(Source – The Hindu, International Edition – Page No. – 6)
Topic : GS 3: Conservation, environmental pollution and degradation
Context
The Budget should reflect the seriousness of the government in integrating climate competitiveness into India’s fiscal framework.

Introduction
All eyes will be on Union Finance Minister Nirmala Sitharaman when she takes centre stage 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
- Strengthening India’s climate response: The Budget must prioritise key policy measures to strengthen India’s climate response and accelerate progress on both adaptation and mitigation fronts.
- Accelerating India’s Green Energy Transition
- 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.
- PM Surya Ghar Muft Bijli Yojana Needs a Comprehensive Review
- Fiscal Approach in the FY26 Budget
- Prioritise the Renewable Energy Service Company (RESCO) Model
- Fiscal allocations should prioritise the RESCO model, effectively transforming the prohibitive upfront costs into manageable operating expenses for lower-income households through innovative financial instruments and credit guarantees.
- Expand the Scope of Production-Linked Incentives (PLI): 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.
- Prioritise the Renewable Energy Service Company (RESCO) Model
- Leveraging India’s railway network for Renewable Energy
- Untapped Potential of Railway Land and TracksL 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.
- Encourage Public-Private Partnership ModelsL The Budget should encourage innovative public-private partnership models to unlock this opportunity.
EU mechanism and India
- The European Union’s Carbon Border Adjustment Mechanism (CBAM) will take effect on January 1, 2026.
- 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 contribute 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 Climate Action Fund can also support capacity-building initiatives for MSMEs to ensure proper compliance and reporting under CBAM.
Accelerating India’s Transition to a Circular Economy
- A recent study by the Council on Energy, Environment and Water estimates that 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%.
- The Budget should introduce a weighted deduction of 150% on investments in recycling infrastructureand refurbishment technologies, complemented by accelerated depreciation benefits for circular economy assets.
- This will encourage businesses to invest in recycling and refurbishment technologies.
- The Budget should also establish a sovereign green bond framework specifically for financing circular economy infrastructure.
European Union’s Carbon Border Adjustment Mechanism (CBAM)
- The European Union’s Carbon Border Adjustment Mechanism (CBAM) will take effect on January 1, 2026.
- 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 contribute 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 Climate Action Fund can also support capacity-building initiatives for MSMEs to ensure proper compliance and reporting under CBAM.
Accelerating India’s Transition to a Circular Economy
- A recent study by the Council on Energy, Environment and Water estimates that 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%.
- The Budget should introduce a weighted deduction of 150% on investments in recycling infrastructureand refurbishment technologies, complemented by accelerated depreciation benefits for circular economy assets.
- This will encourage businesses to invest in recycling and refurbishment technologies.
- The Budget should also establish a sovereign green bond framework specifically for financing circular economy infrastructure.
On insurance products, green finance
- 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.
- Advocate for lower Goods and Services Tax (GST) rates on premiums for insurance products specifically designed for climate resilience and disaster protection.
Standardising Green Finance Definitions
- Some estimates indicate that standardising green finance definitions could help build investor confidence and help India secure part of the ₹162.5 trillion ($2.5 trillion) needed to achieve the Nationally Determined Contributions (NDCs) 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
- Capacity building of financial institutions
- The Budget can further catalyse this transition by:
- Introducing differential tax treatment for taxonomy-aligned investments.
- Committing to classify government expenditure according to green criteria.
Conclusion
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.