The Union Budget as a turning point for climate action

‘The Budget must prioritise key policy measures to strengthen India’s climate response and accelerate progress on both adaptation and mitigation fronts’
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All eyes will be on Union Finance Minister Nirmala Sitharaman when she takes centrestage on February 1 to present the Union Budget. As the nation grapples with increasingly frequent extreme weather events and mounting pressure to meet its climate commitments, the FY26 Budget carries the weight of both urgency and opportunity. With just five years left to achieve India’s first interim Net-Zero target, the Budget must take decisive steps to protect those on the frontlines of climate change.

Previous Budgets have demonstrated the government’s commitment to climate action, notably through initiatives such as the PM Surya Ghar Muft Bijlee Yojana, support for electric vehicle charging infrastructure, viability gap funding for offshore wind energy, and increased allocations for the National Green Hydrogen Mission. Yet, with a total renewable energy installed capacity of 203.18 GW, far short of the 2030 target of 500 GW, accelerated investment and policy support are imperative.

There is much work to be done

The Budget must prioritise key policy measures to strengthen India’s climate response and accelerate progress on both adaptation and mitigation fronts. First, to accelerate India’s green energy transition, the PM Surya Ghar Muft Bijli Yojana needs a comprehensive review. While the scheme has seen around 1.45 crore registrations, the completion rate of only 6.34 lakh installations (4.37%) indicates the presence of significant implementation gaps. To address this, the FY26 Budget must take a multi-pronged approach. In the first instance, fiscal allocations should prioritise the Renewable Energy Service Company (RESCO) model, effectively transforming the prohibitive upfront costs into manageable operating expenses for lower-income households through innovative financial instruments and credit guarantees.

In the second instance, the Budget must expand the scope of production-linked incentives (PLI) across the solar module supply chain, addressing the critical supply-demand mismatch, where domestic manufacturing fulfils only 40% of current requirements. This expansion would boost manufacturing capacity and create economies of scale, potentially reducing costs that are 65% higher for domestically manufactured panels than those imported to the country.

In the third instance, India’s vast railway network offers untapped potential for renewable energy generation. Estimates suggest that the Railways’ extensive land banks and track corridors could host up to 5 GW of solar and wind installations. The Budget should encourage innovative public-private partnership models to unlock this opportunity.

EU mechanism and India

Second, the European Union’s Carbon Border Adjustment Mechanism (CBAM), which will take effect on January 1, 2026, necessitates urgent budgetary interventions to protect India’s export competitiveness. India’s total exports of CBAM products to the EU amount to $8.22 billion annually and will likely face carbon levies ranging from around 20% to 50%.

This presents an existential challenge for India’s Micro, Small and Medium Enterprises (MSME), which have a contribution of 30% of GDP and 45% of exports. The Budget can establish a dedicated ‘Climate Action Fund’, modelled after successful initiatives such as Japan’s Green Transformation (GX) Fund for industrial decarbonisation, particularly across the most vulnerable export sectors. The Fund can also support the capacity-building initiatives for MSMEs to ensure proper compliance and reporting under CBAM.

Third, the Budget must accelerate India’s transition to a circular economy. A recent study by the Council on Energy, Environment and Water estimates that the benefit of adopting a circular economy can yield an annual profit of ₹40 lakh crore ($624 billion) for India by 2050 while reducing greenhouse gas emissions by about 44%. A weighted deduction of 150% on investments in recycling infrastructure and refurbishment technologies, complemented by accelerated depreciation benefits for circular economy assets, can encourage businesses to invest in recycling and refurbishment technologies. The Budget should establish a sovereign green bond framework specifically for financing circular economy infrastructure.

On insurance products, green finance

Fourth, there is a strong need to strengthen climate resilience. India’s insurance penetration remains worryingly low. According to the Insurance Regulatory and Development Authority of India (IRDAI) 2023-24 Annual Report, it has declined from 4% in FY23 to 3.7% in FY24. To address this challenge, the Budget could offer tax deductions to insurance companies on income from climate-linked policies and advocate lower Goods and Services Tax (GST) rates on premiums for insurance products specifically designed for climate resilience and disaster protection.

Finally, some estimates indicate that standardising green finance definitions could help build investor confidence and help India get part of the ₹162.5 trillion ($2.5 trillion) needed to achieve the Nationally Determined Contributions by 2030. The Budget should allocate funds to build the institutional and technical infrastructure required to implement the climate finance taxonomy effectively, including for market readiness programmes, verification systems, and capacity building of financial institutions.

The Budget can further catalyse this transition by introducing differential tax treatment for taxonomy-aligned investments and committing to classify government expenditure according to green criteria.

Climate-linked economic policies are no longer peripheral but central to maintaining competitiveness in international trade and investment flows. With rising global demand for low-carbon goods and the increasing alignment of capital markets with sustainability metrics, India must act decisively and integrate climate competitiveness into its fiscal framework. The Budget will indeed signal the seriousness of the government’s intent in this regard.

Amarendu Nandy is Assistant Professor, Economics area, Indian Institute of Management Ranchi. Aayush Anand is Executive, Bharat Sanchar Nigam Limited. The views expressed are personal.