The Indian government is taking significant steps towards establishing a National Green Financing Institution to support its ambitious climate goals, as revealed by NITI Aayog in its annual report for 2024-25. This initiative comes as a response to the current shortfall in finance flows for climate initiatives, which are far below the desired levels needed to achieve India’s net-zero target by 2070.
Bridging the Green Finance Gap
The proposed National Green Financing Institution is envisioned as a dedicated entity to address the substantial funding gap in India’s green transition. Its primary objective will be to aggregate green capital from various sources and reduce the cost of capital for climate-focused projects. This move is crucial, as preliminary estimates indicate that India requires an aggregate investment of USD 1.4 trillion, averaging USD 28 billion per year, to achieve its 2070 net-zero target.
The scale of this financial challenge is unprecedented, especially considering that India’s climate action has been largely financed through domestic resources, with limited international finance flow. According to the Reserve Bank of India, bridging this funding gap necessitates allocating 2.5% of India’s annual GDP to green finance. A 2022 report by the Climate Policy Initiative highlighted that domestic sources accounted for the majority of green finance in India, at 87% and 83% in fiscal years 2019 and 2020, respectively.
NITI Aayog is currently examining various structuring mechanisms for operationalising the National Green Financing Institution. These include:
– A bank modelled on the National Bank for Financing Infrastructure and Development (NaBFID) or the National Bank for Agriculture and Rural Development (NABARD)
– Repurposing existing institutions like the Indian Renewable Energy Development Agency (IREDA)
– Exploring alternatives such as a Climate Fund in GIFT city or Green Infrastructure Investment Trusts (InvITs)
– Analysing best practices from Green Banks around the world
Aligning with India’s Climate Commitments
The establishment of the National Green Financing Institution is closely tied to India’s climate commitments, as outlined in its Nationally Determined Contributions (NDCs) submitted to the United Nations Framework Convention on Climate Change (UNFCCC) in 2022. These commitments include:
1. Reducing GDP emission intensity by 45% by 2030 compared to 2005 levels
2. Achieving 50% of installed electric power capacity from non-fossil fuel sources by 2030
3. Creating an additional carbon sink of 2.5 to 3 billion tonnes through increased forest and tree cover by 2030
To support these goals, NITI Aayog is developing comprehensive decarbonisation roadmaps for key sectors such as cement, aluminium, and MSMEs. These roadmaps will identify emission sources along production value chains and pinpoint key areas for decarbonisation across the end-to-end value chain. They will also assess the sectors’ competitiveness in light of global developments like the Carbon Border Adjustment Mechanism (CBAM) and evaluate the readiness of infrastructure and technologies to support decarbonisation.
The creation of a National Green Financing Institution is a critical step towards mobilising the necessary funds to achieve India’s climate goals efficiently. By aggregating green capital and lowering the cost of capital, this institution aims to catalyse investments in sustainable projects and technologies across various sectors of the economy.
As India continues to balance its developmental aspirations with its commitment to environmental sustainability, the role of green finance becomes increasingly crucial. The proposed National Green Financing Institution represents a significant move towards creating a more robust and efficient green finance ecosystem in the country.
The success of this initiative will depend on effective collaboration between government bodies, financial institutions, and the private sector. It will also require careful consideration of international best practices and the unique challenges faced by India in its journey towards a low-carbon economy.
As the world watches India’s progress towards its climate goals, the establishment of the National Green Financing Institution stands as a testament to the country’s commitment to sustainable development and its determination to play a leading role in global climate action.
