India's approach to climate budgeting reveals a stark disconnect between policy rhetoric and financial commitment. Despite acknowledging climate change as a critical economic threat, the country's budget allocation patterns show inadequate resourcing for comprehensive climate action.

Current Climate Spending Reality

Analysis of Union budgets over the past decade demonstrates a persistent gap between climate recognition and actual resource allocation. Climate-related federal spending has reached approximately 1.5% of GDP, falling significantly short of the government's own assessment of requirements.

The Ministry of Environment, Forests and Climate Change operates with an annual budget hovering around ₹3,000 crore, representing barely a footnote in total central expenditure. This allocation pattern reflects the low priority given to climate action despite high-profile policy announcements.

Mitigation Versus Adaptation Imbalance

Budget distribution heavily favors mitigation over adaptation measures. The Ministry of New and Renewable Energy experienced substantial budget growth, jumping from ₹7,563 crore to ₹19,100 crore within two years. Electric vehicle schemes and solar installations receive significant subsidies, demonstrating the government's focus on emission reduction technologies.

Adaptation infrastructure receives fragmented and inadequate funding. The National Adaptation Fund formally exists but receives only ₹100-300 crore yearly, often remaining underspent. This allocation appears insufficient when compared to damages from single climate events, with major cyclones causing over ₹10,000 crore in losses.

State-Level Climate Budget Initiatives

Several states have demonstrated leadership in climate budget transparency. Odisha has identified ₹36,065 crore as climate-relevant spending, representing nearly half its total budget. Rajasthan published its first comprehensive climate budget, estimated at ₹2.78 trillion. These state-level exercises create accountability mechanisms that remain absent at the central level.

Private Investment Limitations

Green bonds constitute less than 1% of government borrowing, indicating limited private sector engagement in climate financing. Private investment typically targets profitable ventures like solar farms, while adaptation infrastructure generates no direct returns. Cyclone shelters, heat-resistant public spaces, and flood-resilient urban infrastructure require public investment due to their public good nature.

Recommended Budget Reform Framework

Credible climate budgeting requires systematic reforms across multiple areas:

• Transparency measures: Formal climate budget statements similar to existing gender budget statements
• Infrastructure classification: Treating adaptation as essential infrastructure requiring long-term capital investment
• Spending prioritization: Integrating climate considerations into infrastructure choices
• Federal transfer reform: Including climate vulnerability in Finance Commission criteria

These reforms would address the current paradox where climate risks are acknowledged as growth threats while climate spending remains inadequately prioritized. The challenge involves translating climate recognition into concrete resource allocation that matches the scale of economic risks posed by climate change.

India's fiscal policy is entering a new phase as the government prepares to implement a debt-focused strategy that will be tested by revenue shortfalls and uncertain economic growth. The upcoming budget represents a critical juncture where fiscal consolidation must be balanced against emerging spending priorities and economic realities.

Fiscal Deficit Target Remains on Track

Despite facing revenue challenges, the government is expected to maintain its commitment to fiscal discipline. The finance minister will likely announce a fiscal deficit target for 2025-26 close to 4.4% of GDP, consistent with the previously budgeted figure. This adherence to the fiscal glide path continues the credible approach adopted over the past five years, which has eliminated unrealistic revenue assumptions and off-budget borrowings.

Revenue Collections Fall Short of Targets

The current financial year has presented significant revenue challenges that will impact budget planning:

The revenue shortfall stems from two primary factors: sharp deceleration in nominal GDP growth and reductions in goods and services tax rates during the second half of the year. While higher-than-expected RBI dividends will provide some financial cushion, spending cuts will be necessary to prevent the fiscal deficit from overshooting targets.

New Debt-to-GDP Strategy Takes Center Stage

A fundamental shift in India's fiscal approach begins with the 2026-27 budget, moving beyond annual deficit targets to focus on debt sustainability. The government has committed to keeping fiscal deficits at levels that ensure central government debt will be on a declining path as a percentage of GDP.

This strategy's success depends on three critical variables: the primary balance in the government budget, interest rates on government borrowing, and nominal GDP growth rates. The government controls the first variable, the RBI influences the second, while the third remains largely beyond direct control.

Growth Requirements and Economic Challenges

The debt reduction strategy's viability hinges on nominal GDP growth returning to double digits—approximately two percentage points higher than the estimated level for 2025-26. This growth acceleration must come through faster output growth, higher inflation, or a combination of both factors.

The challenge is compounded by limited fiscal firepower available to respond to potential global economic storms, as the government remains committed to controlling budgetary deficits while managing the debt burden.

Balancing Consolidation with New Priorities

Despite fiscal constraints, the government faces mounting pressure to address multiple spending priorities:

New Strategic Areas:

• Higher defense spending requirements
• Semiconductor manufacturing capacity building
• Artificial intelligence technology development
• Green energy infrastructure investments

Traditional Economic Concerns:

• Job creation initiatives
• Small enterprise scaling programs
• Urban growth investments
• Private sector investment cycle revival

The government previously demonstrated its ability to increase infrastructure spending while reducing fiscal deficits post-pandemic. The current challenge represents an advanced version of this balancing act, requiring careful examination of government spending components.

External Factors Shaping Future Budgets

Two significant external developments will influence budget planning over the next five years. The 16th Finance Commission's report on tax distribution between the central government and states will impact revenue allocation. Additionally, the 8th Pay Commission's decision on government salaries in 2027 will cast a long shadow over future budget commitments, both representing substantial fiscal considerations for the government's debt management strategy.