The Indian government will soon present the budget for 2026-27, offering a moment to assess progress on one of the most significant announcements made at the start of PM Modi’s third term: the development of India’s climate finance taxonomy.
For a developing economy pursuing a Viksit Bharat strategy, this taxonomy is more than a classification tool — it is a governance instrument to channel needed capital towards credible green transitions while safeguarding markets from greenwashing. As India accelerates trade agreements, a robust taxonomy could potentially mobilise capital flows through mutual recognition of climate‑aligned activities, easing non-tariff barriers linked to environmental performance.
The twin pillars: Framework and sectoral annexures
In May 2025, the Ministry of Finance released the Draft Framework for India’s Climate Finance Taxonomy, marking an important evolution in the country’s green finance architecture.
The framework aims to bring coherence to what counts as 'climate-aligned,' guiding investors and regulators through a rapidly expanding sustainable finance landscape and intends to help mobilise around USD 250 billion (INR 22.5 lakh crore) per year till 2047 to aid India’s energy transition.
The taxonomy is being developed in two parts: an overarching framework and detailed sectoral annexures. The framework sets out objectives, principles, classification logic, and flexibilities. The annexures, to follow, will define sector‑specific thresholds and metrics for power, mobility, buildings, agriculture, water, and hard‑to‑abate industries.
This sequencing allows regulators and sectoral experts to design standards that are rigorous yet adaptable — for example, recognising that emission‑intensity benchmarks for steel cannot mirror those for power generation, and that adaptation metrics for agriculture and water systems will differ from those for mobility or buildings.
Shades of green: Climate and transition
The framework distinguishes between 'climate supportive' and 'transition supportive' activities, recognising different stages and pathways of decarbonisation.
Tier 1 'climate supportive' activities include projects that lead to absolute emission avoidance or significant emission-intensity reduction, such as renewable energy generation, electrified transport, or resilient building designs. Tier 2 'climate supportive' activities cover incremental advances in efficiency or resilience, including measures that improve performance where zero carbon options are not yet viable.
Transition supportive activities apply to 'hard to abate' sectors such as iron, steel, and cement, where technologically and economically feasible low-emission alternatives are still emerging, but pathways for progressive decarbonisation can be defined.
This tiered logic acknowledges India’s varied technological readiness and allows financial institutions to scale investments across a 'shades of green' spectrum, rather than restricting capital only to fully decarbonised projects. Such inclusive classification is vital for a just transition — ensuring economic continuity alongside climate credibility.
Aligning taxonomy with clean-tech manufacturing
India’s climate finance taxonomy can serve as the 'rules of the game' for directing the cleantech manufacturing push announced in Budget 2025, rather than sitting alongside it as a parallel exercise.
It can help convert production incentives and duty tweaks into genuinely climate-aligned industrial growth. Budget 2025’s focus on cleantech manufacturing is also about positioning India as a credible alternative supplier in global solar, battery, and hydrogen value chains.
A domestic taxonomy that is broadly interoperable with the EU and other sustainable finance frameworks strengthens India’s claim that its exports — modules, cells, batteries, electrolyzer components — emerge from climate-aligned value chains.
This will matter increasingly for future carbon-related trade measures, public procurement rules, and corporate supply chain decarbonisation commitments. A finalised taxonomy can also define which manufacturing investments and processes qualify as 'climate supportive' or 'transition supportive', allowing the Finance Ministry and sectoral ministries to hardwire taxonomy alignment into Productive Linked Incentive (PLI) tranches, interest subvention, credit guarantees, and viability gap funding.
Finalising the taxonomy soon matters
The Ministry’s phased strategy — framework first, sectoral annexures next — is sound, but timing now becomes critical. Finalising the framework, with clear direction on how annexures will be operationalised, would allow the 2026–27 budget to use the taxonomy as a north star for climate-related fiscal policy.
Subsidies, guarantees, and blended finance vehicles could then be explicitly linked to taxonomy-aligned activities, sending a strong signal to both domestic and global investors that India’s green finance ecosystem is maturing with clear standards and accountability.
Delaying finalisation risks losing momentum just as climate finance commitments and climate-linked trade measures intensify globally. A credible, operational taxonomy would strengthen India’s hand in trade negotiations, support its cleantech manufacturing ambitions, and give investors a transparent basis for assessing alignment with India’s 2030 and 2070 targets.
If done right, the taxonomy will redefine not only how India mobilises its roughly USD 250 billion in annual climate finance needs, but also how it measures progress — from aspiration to architecture, from promises to pathways.
(Shashwat Kumar is a fellow with the Chair on India and Emerging Asia Economics at the Center for Strategic and International Studies)
The opinions expressed in this article are those of the author and do not purport to reflect the opinions or views of THE WEEK.
