Lessons from financing green industrial policy under financial constraints in India

This policy brief sets out India’s approach to financing green industrial policy, and particularly the expansion of solar power, in the context of limited fiscal resources and India’s 2070 net zero goal. The brief describes the success of state-organised financing policies for solar power and lessons that can be applied to other emerging markets and developing economies (EMDEs).

The brief is one of a series of three; read the China brief here and the Vietnam brief here.

Main messages

• Annual investments in India’s energy sector need to triple to around US$200 billion to meet the country’s 2070 net zero ambition, suggesting that energy will likely require the most capital of any sector.
• India is using tools outside the state budget to address the current investment gap and the country’s green industrial policy has far exceeded expectations, notably in the space of solar power.
• India recently became the second-largest manufacturer and installer of solar panels globally.
• India’s approach can be summarised as ‘state-organised financing with limited fiscal expenditure’, highlighting a distinction between two categories of state spending: fiscal spending from the parliament-approved state budget and other forms of government-organised financing.
• Direct fiscal expenditures from the state budget are kept at a minimum and are narrowly scoped to specific technologies, such as through the Production Linked Incentive (PLI) scheme for solar manufacturing.
• Most state financing comes from tools with no direct state budget impacts. This includes state-owned enterprises (SOEs) investing in renewable energy projects, state-owned financial institutions being mandated by the state to increase green lending, and sub-national state-owned distribution companies (‘discoms’) providing financial de-risking through advantageous price and uptake terms for renewable power generation.
• These measures are complemented by state demand and import barriers to improve the profit case and incentivise the private sector to scale up investment.
• India’s experience provides key lessons globally but particularly for EMDEs, where financing needs are as great and financial resources are frequently as constrained as India’s. The findings suggest that green industrial policy may be feasible even under severe financial constraints.