India’s climate finance blueprint: A snail’s pace or a fast gallop?

Posted on 15 Jun 2025

Synopsys

India’s climate finance taxonomy, which determines the sectors of the economy for sustainable development that would buttress its climate change commitments, stands apart from rigid Western models by being inclusive and adaptive. The Indian model, while seeking interoperability with international systems, prioritises national contexts and sectoral constraints. While this raises opportunities, especially for India’s agrarian sector, there is scope for friction. Without rigorous performance tracking and, status quo could be maintained and complacency would set in.

Image: A woman walks through a parched farmland. Photo by Md Harun or Rashid

The Indian government recently unveiled a comprehensive draft titled the Framework of India’s Climate Finance Taxonomy. Published by the Ministry of Finance’s Department of Economic Affairs, this document aims to reshape the country’s financial and policy landscape for climate action.

It attempts to chart a path toward India’s ambitious goal of net zero emissions by 2070 while pursuing its broader national vision of becoming a ‘Viksit Bharat’ (Developed India) by 2047.

The national-level climate finance taxonomy – which classifies the relevant part of the economy as contributing to sustainable development – is the essential first building block for a sustainable finance ecosystem in the country, providing direction to all stakeholders with respect to their financial investment decisions.

The taxonomy's relevance cannot be overstated: it is expected to guide how trillions of rupees will be directed towards climate-friendly infrastructure, industries, and innovation over the coming decades.

Yet, beneath the technocratic surface of performance thresholds, sectoral classifications and policy pathways, lies a deeper and more contested story.

The taxonomy is not merely a checklist for sustainable investments. It is a political and economic intervention that may redefine the balance of industrial growth, international climate finance and developmental justice in the world’s most populous country.

Why India needs a climate finance taxonomy

India’s climate finance needs are staggering.

According to government estimates, approximately USD 2.5 trillion (at 2014-15 prices) will be required to meet India’s Nationally Determined Contributions (NDCs) under the Paris Agreement by 2030. This figure balloons when factoring in the projected USD 648.5 billion needed for climate adaptation measures across agriculture, water, and ecosystems by the same year.

India's per capita energy consumption is only a fraction of developed countries. For the country to achieve a Human Development Index (HDI) of 0.9, considered the threshold for the ‘developed nation’ status, its energy use per person must increase substantially. However, without strategic guidance, increased energy consumption risks raising emissions and derailing climate commitments.

The taxonomy, therefore, seeks to establish a transparent, science-based, and development-aligned classification system for climate-supportive and transition-related activities. It aims to attract both domestic and international capital by offering investors clarity and confidence while insulating Indian climate policy from accusations of greenwashing.

India's approach takes cues from global precedents while tailoring its system to unique national circumstances. Where the European Union (EU) has adopted a rigid, performance-based model, India opts for flexibility, inclusivity and a phased implementation. This makes sense, given the country’s size, diversity and vast disparities in technological readiness across sectors and regions.

A phased, context-sensitive approach

Unlike the EU taxonomy, India’s framework acknowledges its unique developmental needs. The document proposes a two-tiered system of classification: climate-supportive (tiered into 1 and 2) and transition-supportive. The latter acknowledges sectors like steel, cement and fertilisers where low-emission alternatives are not yet commercially viable in India.

In doing so, the framework seeks to sidestep a common pitfall of Western taxonomies: excluding transitional technologies or making unrealistic demands on developing economies. Instead, it supports gradual decarbonisation aligned with India’s industrialisation goals. This flexibility is especially critical for India’s micro, small and medium enterprises (MSMEs), which often lack the capacity for immediate adoption of stringent sustainability metrics.

Yet this pragmatic approach invites critique.

Environmental advocates might argue that transition labels could be used to prolong reliance on fossil fuels under the guise of gradual reform. On the other hand, industry leaders warn that without such flexibility, sectors critical to economic growth risk becoming financially isolated and globally uncompetitive.

The taxonomy is also intended to evolve. Its phased rollout ensures that sectors can adapt incrementally, allowing for the development of domestic capabilities. For MSMEs, in particular, simplified thresholds, proportionate criteria and capacity-building components are essential to ensure participation without undue burden.

This marks a deliberate shift from a punitive to an enabling policy stance.

Embedding climate in the economy: Examples from the field

India is already making notable progress in deploying renewable energy. As of February 2025, non-fossil fuel sources account for 47.4 percent of the country’s total installed electricity generation capacity. The solar sector, under initiatives like the PM-KUSUM (Pradhan Mantri Kisan Urja Suraksha evam Utthaan Mahabhiyan) scheme, continues to expand, with decentralised and agricultural solar infrastructure reaching hundreds of thousands of installations.

Meanwhile, energy efficiency measures such as the Perform, Achieve and Trade (PAT) scheme and LED rollouts under the UJALA programme have demonstrably reduced energy demand and emissions. Initiatives like the National Green Hydrogen Mission and the nuclear energy roadmap provide a longer-term, high-tech dimension to India’s low-carbon ambitions.

Another area gaining traction is the electrification of transport. India’s FAME and PM E-DRIVE schemes aim to mainstream electric mobility, with subsidies, local manufacturing incentives and regulatory reforms supporting widespread EV adoption. Charging infrastructure is growing, and public transport is being electrified at scale in cities such as Delhi, Pune and Bengaluru.

In the building sector, green construction codes and performance standards are reshaping urban development. Programmes like Eco Niwas Samhita and GRIHA are pushing energy efficiency in both commercial and residential real estate. Net-zero buildings are gradually moving from concept to reality, aided by government mandates and private-sector innovation.

The cumulative impact of these measures is visible.

India met its previous NDC target of achieving 40 percent power capacity from non-fossil sources nine years ahead of schedule, and it cut its emissions intensity of GDP by 33 percent from 2005 levels by 2019. These milestones underscore the potential for India to lead in climate action, provided policy continues to incentivise momentum.

A global lens: Comparisons and tensions

India’s taxonomy is not developing in a vacuum. It draws inspiration from global counterparts such as the ASEAN taxonomy (which is now in its third iteration), South Africa’s Green Finance Taxonomy, and the EU’s framework. However, key divergences stand out.

While the EU taxonomy is driven by strict environmental performance thresholds, India’s model is designed with an adaptive, inclusive approach. It seeks interoperability with international systems but prioritises national contexts and sectoral constraints. This raises both opportunities and friction.

For example, some global investors may perceive India’s flexible standards as less credible or rigorous. Conversely, others may value the approach as more grounded in real-world feasibility. As the global south collectively pushes for climate justice, India’s taxonomy could emerge as a template for other developing economies.

The question of interoperability is especially critical in a world where green bonds and sustainable finance instruments are proliferating. If India’s taxonomy is seen as too lenient, it might be excluded from international certification schemes. On the other hand, if it aligns well with international goals while retaining domestic relevance, it could become a magnet for foreign green capital.

Adaptation, agriculture, and resilience

A distinguishing strength of India’s taxonomy is its emphasis on adaptation. Unlike many taxonomies that lean heavily on mitigation (i.e., emission reductions), India’s framework acknowledges the centrality of climate resilience, especially in agriculture.

With nearly half the population dependent on farming and only 55 percent of the net sown area irrigated, climate change poses an existential threat to food security. Extreme weather, erratic rainfall and soil degradation are already affecting yields. Yet climate finance for agriculture remains minimal.

By explicitly including adaptation projects in agriculture, food systems and water management as ‘climate supportive,’ the taxonomy offers a significant departure from the norm. If implemented correctly, it could help channel much-needed investment into precision irrigation, climate-resilient crops and post-harvest infrastructure.

Several states are already exploring climate-smart agriculture pilots. In Maharashtra, climate-resilient seed varieties are being tested. In Andhra Pradesh, micro-irrigation is being scaled to counter unpredictable rainfall. These programmes need consistent funding streams, which a robust taxonomy can help unlock.

What is at stake: Green growth or just green ink?

Ultimately, the success of the taxonomy hinges on its implementation. Will financial institutions align their portfolios with the framework? Will it guide government subsidies, tenders and regulatory priorities? Will it catalyse innovation, or merely document best intentions?

One potential risk is the misuse of the transition category to maintain the status quo. Without rigorous performance tracking and regular updates, the taxonomy could legitimise high-emission activities. Transparency and periodic revision, as proposed, will be crucial.

Civil society also has a role to play. Watchdog groups, researchers, and the media must scrutinise taxonomy-driven investments to ensure accountability. Public consultation, built into the taxonomy’s evolution, is one such safeguard. But it needs to be meaningful, not procedural.

However, the taxonomy’s recognition of India’s developmental constraints could be its greatest strength. By embedding inclusivity, proportionality, and a commitment to domestic technology, the framework attempts to fuse climate action with national progress. Done right, it can help India lead a new model of green industrialisation that other countries in the global south can follow.

The international finance challenge

India’s taxonomy also places the spotlight back on international obligations. Developed countries, which have long underdelivered on climate finance commitments, may find in this framework a credible channel for directing funds. With transparent criteria and defined impact metrics, the taxonomy could become a trust-building instrument.

But this hinges on reciprocity. The burden cannot fall solely on Indian taxpayers, especially when historical emissions and global climate financing gaps remain skewed. The taxonomy is as much a call to action for multilateral banks, green bond markets and sovereign wealth funds as it is a blueprint for domestic reform.

It is also a chance for India to shape global finance norms. By offering a pragmatic yet principled model, India could influence the architecture of climate finance more broadly, helping shift the focus from aspirational targets to implementable pathways.

A living document in a living struggle

The Framework of India’s Climate Finance Taxonomy is more than a technocratic exercise. It is a political manifesto for a country attempting to reconcile poverty alleviation, economic growth and planetary survival. Its phased, adaptive and inclusive design reflects India’s dual identity: a rising industrial power and a climate-vulnerable nation.

As a way forward, the National Climate Finance taxonomy must give timelines for the next revision along with detailed objectives and milestones to be achieved for each sector. The objective targets and milestones of each sector may adopt flexibility but their cumulative summation needs to be aligned with national goals.

To make national climate finance taxonomy impactful on the ground, it must be accompanied by the formulation of a regulatory framework for each sector, identification of implementation barriers and filling up regulatory enforcement gaps both at sub-national and national levels respectively. Further, there is also a need for the identification of key institutions in order to establish institutional-level accountability and responsibility for better implementation of national climate finance taxonomy.

Finally, it is understood that taxonomy will evolve. But it begins with a clear signal: that climate finance must be integrated, not appended, to development policy. That growth can be green, but only if it is also just. And that in the turbulent era of climate breakdown, frameworks like this are not mere paperwork—they are, potentially, instruments of survival.

(Amit Kumar is an economist and a former consultant to the Ministry of Finance, Government of India. He can be contacted at amitcds10@gmail.com.)

Originally published at The Polity. Republished here with permission.

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