Context

• The Union Budget 2026 presents a critical juncture for India as it grapples with the dual challenge of climate change and economic resilience.
• With just five years remaining to achieve the first interim Net-Zero target, Finance Minister Nirmala Sitharaman must navigate an intricate balancing act—addressing the urgency of climate adaptation and mitigation while ensuring economic growth.
• The Budget can catalyse transformative policy measures that can safeguard vulnerable communities, boost India’s global competitiveness, and accelerate progress toward sustainable development.

India’s Progress in Climate Action

• PM Surya Ghar Muft Bijli Yojana
  • This flagship initiative aims to promote solar energy adoption in residential households, enhancing energy access while reducing carbon footprints.
  • Over 1.45 crore households have registered under this scheme, showcasing strong public interest.
• National Green Hydrogen Mission
  • With an increased budgetary allocation, this initiative seeks to position India as a global hub for green hydrogen production.
  • This is a critical step toward decarbonizing industries like steel, cement, and transportation.
• Viability Gap Funding for Offshore Wind Energy
  • The government’s support for offshore wind energy projects reflects its ambition to diversify renewable energy sources.
  • Offshore wind energy holds significant potential for reducing dependency on fossil fuels and achieving long-term energy security.
• Electric Vehicle (EV) Infrastructure Support
  • By investing in EV charging infrastructure, India is addressing one of the key barriers to EV adoption, range anxiety.
  • This initiative is pivotal to reducing emissions from the transport sector, which accounts for a significant portion of urban pollution.

Remaining Gaps in India’s Climate Action Plan

• Renewable Energy Capacity Gap
  • India’s installed renewable energy capacity stands at 203.18 GW, significantly short of the 500 GW target set for 2030.
  • Bridging this gap requires unprecedented levels of investment, improved policy frameworks, and streamlined execution.
• Implementation Challenges in Solar Energy
  • The PM Surya Ghar Muft Bijli Yojana highlights the disparity between policy intent and execution.
  • While registrations for the scheme have crossed 1.45 crore households, the actual completion rate remains dismal, with only 6.34 lakh installations (4.37%).
  • This points to systemic issues such as bureaucratic inefficiencies, funding shortages, and a lack of robust monitoring mechanisms.
• Dependence on Imports for Solar Modules
  • India’s solar manufacturing ecosystem remains underdeveloped, fulfilling only 40% of domestic demand.
  • This reliance on imports makes renewable energy projects more expensive and vulnerable to global supply chain disruptions.
  • Additionally, domestically manufactured solar panels cost 65% more than imported alternatives, discouraging their adoption.
• Underutilised Potential in Railways
  • India’s vast railway network, which includes extensive land banks and track corridors, offers untapped opportunities for renewable energy generation.
  • Estimates suggest the network could host up to 5 GW of solar and wind installations, yet this potential remains largely unexplored due to a lack of targeted public-private partnerships and investment incentives.
• Lack of Comprehensive Fiscal and Policy Measures
  • Existing fiscal incentives and subsidies often fall short of addressing critical barriers to renewable energy adoption.
  • For instance, the high upfront costs associated with solar installations deter low-income households, despite the availability of schemes like the Renewal Energy Service Company (RESCO) model.
  • Comprehensive measures to reduce these costs and increase affordability are urgently needed.

Expectations from Union Budget 2026 Pertaining to Transformative Policy Measures

• Adapting to International Market Dynamics
  • India’s export sector faces a looming challenge with the European Union’s Carbon Border Adjustment Mechanism (CBAM), set to take effect in 2026.
  • This measure, imposing carbon levies on imports, could impact India’s exports to the EU, valued at $8.22 billion annually.
  • The implications for Micro, Small, and Medium Enterprises (MSMEs), contributing 30% of GDP and 45% of exports, are profound.
  • To mitigate this, the Budget should establish a dedicated ‘Climate Action Fund’ modelled on Japan’s Green Transformation Fund.
  • This fund can support industrial decarbonisation in vulnerable sectors and build MSME capacity to comply with CBAM regulations, ensuring export competitiveness.
• Transitioning to a Circular Economy
  • The adoption of a circular economy offers India significant economic and environmental benefits.
  • A recent study estimates a potential profit of ₹40 lakh crore annually by 2050 and a 44% reduction in greenhouse gas emissions.
  • The FY26 Budget should incentivize investments in recycling and refurbishment technologies by offering a weighted deduction of 150% and accelerated depreciation benefits.
• Strengthening Climate Resilience and Green Finance
  • India’s vulnerability to climate change necessitates urgent measures to enhance resilience.
  • Alarmingly, insurance penetration has declined to 3.7% in FY24, highlighting the need for innovative solutions.
  • Tax deductions for climate-linked insurance policies and reduced GST rates on disaster protection premiums could encourage broader adoption.
  • Simultaneously, the Budget should prioritize standardising green finance definitions, building investor confidence, and securing a share of the ₹162.5 trillion required to meet India’s climate goals by 2030.
• Enhancing RESCO Support and Expanding PLIs for Solar Manufacturing
  • By transforming prohibitive upfront costs into manageable operating expenses through innovative financial instruments and credit guarantees, the government can make renewable energy more accessible to low-income households.
  • Production-linked incentives across the entire solar module supply chain can reduce the cost of domestically produced panels and build economies of scale.
  • This would not only boost India’s manufacturing capacity but also reduce its reliance on imports.

The Importance of Climate-Linked Policies

• Climate-linked economic policies are no longer peripheral concerns but central to maintaining India’s competitiveness in global trade and investment.
• The rising demand for low-carbon goods and the growing alignment of capital markets with sustainability metrics necessitate decisive action.
• Integrating climate competitiveness into India’s fiscal framework is imperative to secure its position in an evolving global economy.

Conclusion

• The Union Budget 2026 represents a pivotal opportunity for India to align its fiscal priorities with its climate commitments.
• By addressing implementation gaps in renewable energy, safeguarding export competitiveness, creating a circular economy, and strengthening climate resilience, the government can pave the way for a sustainable and prosperous future.
• This Budget will be a litmus test of India’s seriousness in integrating climate action into its economic strategy, reflecting the nation’s readiness to lead in a low-carbon global economy.