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News Analysis: India budget sets new incentives for energy transition

India’s budget for the fiscal year through March 2025 proposed several measures to support the country’s energy transition plans, including tax breaks and greater participation by the private sector.

Finance Minister Nirmala Sitharaman proposed fully exempting critical minerals – including copper, lithium and cobalt – from customs duties, and suggested developing a climate finance taxonomy. The list of measures announced today include a plan to expand a customs-free list of capital goods used in solar cells and panels.

The government will also conduct an auction for offshore mining of critical minerals and rare earths, essential for manufacturing components such as batteries and electrolysers. Sitharaman did not provide a timeline. India aims to achieve net zero emissions by 2070 and reach 500 GW of renewables capacity by 2030, compared with 135 GW at the end of 2023.

Sitharaman allocated INR 11trn (USD 133bn) for the infrastructure sector, an increase of 11.1% over the previous year. This is lower than the 33% increase for the year through March 2024.

Sitharaman’s other proposals include:

  • Inviting the private sector to set up small-sized nuclear reactors;
  • Encouraging storage solutions for renewables;
  • Introducing a policy for pumped hydro storage;
  • Setting up a transit-oriented development plan for 14 cities with a population of more than 3 million;
  • Inviting the private sector for digital infrastructure projects designed to deliver public services;
  • Building a framework for the redevelopment of selected cities;
  • Rental housing PPPs in the form of dormitories for the workforce, especially to support new-age manufacturing and industrial growth;
  • Fifty-year interest-free loans to state governments for land reforms and urban planning; and
  • Focusing on water supply, sanitation and solid waste management with the assistance of multilateral development banks, as well as developing services for 100 large cities through bankable projects.

The intent to develop a climate finance taxonomy will provide clear, transparent, consistent and standardised definitions of green investments, said Sandeep Mohanty, partner and leader for PwC India’s climate and sustainability strategy.

“Climate finance taxonomies can reduce green-washing, lower transaction costs and increase investor confidence, thereby facilitating greater capital flow,” he told Infralogic. “Companies and financial institutions can report on their alignment with the taxonomies, leading to greater transparency and accountability in their climate-related activities. This will help the country in planning and developing infrastructure which is resilient against climate change.”

Anvesha Thakker, partner and industry lead for clean energy at KPMG India, said that a focus on domestic production, recycling and overseas acquisitions of critical mineral assets can significantly improve the supply chain for energy transition and encourage local manufacturing of renewables, batteries, electrolysers and other equipment. She added India will need close to USD 100bn annually till 2030 to achieve its energy transition targets.

The exemptions on capital goods for making solar cells and modules are an indication that the government is likely to incentivise domestic production, said Deepak Thakur, a partner at Luthra and Luthra Law Offices India. His practice areas include mergers and acquisitions of project companies, especially in renewables, as well as advice on litigation arising out of concessions and development contracts.

These tax breaks will lower production costs, making solar energy more affordable and accessible, said Gopal Kabra, founder and managing director at Pune-headquartered solar power developer GK Energy. The company, which focuses on solar development, has an agreement since 2008 with Germany’s RWE and EnBW for solar water heaters.