Viksit Bharat and net-zero as goals demand that India sets up a specialized transition finance institution

The EU’s Carbon Border Adjustment Mechanism presents a threat to Indian exports like steel and aluminium. From 2026, exporters could face an additional tax burden of 25% and price disadvantages of 15-22%. To maintain market access, production must shift rapidly to lower-emission processes.

Domestically, India’s carbon credit trading scheme and green steel frameworks are making emission compliance mandatory. While our voluntary carbon market could reach $20-40 billion by 2030, high-emitting sectors and small and medium firms face back-breaking capital requirements. As global value chains pivot to mandatory disclosures and net-zero commitments, we need a dedicated financial institution to provide low-cost capital.

The scale, tenor and technological uncertainty of decarbonization investments exceed the risk appetite of commercial banks. Unlike typical greenfield projects, transition finance often targets the retrofitting of legacy assets with uncertain returns and payback periods of 15-25 years, creating an asset-liability mismatch for banks reliant on short-term deposits. Further, many transition technologies remain commercially untested in India, exposing lenders to default risks from technical underperformance and carbon price volatility.

These challenges are compounded by a lack of specialized technical expertise; as highlighted in the Reserve Bank of India’s (RBI) 2022 discussion paper on Climate Risk and Sustainable Finance, domestic financial institutions lack the data and scenario-analysis capabilities to accurately price climate risk. Also, India’s historical experience with stressed infrastructure assets has entrenched a deep risk aversion vis-a-vis heavy industry. Consequently, commercial lenders prioritize near-term returns over long-term systemic benefits, leading to chronic under-provision of capital.

Taken together, relying solely on existing banks and non-bank financial companies would lead to chronic under-provisioning of transition finance, delayed decarbonization and elevated systemic climate risk.

International experience shows that specialized public financial institutions can bridge the transition gap through technical expertise and risk-sharing. Germany’s KfW provides long-tenor, concessional financing for green innovation, using sovereign backing to fund projects deemed too risky by commercial lenders.

Similarly, the European Investment Bank has been repositioned as a climate bank; it uses blended finance and guarantees to de-risk large-scale decarbonization. The UK Infrastructure Bank illustrates this model, offering patient capital to crowd in private investment for net-zero technologies.

These examples show that accelerating transition investments at scale requires three pillars: concessional funding, specialized technical appraisals and structured risk-sharing mechanisms.

Indian policy discourse, led by Niti Aayog, emphasizes the need for specialized financing to help small businesses and heavy industries decarbonize without losing competitiveness. Proposals include a national green financing body to act as an intermediary, addressing coordination failures and information asymmetry in the transition ecosystem.

India’s success in scaling renewable energy offers a proven blueprint. The coordinated efforts of Power Finance Corporation, Rural Electrification Corporation and Solar Energy Corporation of India demonstrate how specialized architecture and policy clarity can drive structural change.

To replicate this for the broader net-zero transition, the proposed institution could be administratively anchored under the ministry of finance. A governing council that includes RBI, Niti Aayog and sectoral ministries could ensure that fiscal policy and financial stability are aligned with industrial decarbonization pathways.

In sum, given the external and domestic environment, India’s transition finance needs are urgent and non-negotiable and hence require a dedicated transition finance institution with the capacity to provide patient capital, undertake rigorous technical appraisals and align domestic flows of finance with global climate and trade regimes.

Such a body would also unify and operationalize a credible transition taxonomy to deliver much-needed transparency, consistency and simplicity for industry. Setting it up would count as a strategic move to ensure that India’s pathway to net-zero is orderly, competitive and aligned with the broader national objective of building a resilient and globally integrated economy.

In other words, a dedicated transition finance body can help transform climate commitments into a desirable growth formula.

The author are, respectively, an energy economist, and vice president at a private Indian bank.