Climate Finance = Resource Management

India stands at a critical juncture, with its growth path needing to align with climate-conscious policies that demand vast financing. Estimates put India’s climate finance needs between $160 bn and $288 bn annually up to 2030.

These top-down estimates hinge on assumptions and miss sector-specific needs. A new Centre for Social and Economic Progress (CSEP) study, ‘India’s Climate Finance Requirements: An Assessment’, follows a bottom-up approach to provide a granular understanding of the country’s financial needs for effective decarbonisation.

The study, covering up to 2030, focused on four key CO2-emitting sectors – cement, steel, power and road transport – to estimate additional capex over and above business-as-usual (BAU) scenario. It estimates that climate finance requirements for four largest CO2-emitting sectors amount to $467 bn up to 2030, with an annual average capex of $54 bn, or 1.3% of India’s GDP, consisting mainly of capex for steel ($251 bn) and cement ($141 bn).

India’s steel production is projected to rise by 80% from 125 mn t in 2022 to 225 mn t by 2030, and cement production by 82% from 370 mn t to 670 mn t. India’s carbon emission intensity of 2.4 t of CO2 per t of steel exceeds the global average of 1.85 because of its carbon-intensive production methods, while carbon intensity of the cement sector at 0.44 is lower than the global average of 0.6.

Of all the nine EM economies in G20, India’s capex requirement for steel and cement sectors is the largest as percentage of GDP. On an annual average basis up to 2030, they amount to 0.7% and 0.4% of GDP for steel and cement, respectively. These sectors are hard to abate since they require the use of carbon capture and storage (CCS) technology, which is expensive but is the only option available.

Capex for power sector is estimated at $47-57 bn for transitioning from fossil fuel-based sources of power to RE, and $10 bn for pumped and battery storage. Thus, contrary to the common narrative, the power sector does not entail large additional capex relative to BAU scenario for abating carbon emissions.

This is because the unit capital cost for setting up RE plants (installed capacity) is lower than that of coal-fired power plants. Relative to conventional energy sources, the capital unit cost of solar energy is about half, and that of wind energy is about one-third. Road transport is estimated to require capex of $10-18 bn for transitioning from ICEVs to EVs, and $8 bn for developing charging infra for EVs.

The estimated capex in this study will reduce use of 291 mn t of coal and 72 bn litres of petrol and diesel up to 2030, mitigating 6.9 bn tonnes of CO2 emissions (excluding road transport). The study also evaluated the macro consistency of India’s climate finance estimates. Overall, net of CAD, capital and financial flows for India are estimated at $530 bn during 2023-30, or 1.4% of its GDP on an annual average basis in the BAU scenario. Consistent with the expansion in the monetary base, India can manage up to about $470 bn during the same period.

Thus, India would need to skilfully manage:

External financial flows in BAU scenario.

Climate finance from external sources. For absorbing such flows, India may have to widen CAD. But for prudential and financial stability concerns, it should be subject to a maximum of 2.5% of GDP. The remaining gap would need to be financed from domestic sources by stepping up the saving rate.

There is a mix of private and public sector involvement in power. Though the onus of financing climate action rests largely with the private sector, GoI would need to provide subsidies and tax incentives to the private sector, and put in place regulatory frameworks that derisk green investments and develop charging infra for EVs alongside the private sector.

But fiscal space is limited, with government debt-GDP ratio at 82.6% as of end-March 2025. The CSEP assessment suggests there will be need for further fiscal consolidation to bring the debt-GDP ratio to a sustainable level. Thus, it would be a challenge for the general government to finance even limited climate finance action.

CSEP’s findings suggest lower capex for energy transition, but large capex for steel and cement. At a time when India is stepping up its efforts to accelerate its growth rate by focusing on physical infra development and promoting manufacturing, it would need to manage its resources deftly by balancing competing uses so that it does not complicate macroeconomic management.

(Disclaimer: The opinions expressed in this column are that of the writer. The facts and opinions expressed here do not reflect the views of www.economictimes.com.)



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