The energy portion of India’s latest budget for 2024-2025 released last month provided some new announcements related to developing a national energy transition pathway, including a taxonomy for climate finance, a roadmap to move hard-to-abate industries to emission targets, and the promotion of nuclear energy and pumped hydro storage.
India expanded its energy budget to $8.2 billion from $6.6 billion in the previous fiscal year (Figure 1). As a share of the total budget, it is close to the previous year, around 1.4 percent. Still, in the context of forecasts of a doubling of electricity demand by 2030 and a quadrupling by 2050, the budget indicates that to meet the estimated annual clean energy investment of over $250 billion, the role of the private sector needs to expand further. The investment gap remains large with clean energy investments in India amounting to only $60 billion in 2022.
This article discusses the new details of the energy budget, focusing on the developments around solar, critical minerals, electric transportation, nuclear energy, climate finance, green bonds, and a few other key initiatives.
Figure 1: Total and energy-related budget allocations
Note: Average exchange rates for each fiscal year are based on Bloomberg data.
Source: Ministry of Finance, Government of India.
Solar Generation and Manufacturing
Solar energy capacity has been growing as it is key to achieving India’s target of 500GW of electricity capacity from non-fossil sources by 2030. The rapid growth over the past decade has been driven by utility-scale projects as the uptake of rooftop solar systems has been lower than the targeted addition of 40GW to the generation mix. To address this, in the interim budget, the government proposed a scheme to support up to 10 million households to generate 300 units of electricity free of charge every month through solar rooftops, which has been received well with more than 12.8 million registrations so far, according to the finance minister. The budget allocation to grid-connected solar projects almost doubled to $1.1 billion. The allocation for the PM-KUSUM scheme, which aims to add solar capacity through the agricultural sector, also increased by 78 percent to $238 million. In comparison, there was no noticeable change in allocation for wind energy projects, as was noted in a CGEP analysis of the interim budget.
Domestic solar module manufacturing capabilities were emphasized in the budget to reduce the dependency on imports. Building on support of over $3 billion from the production-linked incentive (PLI) scheme since 2019, India’s solar PV module manufacturing capacity increased to 38 GW in 2023 and is expected to reach 116 GW by 2026.
Figure 2: Budget allocations for selected energy-focused federal programs
Note: Average exchange rates for each fiscal year are based on Bloomberg data.
Source: Authors’ calculations based on Ministry of Finance data.
Critical Minerals and Transportation
As part of efforts to ensure critical minerals are secured, processed, and refined domestically for strategically important sectors like nuclear, renewable energy, telecommunications, and space, in the current budget the government has fully exempted 25 critical minerals from customs duty. This is expected to benefit the electric vehicle (EV) industry by helping bring down the cost of battery manufacturing, potentially reducing the cost of EVs for customers.
Higher incentives for battery manufacturing were paired with a 45 percent reduction in customer subsidies through the FAME scheme. Certain classes of EVs are already cost-competitive with internal combustion vehicles and therefore no longer need upfront capital subsidies. The allocation for electrification of railways was also reduced by 23 percent from last year’s $1 billion. This was expected as Indian Railways is nearing completion of the electrification of its routes, with close to 95 percent of the over 40,000-mile network electrified as of March 2024.
Nuclear Energy
Nuclear energy has been recognized as a significant part of the Viksit Bharat 2047 (Developed India) program. The state-owned Indian nuclear establishment is looking to almost triple the current nuclear power capacity of 8,180 MW to 22,480 MW by 2031-32. India’s long-term goal is to achieve 100 GW nuclear power capacity by 2047, which will need the involvement of the private sector to meet investment requirements.
The overall budget for nuclear projects increased by 10 percent to $734 million as the government aims to partner with the private sector to set up indigenous small modular reactors or Bharat Small Reactors and support R&D for newer nuclear technologies. The increase in government spending along with the development of the Indian pressurized heavy-water reactor (IPHWR-220), which can be deployed to provide clean energy for hard-to-abate sectors and to replace coal plants set to retire by 2050, signals a new direction for nuclear energy in India.
Climate Finance and Green Bonds
Building on the launch of India’s first sovereign green bond in January 2023 with a $2 billion issuance, the targeted issuance amount has been increased to $3.8 billion in the current budget, effectively funding almost half of the energy-related expenditures, especially the electrification of transportation and solar energy (Figure 3).
Figure 3: Budget allocations for green bonds for energy and climate projects
Note: Average exchange rates for each fiscal year are based on Bloomberg data.
Source: Ministry of Finance, Government of India.
Complementing the increased sovereign green bond issuance is the notification that a new sustainable or green taxonomy is being developed to enhance investments in climate mitigation and adaptation. A properly designed taxonomy could help attract private investments by lowering greenwashing risk and providing greater certainty that the capital being deployed would help in promoting environmental sustainability consistent with national climate goals.
Other Initiatives
In her budget speech, the finance minister noted that a roadmap to transition hard-to-abate industries from energy efficiency targets to emission targets is forthcoming. This is a critical step for India as it prepares to launch a new carbon market, a cap-and-trade emission trading system. Imposing a carbon price on emissions from sectors such as steel has taken an urgency as the European Union is set to impose a carbon tariff on such high-emitting sectors, which would impact the cost of imports of these goods from India.
The focus on energy efficiency also extended to small industries, with fresh financial support announced for conducting investment-grade energy audits for 60 industrial clusters, and to help them transition to clean energy and efficient technologies, although details are still to be provided.
In addition, $2 billion was allocated for grid strengthening measures, a 16 percent increase from the previous year. The bulk of this is for the Reform Linked Distribution Scheme, which aims to improve the operational efficiency and financial health of the distribution companies. Transmission grids also received a boost with over $200 million to be invested in the Power System Development Fund and Green Energy Corridor, which aim to relieve congestion on the grid and facilitate the evacuation of grid-scale renewable energy respectively.
Energy storage also received increased attention with the government signaling the development of a policy framework for pumped hydro storage. India currently has 3.3GW of pumped hydro storage and 219MW of battery energy storage systems (BESS) with a goal of reaching 70GW of storage capacity by 2030. These technologies are essential for improving grid stability as more renewable generation is integrated into the grid.
