What does Budget 2024 hold for India’s energy transition?

With the Bharatiya Janata Party (BJP) coming to power for the third consecutive time, all sections of society had high expectations from the Union Budget 2024, the seventh presented by Finance Minister Nirmala Sitharaman. From a macro perspective, the budget is encouraging, with the government reducing its fiscal deficit to 4.9% this year through fiscal consolidation and inflation moving towards the 4% target.

From an energy transition perspective, the budget built upon the Economic Survey 2023-24 that was released a day before and gave ample emphasis on ensuring economic growth is sustainable and India accelerates the adoption of clean energy.

Policy continuity

It was important to have policy continuity to ensure India’s energy transition does not get derailed. The budget delivered on that front with schemes announced during the interim budget – PM Surya Ghar Muft Bijli Yojana and Pumped Hydro Storage – continuing to receive due importance.

The government also announced that it will produce a policy document on appropriate energy transition pathways that balance the imperatives of employment, growth and environmental sustainability.

Securing supply chains

To meet India’s rising energy demand and successfully integrate higher proportions of variable renewable energy, we must overbuild our power system with excess renewable capacity and sufficient energy storage.

However, as the Economic Survey 2023-24 rightly pointed out, India faces a critical challenge in accessing essential minerals like lithium, nickel, and cobalt for battery production. These resources are predominantly found in South America, Africa, China and Australia.

Budget 2024 takes a strategic approach to securing critical minerals, not only focusing on domestic access but also aiming to capture value in the global supply chain. The Critical Minerals Mission, with its three-pronged objectives of boosting domestic production, acquiring overseas resources, and promoting recycling, will ensure a reliable and secure critical minerals supply chain for India.

Further, to incentivise the establishment of refining and processing capacities in India - currently dominated by China - the budget includes a waiver of customs duties on 25 critical minerals and a reduction in duties on a few others.

Impact of taxation decisions

The government has reduced customs duties on solar panels and cells, recognising the importance of the value chain and boosting domestic manufacturing.

But, on the other hand, it increased customs duties for solar glass and tinned copper interconnect. It remains to be seen how this move impacts overall prices.

While the industry was expecting a goods and services tax (GST) cut on wind, battery storage, EVs and charging stations, there was no indication of the same. Hopes are now pinned on the GST Council meeting in the next few weeks to discuss tax rationalisation on certain components.

Decarbonising MSMEs

India needs a “whole economy transition” approach, and an important piece of the energy transition puzzle is the micro, small and medium enterprise (MSME) sector.

For decarbonising MSMEs, a key bottleneck is financing and their access to finance. With ample focus on MSMEs, the budget seeks to address the bottleneck with a credit guarantee scheme, which will be introduced. To avoid MSMEs becoming non-performing assets (NPAs) for banks, a government-promoted fund will support a guarantee for credit availability. Further, the credit assessment of MSMEs will not be done traditionally. Instead, banks and financial institutions will need to develop a new credit assessment model based on the scoring of digital footprints of MSMEs in the economy.

Opening up another revenue stream, the budget emphasised the transition of MSMEs, as well as other large corporations, from the current ‘Perform, Achieve and Trade’ mode to the ‘Indian Carbon Market’. For MSMEs, in particular, energy audits will be provided. They will also get financial support for deploying clean energy and energy efficiency measures. 

R&D spending

India has been a late adopter of technology, and the minuscule budget spent by public and private enterprises is responsible for industry lagging in technology innovation. This year’s research budget has focussed on developing small nuclear reactors.

While India needs to diversify its energy sources, the viability of such projects is still questionable. India needs to increase its R&D spending across the value chain, from renewable energy deployment to mining and extracting minerals to a circular economy. 

On the other hand, the government has introduced the Anusandhan National Research Fund for basic research and prototype development with a financing pool of Rs 1 lakh crore. This can provide the initial impetus, but the private sector must also play a big role. 

Skill Development

Employment creation and skill development have been at the core of this budget. While there is a lot of emphasis on skill development, there needs to be an emphasis on how money is allocated for skilling people for the clean energy sector. 

Here again, as the Economic Survey 2023-24 emphasised, the private sector and academia have to work together with the government for real results. For the clean energy sector, strong technology innovation and adoption can help build indigenous production supply chains needed for large-scale clean energy solutions.

Clean Energy Finance

Last but not least, the government finally announced that it would introduce a taxonomy to enhance the availability of climate finance. While many countries have established a taxonomy, many of them actually help in greenwashing. By developing a taxonomy that correctly identifies green activities, India can help developers attract environmental, social and governance (ESG)-focussed investors and funds.

Further, the government is also simplifying foreign direct and overseas investment and promoting opportunities for using Indian Rupee as a currency for overseas investments. However, it made no new announcements of raising capital through sovereign bonds.

Overall, it is clear that the government is laying a strong foundation for building sustainable energy choices. However, given that several of these policies and announcements have been in the offing for a long time, it remains to be seen whether their final shape adequately resolves the issues.

This article was first published by The Economic Times.