Financing the Decarbonization of the Indian Economy

India is poised for strong economic growth over the next few decades. However, as the world’s third highest greenhouse gas (GHG) emitter¹, balancing economic growth with  environmental impact is imperative. Moreover, the country has already committed to reducing the carbon emissions intensity of its gross domestic product (GDP) by 45% by 2030 and to net zero by 2070. 

According to a Reserve Bank of India (RBI) study², the country needs approximately $1 trillion by 2030 to advance its decarbonization initiatives. Solar and wind account for the largest share at 25% of the total requirement ($250 billion³), followed by electric mobility, which requires approximately 18% ($180 billion⁴), and energy efficiency with 12% ($120 billion⁵) in capital investment.

Challenges in Financing Decarbonization Projects in India

In mature sectors such as renewable energy, financing is gravitating towards renewable energy investment platforms and green bonds. However, in India, only large corporates have been able to issue green bonds – over 84% of green bonds have been issued by large private corporates.⁶

Growth segment technologies such as electric mobility and compressed biogas (CBG) have challenges accessing low-cost finance instruments that can fuel sector growth and enable future access to mature instruments such as green bonds, as 

observed in advanced economies. Advanced economies have demonstrated investments in frontier segments such as green hydrogen, offshore wind, and carbon capture, in contrast to India, where these sectors are yet to gain traction in attracting early-stage capital. Here, these segments could be funded through similar instruments as in advanced economies. 

Hence, decarbonization of the Indian economy requires that the following outcomes be realized: 

1. Capital is to be made available at scale for mature sectors such as renewables, energy storage, and rooftop solar, as well as across the board for other decarbonization projects
2. Lower cost of capital is needed for growth sector technologies such as electric vehicles (EVs)
3. Concessional finance and equity capital is required to kick off investment in frontier sectors such as green hydrogen 

Potential Decarbonization Financing Pathways

We suggest the following pathways to solve the financing challenge for India’s decarbonization: 

1. Scaling up international financing: Banks, insurers, asset managers, and asset owners globally managing $130 trillion in collective assets, have committed to achieving net-zero emissions by 2050 and staying on the path to limit temperature increase to within 1.5 °C⁷. India is among the top two emerging markets for international investment in the solar, wind and EV segments⁸, and must leverage its favorable position to attract further international financing to decarbonize and scale up financing in these sectors. 

Gujarat International Finance Tec-City (GIFT City) in Gujarat is expected to help facilitate investment from international investors in Indian securities, in a regulatory regime comparable with any other leading jurisdiction and without currency risk. The IFSC’s [a fully owned subsidiary company of National Stock Exchange Limited (NSE)] International Sustainability Exchange Platform⁹ at GIFT City, will facilitate the listing and trading of a variety of sustainability products, including green bonds, voluntary carbon credits, sustainable bonds, green real estate investment trusts (REITs), and green equity among others, and promises to channelize the flow of sustainable finance to India and other markets¹⁰. Indian project developers and financial institutions must leverage this platform to secure international financing for decarbonization projects. 

2. Create headroom for domestic financial institutions to extend credit to decarbonization projects: Domestic financial institutions are reaching their exposure limits to infrastructure lending¹¹. Securitization of loan books allows banks to offload debt and create further headroom to finance infrastructure projects. Infrastructure Debt Funds (IDFs) are investment vehicles¹² through which banks can offload lower-risk operational assets. Additionally, domestic lenders can securitize their assets and sell their loan books to foreign commercial banks increasingly interested in India’s clean energy growth. This will allow banks to manage sectoral exposure while reducing asset-liability mismatch and liquidity risks.

Pension and insurance funds also need to finance the decarbonization of the Indian economy, given the scale of capital required. Life Insurance Corporation (LIC) has nearly $500 billion worth of assets; 95% of this fund is invested in securities¹³. Re-aligning these assets towards green securities, debt, and equity can also finance decarbonization. 

In addition, private asset management firms can develop asset classes such as infrastructure investment trusts for mature assets such as wind and solar. Most Indian financial institutions are not members of the Net-Zero Banking Alliance or similar collaborative platforms¹⁴. There is a strong need to establish a national net-zero financing alliance to initiate dialogue and build a sector-led financing strategy, or encourage financial institutions to participate in global alliances.

3. Scaling up blended finance for Indian decarbonization projects: There are typically four types of blended finance instruments used in India. These are concessional debt, credit guarantee or risk insurance, technical assistance (TA) and grants, and results/outcome-based financing. 

Typically, a partial credit guarantee instrument has 6-7x leverage. Sectors such as EV, renewable natural gas (RNG), and battery storage can benefit from the development of dedicated sector-based funds, using blended finance to fund the entire value chain of the sector through various instruments. Blended finance currently takes considerable cost and time to structure, and so far, there is a lack of a clear and robust regulatory and legal environment15. Also, there are no intermediaries to help structure and manage blended finance transactions. A collaboration platform to align multiple stakeholders could facilitate transforming and scaling up blended finance in India. 

4. Carbon markets: India’s proposed Carbon Credit Trading Scheme, set for 2026, includes voluntary and compliance-based elements. It aims to reduce net carbon emissions by allowing the trade of carbon credits. Compliance-based trading will set emission limits for sectors, incentivizing reductions, while voluntary trading allows companies to offset emissions for sustainability goals. Carbon markets will allow the project developers to access a new financing source while allowing corporates to hedge the price for carbon credits.

Ultimately, we believe that concerted and collaborative efforts are needed by multiple stakeholders in the financial ecosystem to unlock capital and realize the decarbonization opportunity in India.

References

1. WRI data 
2. RBI-Downtoearth article
3. Bloomberg NEF report 
4. CEEW report on electric mobility 
5. BEE report 
6. World Bank 
7. GFANZ note
8. BNEF Climetoscope 
9. NSE note 
10. Economic Times article 
11. ADB study 
12. RBI note
13. LIC annual report 
14. GFANZ member list 
15. Report on Blended Finance by Asha Impact

This article first appeared in Hydrogen India, April 2025, Vol II, Issue 2

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