As extreme weather threatens India’s economy, climate finance becomes crucial for a net-zero future

In June 2023, over 100,000 were affected by the severe flooding of the Singra River in Assam. Soon after, the monsoon brought further devastation with heavy rainfall causing landslides in parts of northern India, particularly impacting the state of Himachal Pradesh. Heatwaves, cyclones, and increasingly harsh winters—India is grappling with the severe effects of extreme weather conditions.

These seemingly isolated events, the result of long-term climate change, have economic implications as well. The Reserve Bank of India, in its Report on Currency and Finance in 2022-23, said up to 4.5% of India’s GDP could be at risk by 2030 due to lost labour hours from extreme heat and humidity alone.

Timely adoption and rapid implementation of climate adaptation and mitigation strategies to reduce India’s carbon footprint and achieve its net-zero target by 2070 is the need of the hour. However, to achieve this Herculean task, an estimated investment of $10.1–15.1 trillion is required.

Vivek Sen, Acting India Director of global non-profit advisory Climate Policy Initiative (CPI), says most of the investments must go towards transforming India’s energy-related sectors. About $8-10 trillion is required to scale up generation of renewable energy and associated integration, distribution, and transmission infrastructure. In addition, $1.5 trillion would have to be invested in the industrial sector to set up green hydrogen production capacity, and $1 trillion to decarbonise the transport sector. In the short term, to meet the nationally determined contributions (NDCs) by 2030, an investment of about $250 billion is needed annually. “So, by 2030, around $1.5 trillion would be needed,” adds Sen.

But India is far behind this target.

Gaurav Gupta, Global Managing Partner of Dalberg Advisors, says between FY19 and FY20, India secured around $44 billion annually in green financing. “Even though most of it was focused on the power sector, the need from the renewable sector alone is huge, as it requires an average annual investment of around $28 billion to achieve the energy mix targets set by the Central Electricity Authority,” he adds.

Where the money flows

Raising funds to mitigate the adverse effects of climate change is crucial for developing countries. Back in 2009, at the 15th Conference of Parties (COP15), developed countries agreed to mobilise $100 billion per year by 2020 for developing countries. While there has been some progress, actual contributions have consistently fallen short of the target, leading to ongoing discussions and negotiations to bridge the gap and fulfil this pledge. Additionally, a Loss and Damage Fund was established at COP27 in Egypt in 2022 to assist vulnerable countries.

India cannot rely just on these funds. It needs to proactively seek investments from both domestic and international sources by leveraging public funds, private equity, green bonds, and international climate finance mechanisms. For instance, in 2023, the World Bank approved $1.5 billion to finance India’s low-carbon transition, and the International Finance Corporation (IFC) has plans to increase its investments in India to over $4 billion this fiscal.

Multilateral development banks (MDBs) play a pivotal role in financing climate change initiatives. “India needs to crowd in all forms of capital—international grants, green bonds, private investments etc. Deepening partnerships with MDBs is crucial,” says Gupta.

For greater support from MDBs, India needs to ensure that project proposals are robust, scalable, and well-aligned with both national priorities and with the strategic goals of these banks.

Public-private partnerships can also be instrumental as they effectively distribute risk and reward, making large-scale climate projects more feasible and attractive to private investors.

Gupta cites India-headquartered multilateral agencies such as the International Solar Alliance (ISA) and the Coalition for Disaster Resilient Infrastructure (CDRI) as important relationships between governments and the private sector.

Other than international sources, India will have to further scale domestic resources. Per CPI’s assessment, domestic sources continue to account for the majority of green finance, at 87% and 83% in FY19 and FY20, respectively. “Domestically, the private sector contributed about 59% or $22 billion. During 2016-17 and 2017-18, domestic private investors contributed the largest share of $19 billion through debt and equity, respectively. In 2019-20, tracked green finance was $44 billion per annum, approximately a fourth of India’s needs,” adds Sen.

Whether it is participation in EVs or hydrogen as a fuel—India Inc.’s involvement has been apparent. “Now, policymaking is needed, with climate resilience and mitigation in focus. Several sub-sectors need to have policies which extensively focus on private-sector participation, not just for accessing funds, but also for providing implementation expertise,” says Sameer Jain, MD of consultancy Primus Partners.

By harnessing the potential of the private sector, issues relating to investment in transition projects, fostering a sustainable finance ecosystem, and diversifying funding sources can be ironed out.

A multi-tiered approach towards decarbonisation and financing strategies should be adopted. “While energy transition will continue to be a priority, other areas such as material circularity, carbon-capture usage and storage, etc., can be accelerators of green transition,” says Namrata Rana, Partner and National Head—ESG, at advisory KPMG in India. “A technology-first and sustainability-ready digital infrastructure is needed,” she adds.

A concerted effort from the government, private sector, and civil society stakeholders, as well as significant investments in transformative technologies and infrastructure will not just help prevent GDP loss, but can present India with more employment opportunities.

@nidhisingal