UPSC Relevance: GS Paper 3: Environment, Energy, and Sustainable Development
Why in the News?
In 2024, India added 24.5 gigawatts (GW) of solar energy capacity — becoming the third-largest contributor globally after China and the United States.
The United Nations Secretary-General’s 2025 Climate Report has also recognised India, Brazil, and China as leading developing nations in scaling up solar and wind energy.
While India’s renewable growth is remarkable, experts warn that without an expansion of climate finance, this momentum may slow down — creating a “critical gap” in India’s clean energy transition.
Background: India’s Renewable Energy Momentum
India’s clean energy transition has accelerated in the past decade:
- Total installed renewable energy capacity now exceeds 180 GW.
- Solar power alone contributed 24.5 GW in 2024, signalling rapid growth.
- The renewable sector employed over 1 million people in 2023, contributing around 5% to GDP growth.
- Off-grid solar systems (like rooftop panels and rural mini-grids) created 80,000+ jobs in 2021.
Global Leadership
India’s leadership in establishing the International Solar Alliance (ISA) has made it a norm entrepreneur in global climate diplomacy — promoting solar cooperation among over 120 countries, especially in the Global South.
Example: Under ISA initiatives, India has supported African and Pacific nations with solar electrification projects using concessional credit.
The Critical Gap: Shortfall in Climate Finance
1. Need for Sustained Financial Support
Despite progress, India faces a massive financing challenge.
Without adequate and consistent climate finance, it will be difficult to meet its Nationally Determined Contributions (NDCs) and the 2070 Net Zero goal.
2. Economic Case for Clean Energy
The International Renewable Energy Agency (IRENA) estimates that if India adopts a 1.5°C-aligned pathway, it could achieve average annual GDP growth of 2.8% till 2050 — more than double the G-20 average.
Implication: Clean energy is not only an environmental imperative but also an economic growth driver, creating jobs in battery storage, decentralised grids, and green hydrogen.
Yet, the financial scaffolding needed to sustain this growth remains incomplete.
3. India’s Climate Finance Gap
Recent estimates highlight a massive funding shortfall:
- Around $1.5 trillion needed by 2030 to align with the 1.5°C pathway (IRENA estimate).
- The Ministry of Finance projects $2.5 trillion by 2030 to meet national climate targets.
This includes capital for:
- Expanding renewables and grid infrastructure,
- Battery storage deployment,
- Green hydrogen scale-up,
- Transitioning to sustainable transport and agriculture.
Challenge: The current flow of climate finance is only a fraction of what is required.
Current Progress in Green Financing
1. Rise of Green and Sustainability Bonds
India’s GSS+ (Green, Social, Sustainability, and Sustainability-linked) debt market has grown rapidly:
- By December 2024, total issuance reached $55.9 billion, a 186% rise since 2021.
- Green bonds formed 83% of total issuance.
- By 2025, investment crossed $45 billion, with a target of $100 billion by 2030.
Example: Green bond proceeds are being used for solar parks, metro rail electrification, and waste-to-energy plants.
2. Strong Private Sector Engagement
Private companies contributed 84% of total green bond issuance, showing growing investor confidence.
However, small enterprises and innovators still find it difficult to access affordable green finance.
Challenges in Expanding Green Finance
1. Limited Access for MSMEs and Local Innovators
While large corporations attract global capital, MSMEs, agri-tech start-ups, and urban infrastructure developers face barriers due to:
- Lack of collateral and credit history,
- High perceived risks, and
- Weak institutional mechanisms for concessional lending.
2. Dependence on External Finance
India’s green projects still rely heavily on foreign institutional investors and multilateral funding.
This can expose the sector to currency volatility and global market shocks.
Changes to Strategy: Building a Robust Climate Finance Framework
1. Leveraging Public Finance for De-risking
National and State governments can use budget allocations and fiscal incentives to:
- Attract private investment, and
- De-risk renewable projects through guarantees or subsidies.
Example: India’s Solar Park Scheme successfully used public land and infrastructure support to attract private solar developers.
2. Blended Finance for Inclusive Growth
Blended finance combines public concessional funds with private capital to share risks.
It can be scaled through:
- Partial credit guarantees or subordinated debt,
- Performance-based incentives, and
- Loan guarantees for mid-sized renewable projects, especially in Tier-II and Tier-III cities.
These tools improve the risk-return profile of green projects, making them attractive to private lenders.
3. Mobilising Domestic Institutional Capital
India can tap large institutional investors such as:
- Employees’ Provident Fund Organisation (EPFO),
- Life Insurance Corporation (LIC), and
- Pension and Sovereign Wealth Funds.
For this, India needs regulatory reforms, including:
- Clear ESG (Environmental, Social, Governance) investment rules,
- Risk-mitigation mechanisms, and
- A long-term pipeline of green projects for stable returns.
Global Example: Countries like Denmark and Canada use pension funds to finance renewable infrastructure — a model India can adapt.
Way Forward
- Strengthen Domestic Green Finance Institutions
Empower Indian Renewable Energy Development Agency (IREDA) and NABARD to provide concessional loans for green infrastructure. - Promote Carbon Markets and ESG Disclosure
Enforce green reporting norms under SEBI, and develop a national carbon credit framework to incentivise private players. - Enhance International Climate Finance Access
Advocate for equitable global finance flows through mechanisms like the Loss and Damage Fund and Green Climate Fund. - Encourage Localised Climate Investment
Promote State-level green bonds and urban climate funds for decentralised renewable projects.
Conclusion
India’s clean energy story stands at a transformative crossroads — powered by innovation and global leadership but constrained by finance.
To sustain this rise, India must expand and democratise climate finance, blending public resources, private capital, and institutional investment into a unified strategy.
With the right financial architecture, India can not only meet its climate targets but also emerge as the world’s most inclusive green growth model.
UPSC Prelims Practice Questions
Q1.With reference to Climate Finance in India, consider the following statements:
- Green bonds are debt instruments used to raise funds exclusively for environmentally sustainable projects.
- The International Solar Alliance (ISA) was launched jointly by India and France to promote solar energy among developing countries.
- Blended finance refers to combining public concessional funds with private capital to de-risk investments.
- Only central government agencies are permitted to issue green bonds in India.
Which of the statements given above are correct?
(A) 1, 2 and 3 only
(B) 1 and 2 only
(C) 2, 3 and 4 only
(D) 1, 3 and 4 only
Answer: (A)
Explanation:
- (1) Green bonds finance environment-friendly projects like renewable energy and waste management.
- (2) ISA was jointly launched by India and France at COP-21 (Paris, 2015).
- (3) Blended finance combines concessional and private funds to lower investment risk.
- (4) Private corporates, banks, and municipal bodies can also issue green bonds (not only the central government).
Q2.India’s climate finance gap is estimated to be:
(A) $500 billion by 2030
(B) $1 trillion by 2030
(C) Between $1.5 to $2.5 trillion by 2030
(D) $5 trillion by 2050
Answer: (C)
Explanation:
IRENA estimates India needs $1.5 trillion by 2030 for a 1.5°C pathway, while the Ministry of Finance estimates $2.5 trillion to meet national targets.
Q3.Which of the following institutions are considered potential sources of domestic institutional capital for green finance in India?
- Life Insurance Corporation (LIC)
- Employees’ Provident Fund Organisation (EPFO)
- NABARD
- Sovereign Wealth Funds
Select the correct answer using the code below:
(A) 1 and 2 only
(B) 1, 2 and 3 only
(C) 1, 2 and 4 only
(D) 1, 2, 3 and 4
Answer: (D)
Explanation:
All four are institutional investors or facilitators of long-term capital that can be channelled into climate-aligned investments.
Q4.Consider the following pairs:
| Mechanism | Purpose |
| 1. Sovereign Green Bonds | Government-issued debt for funding renewable and climate-resilient projects |
| 2. Solar Park Scheme | Encouraging private participation in large-scale solar projects |
| 3. SEBI-regulated Social Bonds | Financing education, healthcare, and climate action |
Which of the above pairs is/are correctly matched?
(A) 1 and 2 only
(B) 2 and 3 only
(C) 1, 2 and 3
(D) 1 only
Answer: (C)
Explanation:All three initiatives aim at mobilising finance for sustainable and inclusive development.
Q5.Which of the following best describes blended finance?
(A) A government grant provided to the renewable energy sector.
(B) A mix of concessional public funds and private investments to de-risk sustainable projects.
(C) A loan taken jointly by multiple private investors.
(D) A corporate finance model for mergers and acquisitions.
Answer: (B)
Explanation:Blended finance combines public concessional funding with private capital, lowering risk and attracting larger investment flows into climate-aligned sectors.