Union Budget as the Catalyst for Climate Finance

A sector expert recently said that the Union government’s budget is shifting its focus from tax changes to re-architecting expenditures. This creates a pivotal opportunity to redefine its role in climate finance. If climate risk is ultimately financial risk, then the budget must evolve from funding ambition to engineering investible reality. The state cannot be the sole funder and needs to become the strategic de-risker and catalyst for private capital. This demands a historic shift: from being the provider of last resort through subsidies, to becoming the architect of first resort — using public finance to absorb the pioneering risks the private sector cannot bear, thereby multiplying every public rupee with private investment.

This shift is both necessary and overdue. Leading analysts, such as Lisa Sachs of Columbia University, argue that the dominant global approach of the past decade — relying on corporate disclosure to redirect capital — has failed to drive the real-economy transition. Managing financial risk is not the same as financing systemic change, so the budget must move beyond nudging financial institutions. It must wield its power to directly engineer bankable projects and reshape markets, making India’s green transition a compelling, low-risk proposition for global and domestic investors.

The Budget as Strategic Risk-Taker
Deploying the budget as strategic risk capital requires creating specific facilities that surgically address the most binding constraints to private investment. Keeping in mind the need for quick results, steps can be taken on the back of both pipeline initiatives, which have already been worked on, and new instruments:

1. Revive and Scale the National Credit Guarantee Fund
The 2016 proposal for a Credit Guarantee Fund for Infrastructure was conceptually sound. Its previous stalling underscores that visionary ideas require persistent commitment. It should be revived with an enhanced design.

• How It Works: The budget capitalises a fund providing partial credit guarantees (covering, for instance, the first 20-30% of losses) to lenders for green projects, directly improving their risk-return calculus.
• Strategic Upgrade: Transform it into a National Green Transition Guarantee Facility with targeted windows:
• Sub-sovereign Guarantees for municipal projects (e.g., electric bus fleets).
• Currency Risk Guarantees to unlock foreign capital for rupee-denominated infrastructure.
• Technology Performance Guarantees for first-of-a-kind deployments like grid-scale battery storage.

2. Deploy Blended Finance to Bridge Viability Gaps
Public capital must blend with - not replace - commercial finance to make strategic projects bankable.

• How It Works: Concessional budget capital (grants, low-cost loans, subordinated debt) is blended with commercial debt, with Multilateral Development Banks partnerships as a force multiplier.
• Budget-Linked Instruments:
• A Green Project Preparation Facility to fund feasibility studies and legal structuring, de-risking the vulnerable early stage (on the lines of the PPP facility set up by the Asian Development Bank at the request of the Finance Ministry in the early 2000s)
• Concessional Subordinated Debt provided via a dedicated window at IIFCL. This “patient” capital absorbs first losses, making senior debt safer.
• Viability Gap Funding, modelled on the existing PPP scheme, to make socially essential projects (e.g., rural EV charging) commercially viable.

3. Innovate through Risk-Sharing and Insurance Facilities
The budget must fund or backstop insurance for new, climate-specific risks that private markets avoid.

• How It Works: Government capitalises insurance pools or provides premium support, replicating the model of anchoring a fund with a major domestic institutional investor.
• Targeted Products:
• Renewable Resource Risk Insurance, guaranteeing minimum solar or wind resources.
• A Political Risk Insurance Fund, leveraging, say, the ECGC’s expertise, to cover regulatory or contract frustration for greenfield projects.

II. The Critical Enabler: The “Expected Loss” Rating Scale
For these instruments to function efficiently, we have to change how infrastructure projects are assessed. The key is the Infrastructure Credit Rating Scale based on the Expected Loss model, pioneered by India’s major credit rating agencies in consultation with the Ministry of Finance in 2017.

Traditional ratings focus on Probability of Default, a flawed metric for long-term infrastructure, as it ignores recovery prospects. The Expected Loss framework evaluates risk holistically: Expected Loss = Probability of Default × Loss Given Default.

This matters for the following reasons:

1. It reveals the true impact of guarantees: A first-loss guarantee directly reduces the Loss Given Default. The Expected Loss model quantifies this, showing how a government guarantee can transform a project’s rating from non-investible to investment-grade, making the catalytic effect of public money transparent.
2. It attracts long-term institutional capital: Pension and insurance funds need high-rated, long-duration assets. By enabling better ratings through Expected Loss-focused structures, the budget can unlock this vast pool of domestic patient capital.
3. It enables precision in de-risking: The budget can allocate risk capital more efficiently by targeting interventions that most improve the Expected Loss score - whether mitigating construction risk (affecting Probability of Default) or providing asset-backed security (affecting Loss Given Default).

III. Anchoring Implementation
To translate this architecture into investible reality, four principles are non-negotiable:

1. Anchoring it in the national strategy: All instruments must flow directly from India’s Nationally Determined Contributions and National Climate Strategy, targeting priority transitions like grid decarbonization and industrial efficiency.
2. Leveraging and strengthening partnerships: Use the budget to “buy down” Multilateral Development Banks' costs or attract co-guarantees, massively multiplying its reach and credibility.
3. Ensuring arm’s-length, professional management: House risk capital in technically competent, independent intermediaries - like a green window at IIFCL for large infrastructure, or SIDBI for smaller projects - operating under clear commercial mandates.
4. Mandating rigorous transparency: Build credibility with public metrics like Leverage Ratio (private capital per public risk rupee), Greenhouse Gas emissions reduced, and jobs created.

The global challenge is not a lack of capital, but a profound misalignment of risk. While voluntary disclosures have proven inadequate, India’s Union Budget holds the power to break the logjam.

By embracing its role as the architect of first resort, the government can transform climate ambition into a pipeline of bankable projects. By mandating the Expected Loss rating scale, it provides the precise financial language to quantify de-risking, attracting the trillions in institutional capital seeking safe, long-term returns.

As the tools are known, the model exists, and the need is urgent, this budget can present a bold architectural blueprint to become the definitive catalyst that bridges the gap between India’s climate ambitions and its investible reality.