India finds itself at a critical juncture: it must accelerate economic growth while meeting its climate commitments. Estimates of the country’s climate financing needs have ranged from US$160 billion to US$288 billion annually through 2030, but these top-down figures rely on broad assumptions and often fail to reflect sector-specific realities.

In a recent study, we take a different approach, using a bottom-up methodology to provide a more accurate estimate of India’s climate finance requirements. We focus on four of the country’s highest-emitting sectors: power, steel, cement, and road transport. Importantly, our study measures only the additional capital expenditure required to fund climate mitigation, over and above the investments already expected under a business-as-usual scenario.

We estimate that these four sectors will require a total of US$467 billion in climate finance by 2030, averaging US$54 billion annually, or roughly 1.3% of India’s GDP. This figure is significantly lower than the hundreds of billions of dollars per year suggested by earlier studies.

Although much of the climate debate, both globally and in India, has focused on the costs of the energy transition, our study shows that India’s climate finance needs are relatively modest. Between 2023 and 2030, the additional capital expenditure required in the power sector is estimated at US$57 billion: US$47 billion for shifting from fossil fuels to renewables and US$10 billion for pumped hydro and battery storage.

Our projections are significantly lower than those in many other studies, primarily because the per-unit cost of renewable capacity has fallen below that of coal-based plants. Today, building a solar power plant costs about half as much as a coal-based facility, while setting up a wind farm costs roughly one-third.

India’s steel and cement industries face far greater climate finance requirements: US$251 billion and US$141 billion, respectively. This demand is driven by two main factors. First, both sectors are projected to expand rapidly: steel manufacturing is expected to surge by about 80%, from 125 million tonnes in 2022 to 225 million tonnes by 2030, while cement production is set to climb from 370 million tonnes to 670 million tonnes over the same period.

Second, India’s steel industry emits approximately 2.4 tonnes of carbon dioxide per ton of steel, well above the global average of 1.85, due to carbon-intensive production methods. By contrast, the cement sector is less carbon-intensive, emitting 0.44 tonnes of CO₂ per ton of cement, compared with a global average of 0.6.

As a result, India’s average annual capital-expenditure requirements for steel ( 0.7% of GDP ) and cement ( 0.5% of GDP ) are the highest among the G20’s 10 emerging market economies. Decarbonizing these industries is particularly challenging, since the only available technological solution – carbon capture and storage – remains prohibitively expensive.

When it comes to road transport, we estimate India’s additional financing needs at US$18 billion: US$10 billion for shifting from internal combustion engine vehicles to electric ones, and US$8 billion for developing electric vehicle ( EV ) charging infrastructure.

Directing climate finance toward these four sectors could reduce India’s coal use by 291 million tonnes and cut petrol and diesel consumption by 72 billion litres by 2030, lowering CO₂ emissions by 6.9 billion tonnes.

But is such climate financing from external sources macroeconomically feasible? After accounting for the current-account deficit, total net capital and financial inflows to India under the business-as-usual scenario are expected to reach US$530 billion by 2030 – roughly 1.4% of GDP annually. With the expansion of India’s monetary base and projected annual GDP growth of 10.5%, India could absorb up to US$470 billion in capital and financial inflows, net of the current account deficit, over the same period.

This suggests that under business-as-usual conditions, the Reserve Bank of India will need to manage external climate finance very carefully. To absorb the required inflows without jeopardizing financial stability, the government could raise the current account deficit to around 2.5% of GDP. The remaining funding gap would have to be bridged domestically, primarily by boosting the national savings rate to avoid crowding out other sectors.

The steel, cement and road transport sectors are largely privately controlled, but a significant share of the power sector remains under public ownership. Consequently, while it will largely fall on the private sector to finance India’s energy transition, government support will be crucial. By providing subsidies, targeted tax breaks, and a clear regulatory framework, policymakers could reduce risks and encourage private investment in EV charging infrastructure.

Further complicating matters, India’s fiscal capacity is severely constrained. With government debt at 82.6% of GDP, fiscal consolidation is imperative; long-term stability hinges on nominal GDP growth significantly outpacing interest rates. Against this backdrop, mobilizing large-scale public funding for climate action will be particularly difficult.

Yet finding the money is not the biggest obstacle; the real challenge lies in reconciling the energy transition with competing priorities like infrastructure development and industrial capacity expansion. Doing so will demand coordinated, well-crafted policies that sustain growth while advancing decarbonization.

Rakesh Mohan is a president emeritus and distinguished fellow at the Centre for Social and Economic Progress and a former deputy governor of the Reserve Bank of India; and Janak Raj is a senior fellow at the Centre for Social and Economic Progress.

Copyright: Project Syndicate