & Climate-tech Startups, As India Works For A Sustainable Future

Government's Role And Climate Finance

Through the recent budget, the government announced plans to roll out a five-year vision document for the financial sector. This initiative can indeed be a catalyst for comprehensive regulatory intent and operational steps for climate finance.

Using this vision document as a basis, establishing clear regulatory mechanisms, enhancing transparency, and ensuring accountability will build investor confidence. Additionally, integrating climate considerations into national development plans can streamline efforts and resources towards a sustainable future.

Enhanced regulatory frameworks and innovative financial products are essential to mitigate risks, reduce investment barriers, and ensure the steady flow of capital towards projects that align with the country's development and climate goals.

Climate change is no longer a distant threat; its impacts are being felt globally, with India being particularly vulnerable. Extreme weather events, rising sea levels, and erratic monsoons are already affecting agricultural productivity, water resources, overall economic stability, and human indices. The Reserve Bank of India has identified increasing climate shocks as a significant risk to the Indian economy.

The financial burden of adapting to and mitigating these changes is substantial, requiring an estimated 2.5% of India’s GDP annually until 2030. To tackle these challenges head-on, climate finance must be prioritised. This involves mobilising resources to fund projects that reduce greenhouse gas emissions, promote renewable energy, and enhance resilience to climate impacts.

Domestic finance has been pivotal for India's climate action thus far, but to scale up, India must tap into global funding sources as well as wider and newer domestic investors.

Accessing finance for small-scale and micro-impact projects might necessitate shifting from traditional public grants, institutional lending, and philanthropy to adopting blended finance. This approach leverages development finance from private investors for sustainable development.

Social impact bonds can offer funding structure for small-budget initiatives at local, district, municipal, and state levels, combining impact investing, public-private partnerships, and outcome-based finance. These funding structures allow investors to provide early risk financing for green projects, encouraging more investment by offering incentives like defined outcome parameters and guarantee support for unknown risks.

Developing A Climate Finance Taxonomy

The commitment to developing a taxonomy for climate finance, as fleetingly addressed in this year’s union budget, however is a promising step forward. Establishing clear and specific guidelines for climate finance can significantly enhance foreign investment, bolster food security, curb inflation, and reduce dependence on conventional energy sources.

Several comparable developing economies like China, Malaysia, and Sri Lanka have already formulated green taxonomies to facilitate climate-sensitive investments. Effective taxonomies are crucial for determining if investments align with national climate objectives, and its commitments across geopolitical treaties and agreements.

While a single global taxonomy may not be feasible, universal principles can guide jurisdictions and industries towards Paris Agreement alignment. These taxonomies must be objective, grounded in science-based metrics and targets, and adaptable to evolving pathways, industries, and technologies.

With different regulators for different financial needs, India needs to ensure that the entirety of the financial sector uses one common taxonomy that allows for clarity and interoperability.

Also Read: Budget 2024: Greener Directions Beckon, Environment Ministry Needs More Funds To Get There

The Path Forward

India's vision of Viksit Bharat and its net zero aspirations are mutually reinforcing goals. Achieving them will require a concerted effort to mobilise climate finance, foster innovation, and implement sustainable practices across sectors.

India can lead the way in demonstrating that development and sustainability are not only compatible but indispensable to each other. Climate finance, thus, is not just a means to an end but the foundation upon which the edifice of Viksit Bharat will stand strong and resilient.

(Dr Srinath Sridharan is Mumbai-based researcher and corporate advisor. Meyappan Nagappan is a partner at law firm Trilegal. Views expressed are personal)