28-February -2025-Special-Article

GREEN FINANCE IN INDIA

Green finance refers to financial investments that support environmentally sustainable projects. With India’s commitment to achieving net-zero emissions by 2070, there is a growing need for robust green financing mechanisms.

The government is planning to establish a National Green Financing Institution to aggregate funds from various sources and reduce capital costs for green projects. NITI Aayog is analyzing models like NaBFID, NABARD, IREDA, Green InvITs, and global Green Banks to develop this institution.

Need for Green Finance in India

Climate Change Risks

• Climate change could cause a 10% loss in total economic value by 2050.
• It could also reduce global GDP by up to 18%, severely affecting India’s goal of reaching a USD 10 trillion economy by 2030.

India’s Net-Zero Target

• At COP26, India pledged to achieve net-zero emissions by 2070.
• Achieving this target requires an estimated investment of over USD 10 trillion.

Threat to Financial Sector

• Financial institutions face 72% of the economic risks from climate change.
• Banks can mitigate risks by financing green infrastructure, renewable energy, and decarbonization projects.

Investment Shortfall

• India needs USD 1.4 trillion in total investments or USD 28 billion annually to meet its 2070 net-zero goal.
• As of February 2023, India’s green bond issuances stood at USD 21 billion, with 84% coming from private sector participation.

Current Green Financing Initiatives in India

National Clean Energy and Environment Fund (NCEEF)

• Funds clean energy projects through the Clean Environment Cess on coal.
• IREDA uses part of these funds to provide concessional loans for renewable projects.

Role of IREDA

• Sources funds from global institutions like the World Bank (USD 100 million for solar parks).
• Lends at lower interest rates to banks for green energy projects.

Priority Sector Lending (PSL)

• In April 2015, RBI included renewable energy under PSL.
• Banks must allocate up to 40% of their net credit to sectors like solar, wind, biomass, and micro-hydropower.
• Loans up to Rs 15 crore per borrower are provided for green energy projects.

Green Banks

• Financial institutions that focus on funding environmentally sustainable projects.
• In India, IREDA and SBI offer concessional loans for renewable energy.

Green Bonds

• These market-based instruments raise capital for eco-friendly projects.
• Example: IREDA’s Green Masala Bonds.

Crowdfunding

• A decentralized funding model where small investors contribute to renewable projects.
• Example: Bettervest’s support for MeraGao Power and Boond Engineering in rural India.

Challenges in Green Energy Financing in India

Limited International Finance

• Developed countries pledged USD 300 billion annually at COP29, but this is insufficient.
• Experts suggest that USD 1 trillion per year is needed by 2030 to help developing nations tackle climate change.

High Borrowing Costs

• Green projects face high interest rates and long payback periods.
• Lack of fiscal incentives makes financing expensive and often unviable.

Diversion of Funds

• NCEEF funds, meant for clean energy, have been redirected to other purposes like GST compensation and Namami Gange.

Lack of Institutional Support for Green Banks

• Green banks are not legally recognized, and RBI has not provided clear guidelines.
• This affects their credibility and ability to attract investments.

Underdeveloped Green Bond Market

• High credit rating requirements limit green bond issuance.
• Many renewable projects lack financial stability, leading to investor skepticism.

Way Forward

Strengthening Climate Finance

• Utilize global platforms like the Green Bond Market and international institutions (World Bank, AIIB) to secure concessional funding.
• Offer sovereign guarantees and interest rate subsidies for green projects.
• Launch a Tax-Free Green Bond Scheme to attract investors.

Developing a Green Banking Ecosystem

• Establish Green Banks with RBI oversight and a clear regulatory framework.
• Encourage public-private partnerships to mobilize global green investments.

Alternative Financing Mechanisms

• Expand Green Infrastructure Investment Trusts (Green InvITs) to attract private sector participation.
• Develop a robust carbon credit market linked to green finance instruments.

Microfinancing for Climate Adaptation

• Support women-led green businesses through small loans.
• Provide affordable climate risk insurance for farmers to ensure resilience against environmental changes.

Conclusion

India’s commitment to achieving net-zero emissions by 2070 requires a strong green financing ecosystem. The government’s plan to establish a National Green Financing Institution is a crucial step in mobilizing funds from domestic and international sources. Addressing existing challenges, such as high borrowing costs, fund diversion, and weak institutional frameworks, will be essential in ensuring a smooth transition toward a sustainable economy. Through innovative financial mechanisms and stronger policy support, India can accelerate its green growth and contribute effectively to global climate goals.

Mains Question:

2070. Discuss the need for green finance in India and evaluate the challenges in mobilizing adequate funds for achieving the country’s net-zero emissions target by 2070. (150 WORDS)