Can Budget 2025 Usher in a Greener Economy?

The 2023-24 Union Budget saw the declaration of “green growth” as one of seven government priorities. This is directionally important in the context of at least two major adverse developments in India this past year—thanks to global warming, 2024 was the hottest year experienced in recorded history, with unprecedented heat wave conditions in India during the summer impacting labour productivity; and a dramatic increase in awareness of the consequences of extremely poor air quality in the form of increased respiratory diseases and reduced economic activity across major Indian cities, including Delhi and Mumbai.

The movement towards a green economy will curb the more egregious impacts of environmental degradation and climate change, while yielding many benefits including energy security (and its link with a stable and strong international rupee) and job creation in emerging green sectors such as waste-to-energy and biofuels. The actions outlined below can aid in the swifter greening of the economy.

Money Matters 

The first is carbon credits trading. The government has announced a Carbon Credits Trading Scheme to incentivise carbon mitigation actions, the broad contours of which have been laid out by the Ministry of Power. With the COP29 go-ahead for international trading under Article 6 of the Paris Climate Treaty, India can seek to also build a strong export market for its green credits, potentially valued in excess of $12.5bn a year by the International Emissions Trading Agency. The budget could announce specific timetables for the active operation of the domestic carbon market and commencement of international trading of carbon credits by Indian players under Article 6. To stimulate the carbon credits market, it could also offer tax concessions/waivers on profits generated from the creation of these credits through desirable activities such as regenerative agriculture and the afforestation of degraded lands.

Investments in emerging green sectors can be risky and a robust ecosystem must emerge that straddles the continuum from green venture finance to growth and expansion capital. Towards this end, building on Budget 2022-23’s willingness to promote blended finance solutions implemented by private fund managers, the government could announce a programme to establish a Rs 25,000cr fund of funds for seeding new domestic green and climate focused private equity and venture capital funds in India; such an investment could catalyse the deployment of well over Rs 2mn crore of capital that can promote many new green ventures in India over the next decade.

IFC [International Finance Corporation] and government estimates suggest that India will require in excess of $2trn for addressing the climate challenge within the next decade. Other investment requirements for building a green economy would take the capital requirement even higher. This is clearly beyond the capacity of a government running a high fiscal deficit and a resource-constrained domestic economy with a more risk-averse corporate and banking sector than in the years past. To address this gap in financing capacity, a dedicated green trading exchange could be created at GIFT City to support the inflow of foreign capital into specialised tradeable green financial instruments such as green bonds, climate bonds, green REITs [real estate investment trusts] and the like. This would benefit the Indian market while creating a USP for GIFT City as a hub for sustainable finance.

Green enterprise in India currently lacks adequate financing support from the traditional banking and NBFC [non-banking financial company] ecosystem for reasons that include weak capacity to assess the risks involved in deploying emerging green technologies. To ease the flow of capital for legitimate green purposes, the government must deliver the promised green taxonomy announced in the July 2024 budget by the Finance Minister, and consider including green lending activities based on this taxonomy under the RBI’s [Reserve Bank of India] definition of priority sector lending. The RBI could also specify green asset ratios to be maintained by banks and NBFCs, and encourage dedicated green lending and climate finance NBFCs alongside charting a pathway for the creation of green banks in India.

Helping Hand for Small Biz

Several tens of millions of MSMEs [micro, small and medium enterprises] account for well over 30% of the actual natural resource consumption and a significantly larger part of the adverse environmental impact in India. They need financing and technology support to undertake the green transition. Leveraging SIDBI’s [Small Industries Development Bank of India] learnings from financing MSMEs in designated industrial clusters, an MSME cluster green infrastructure development fund could be established and administered by SIDBI, to support the creation of shared green infrastructure such as effluent treatment plants and ground-based and rooftop solar power deployments in MSME clusters.

In addition, the government could create guarantee funds managed by SIDBI to stimulate additional MSME lending by public sector banks specifically for green capital expenditure. Some of these guarantee funds could be structured as public-private partnerships to finance the climate transition of MSMEs that are part of the supply chains of large enterprises in hard-to-abate sectors like cement and steel; the government could create guarantee funds for each such industry which the government and designated large enterprises could contribute to in equal measure, to catalyse the flow of low-interest loans from public sector banks to MSME supply chain partners meeting prescribed credit rating and performance thresholds.  

To hasten India’s shift from a large oil-importing nation to a country that is self-sufficient for its energy needs, the government should sustain its encouragement of the use of renewable energy through programmes like the PM Surya Ghar Muft Bijli Yojana for promoting solar rooftop energy for households, and enhance its support for the waste-to-energy and biofuel sectors including through appropriate funding and inclusion in the PLI [production-linked incentive] framework.

The government must fund a massive public awareness campaign about India’s environmental challenges, including the importance of resource conservation and climate-informed land use and civic infrastructure planning. It should also educate customers on using product label information to nudge manufacturers to do better on their sourcing strategies and lifecycle outcomes. This can be aligned with the government’s ongoing thrust on circular economy practices, including mandating extended producer responsibility for products beyond plastics, batteries, electronics and tyres, such as end of life vehicles and discarded solar panels. A special focus can also be provided to waste management via the equivalent of the US SuperFund for the clean-up and bioremediation of all landfills that have reached full capacity in major Indian cities.

The government has enormous clout as a buyer of products and can support green procurement, including through the Government e-Marketplace (GeM). It can mandate the use of electric vehicles by all ministries, and for all government-funded projects to use green steel, green cement, low-carbon building materials, alternative fuels and green energy.

Alongside ongoing regulatory actions including SEBI’s [Securities and Exchange Board of India] initiative to improve the standards of disclosure by the top 1,000 listed entities in India under its Business Responsibility and Sustainability Report (BRSR) mandate, each of the actions listed above for the government in Budget 2025 can go a long way in preparing the Indian economy for a cleaner and greener future on the road to a Viksit Bharat in 2047.

The writer is chairperson, ECube Investment Advisors. Views are personal.