The Union Budget as a turning point for climate action Premium

The Union Budget must prioritise key policy measures to strengthen India’s climate response and accelerate progress on both adaptation and mitigation fronts

All eyes will be on Union Finance Minister Nirmala Sitharaman when she takes centrestage on February 1 to present the Union Budget. As the nation grapples with increasingly frequent extreme weather events and mounting pressure to meet its climate commitments, the FY26 Budget carries the weight of both urgency and opportunity. With just five years left to achieve India’s first interim Net-Zero target, the Budget must take decisive steps to protect those on the frontlines of climate change.

Previous Budgets have demonstrated the government’s commitment to climate action, notably through initiatives such as the PM Surya Ghar Muft Bijlee Yojana, support for electric vehicle charging infrastructure, viability gap funding for offshore wind energy, and increased allocations for the National Green Hydrogen Mission. Yet, with a total renewable energy installed capacity of 203.18 GW, far short of the 2030 target of 500 GW, accelerated investment and policy support are imperative.

The Budget must prioritise key policy measures to strengthen India’s climate response and accelerate progress on both adaptation and mitigation fronts. First, to accelerate India’s green energy transition, the PM Surya Ghar Muft Bijli Yojana needs a comprehensive review. While the scheme has seen around 1.45 crore registrations, the completion rate of only 6.34 lakh installations (4.37%) indicates the presence of significant implementation gaps. To address this, the FY26 Budget must take a multi-pronged approach. In the first instance, fiscal allocations should prioritise the Renewable Energy Service Company (RESCO) model, effectively transforming the prohibitive upfront costs into manageable operating expenses for lower-income households through innovative financial instruments and credit guarantees.

In the second instance, the Budget must expand the scope of production-linked incentives (PLI) across the solar module supply chain, addressing the critical supply-demand mismatch, where domestic manufacturing fulfils only 40% of current requirements. This expansion would boost manufacturing capacity and create economies of scale, potentially reducing costs that are 65% higher for domestically manufactured panels than those imported to the country.

In the third instance, India’s vast railway network offers untapped potential for renewable energy generation. Estimates suggest that the Railways’ extensive land banks and track corridors could host up to 5 GW of solar and wind installations. The Budget should encourage innovative public-private partnership models to unlock this opportunity.

Second, the European Union’s Carbon Border Adjustment Mechanism (CBAM), which will take effect on January 1, 2026, necessitates urgent budgetary interventions to protect India’s export competitiveness. India’s total exports of CBAM products to the EU amount to $8.22 billion annually and will likely face carbon levies ranging from around 20% to 50%.

This presents an existential challenge for India’s Micro, Small and Medium Enterprises (MSME), which have a contribution of 30% of GDP and 45% of exports. The Budget can establish a dedicated ‘Climate Action Fund’, modelled after successful initiatives such as Japan’s Green Transformation (GX) Fund for industrial decarbonisation, particularly across the most vulnerable export sectors. The Fund can also support the capacity-building initiatives for MSMEs to ensure proper compliance and reporting under CBAM.