(Co-authored with Lekha Chakraborty)

India’s commitment to net-zero emissions by 2070 demands transformative investments across energy systems, infrastructure, and climate resilience. Recent estimates suggest an annual requirement of around US$250 billion to scale low-carbon technologies and build climate resilience (Department of Economic Affairs 2025).

In May 2025, the Department of Economic Affairs released the draft Framework of India’s Climate Finance Taxonomy, marking a pivotal step toward mobilising green capital while improving transparency and reducing the risk of greenwashing (Department of Economic Affairs 2025). Yet, beyond its technical role in classifying sustainable activities, the taxonomy represents a core element of fiscal architecture—one that shapes budgetary priorities, expenditure eligibility, and intertemporal resource allocation. This taxonomy is thus a thematic Public Financial Management (PFM) instrument.

A well-designed taxonomy is therefore not merely a classification tool; it is an upstream foundation influencing downstream fiscal decisions. If it remains “distributionally blind”, it introduces “analytical model risk,” whereby fiscal space is may be misdirected toward activities that appear efficient in aggregate but generate uneven adjustment costs in practice, thus undermining inclusive outcomes. In Indian context where unpaid care and domestic work, limited asset ownership, and differential exposure to climate shocks are structured along gender lines, these costs are not neutral. Integrating a gender lens and social equity criteria into the taxonomy is essential to identify such distributional risks ex ante, improving the accuracy of capital allocation and ensuring that climate finance strengthens, rather than inadvertently weakens, household-level resilience.

The Intertemporal Fiscal Space

This classification foundation links directly to the intertemporal fiscal space challenge. India operates under binding fiscal consolidation paths, with the Fiscal Responsibility and Budget Management (FRBM) Act targeting a fiscal deficit of 4.4% of GDP for 2025-26 (Government of India 2025). In a context of high committed expenditure - salaries, pensions, and interest payments - and political preferences for visible capital investments, fiscal adjustment frequently compresses discretionary social spending.

As the taxonomy is operationalised, it will increasingly act as a coordination device: influencing which expenditures qualify as “priority” or “future-oriented,” shaping eligibility for public finance, guarantees, blended instruments, and medium-term expenditure frameworks (MTEFs).

Climate finance is often framed as technical capital expenditure (capex) on hard infrastructure, such as renewable energy grids. Without robust medium-term planning and institutionalised fiscal discipline, accommodating large-scale green investments risks ad hoc cuts to social sectors, undermining human development outcomes.

Given the net-zero investment scale - cumulatively over US$10 trillion by 2070 - the central fiscal question becomes : How does the state manage the intertemporal trade-off between green investment and social spending without eroding development gains? Reframing is needed in the sense fiscal discipline should be viewed as safeguarding tomorrow’s priorities, not mere austerity, while consolidation creates headroom for resilience-building investments.

The Chart of Accounts and IFMS

The most overlooked dimension in India’s climate discourse is the systems-level granularity required for effective implementation. Avoiding credibility risks of greenwashing at the sovereign level demands robust accounting and reporting structures.

India’s current Chart of Accounts (CoA) is dynamic, but often overly aggregated, fragmenting expenditures across heads and limiting functional, beneficiary, or target-group views. The Sundaramurthi Committee, appointed to review budget classification, noted that emerging needs like gender budgeting and Scheduled Caste/Scheduled Tribe allocations were poorly accommodated under existing systems, recommending structural reforms.

Climate finance intensifies this granularity challenge, as it is inherently cross-sectoral, requiring inter-departmental coordination. A standalone “climate tag” in the budget, without integration into the Integrated Financial Management System (IFMS), risks becoming performative rather than informative, for seamless fund traceability. Proper accounting ensures a rupee can be tracked from allocation to climate-and-gender-aligned outcomes, enabling accountability. A key question therefore, is how do we enforce and strengthen such accounting and reporting structures, so upstream taxonomy design translates into measurable and verifiable results.

Fiscal Stress Test

Traceability serves as a stress test: without it, fiscal information systems falter under multi-objective demands. Linking these three pillars—the classification problem, fiscal space challenge, and systems granularity—reveals climate finance as a profound governance test. Many jurisdictions excel in taxonomy design but lack fiscal room or tracking mechanisms to operationalise them.

In India, bridging this delivery gap requires viewing the taxonomy holistically:
• Taxonomies classify what should count.
• Budgets allocate what will be funded.
• Execution determines how much will be spent.
• Accounting records what occurred.
• Reporting reveals what can be scrutinised.
• Audit enforces accountability.

By embedding distributional lenses, reframing fiscal rules for resilience, and modernising CoA and IFMS, India’s taxonomy can drive an inclusive transition.

This is not just a funding imperative but a reimagining of public financial management for equitable climate action.

References

Department of Economic Affairs. 2025. Framework of India’s Climate Finance Taxonomy. Ministry of Finance, Government of India.

Government of India. 2025. Union Budget 2025-26: Fiscal Policy Statements under FRBM Act. Ministry of Finance.