India’s Union Budget 2026 and net-zero: High ambitions, decisive progress

The tone and tenor of the narrative on global climate action have upended since the new administration took charge in the United States (US). The US withdrew from all global climate commitments and promoted fossil fuels, while Europe, China, and emerging economies have slowed their climate action initiatives. This din of present-day global geopolitical rupture is only growing louder.  Any attempt to strike a symphony is sabotaged by back-channel trade-offs, mercurial tariff regimes, capacity constraints and a widening gap between global ambition and execution reality. India’s recent Union Budget 2026 attempts to isolate itself from this cacophony by prioritising resilience over heroism. 

Locking up carbon: CCUS for hard-to-decarbonise industries

Presently, energy contributes ~75% of India’s total emissions, followed by agriculture (~13%), industrial process & product use and waste. However, one-third of energy is consumed by the industrial sector, which is hard to decarbonise. Given the current level of technological readiness for Carbon Capture Utilisation and Storage (CCUS), it is one of the most effective solutions for reducing emissions from hard-to-decarbonise industries. Reinforcing the roadmap launched in 2025, its deployment at scale can help achieve emission targets in end-use applications across five industrial sectors, such as power, steel, cement, refineries, and chemicals. Presently, the cost of CCUS is prohibitively high, primarily due to the processes of capturing carbon and producing green hydrogen, which help convert the captured carbon into value-added products. Accordingly, to provide impetus to this cross-sectoral technology over the next 5 years, an outlay of INR 20,000 crore is proposed. The emphasis should be on utilising this fund to bring down the cost of carbon captured to between INR 4 and 8 per Kg.

Unlocking growth: Unearthing critical minerals 

India is endowed with the world’s 5th-largest reserves of rare-earth elements. These dormant reserves can be strategically utilised by establishing an indigenous and integrated value chain to support India’s ambitions in electronics and green technology. To incentivise the prospecting and exploration of the critical minerals, Budget 2026 proposes to include certain critical minerals in the list of minerals in Schedule XII of the Income Tax Act, thereby making expenditure on prospecting and exploring such critical minerals eligible for deduction as per the provisions of section 51 of the Act. The near absence of globally competitive large-scale downstream processing capacities of critical minerals in India is a crucial void to be filled. Budget 2026 aims to establish rare-earth mineral corridors across geographies and value chains as a step to secure the critical minerals supply chain, particularly in the electronics and green sectors. The exemption of Basic Customs Duty (BCD) on the import of capital goods used for the processing of critical minerals. A special scheme for rare earth permanent magnets to support the mineral-rich States of Odisha, Kerala, Andhra Pradesh and Tamil Nadu to establish dedicated rare-earth corridors (REC) to promote mining, processing, research and manufacturing.

Atoms for peace: SHANTI protocol

One of the most ambitious & unconventional initiatives in India's energy strategy is the embrace of atoms as the core of decarbonization. In addition to the combination of solar and wind, along with long-duration energy-storage (LDES) - that can be designed to deliver firm baseload - India has recognised that a credible green transition needs multi-level backstops. The enactment of the Sustainable Harnessing and Advancement of Nuclear Energy for Transforming India (SHANTI) Act ushers in a paradigm shift. It welcomes private sector innovation in the nuclear value chain. This manoeuvre ensures the global competitiveness of the country’s manufacturing value chain (through cost-competitive, clean, and reliable power) while enhancing India’s readiness for the international nuclear export market. A dual-track approach anchors the roadmap to deliver 100 GW of nuclear capacity by 2047: commissioning indigenous Pressurised Heavy Water Reactors (PHWRs) alongside Small Modular Reactors (SMRs), such as the Bharat Small Modular Reactor. The Union Budget 2026 extends the existing customs duty exemptions on the import of goods for nuclear projects, irrespective of capacity, until 2035. This stability in policy communicates long-term commitment to the sector, reassuring potential participants & investors. It augurs well for India’s exabyte-scale ambitions to attract data centres, which can choose to use captive nuclear energy assets.  

Infrastructure risk guarantee fund 

The Budget-2026 also proposed establishing an Infrastructure Risk Guarantee Fund (IRGF) that could catalyse energy transition projects. This credit-enhanced fund can improve the credit rating of green projects, particularly renewable energy projects, raising them from A/AA to AAA and attracting long-term institutional debt capital. 

Municipal bonds

The continuity in supporting municipalities to issue bonds - grants of 100 crores for a single municipal bond issuance of more than ₹1000 crore - can nudge municipalities to raise capital from the financial markets instead of bonds. A significant portion of these bonds can be issued as green and sustainable bonds, with proceeds used for green projects such as pollution controls, waste management, urban forestry, and heat management. 

Financial sector reform

India’s Vikshit Bharat and green transition ambitions require massive capital allocation, and, according to various estimates, there will be a shortfall in capital mobilisation for the green transition. The establishment of the High-Level Committee on Banking can rationalise credit allocation by the banking sector, including greater allocation to green projects.  

The announcement of the restructuring of Power Finance Corporation (PFC) and REC (formerly Rural Electrification Corporation), the two largest power lenders, could be a major boost to energy generation and transmission, including green projects.

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