India’s Struggle with Sovereign Green Bonds

India has faced challenges in its pursuit of sovereign green bonds (SGrBs) to finance its transition to a low-carbon economy. Despite issuing these bonds since 2022, investor demand has remained weak. This has hindered the government’s ability to secure lower borrowing costs, known as the greenium, essential for funding key clean energy projects.

About Sovereign Green Bonds

• Sovereign green bonds are debt instruments issued by governments to raise funds for environmentally friendly projects.
• The proceeds from these bonds are allocated exclusively to initiatives that reduce emissions or enhance climate resilience.
• Investors are attracted to these bonds due to their potential for stable, long-term returns and their alignment with sustainability goals.

The Framework for Green Bonds in India

In 2022, the Government of India established a framework for issuing SGrBs. This framework defines eligible “green projects” as those promoting energy efficiency, reducing carbon emissions, and enhancing natural ecosystems. Since the introduction of SGrBs, India has raised nearly Rs 53,000 crore, primarily funding energy-efficient electric locomotives and various renewable energy projects.

Investor Demand and Challenges

Despite the potential of SGrBs, investor interest has been tepid. Factors contributing to this include limited auction participation and low greenium rates. While global greeniums average around 7-8 basis points, India’s greenium typically hovers between 2-3 basis points. Liquidity issues also arise from small bond issue sizes and a lack of secondary market trading.

Impact on Funding and Allocations

The inability to generate sufficient proceeds from SGrBs has implications for funding clean energy initiatives. The original funding requirement for 2024-25 was estimated at Rs 32,061 crore but was revised down to Rs 25,298 crore due to investor reluctance. Consequently, allocations for vital projects, such as grid-scale solar initiatives, have been drastically reduced.

Potential Solutions and Future Directions

To enhance investor confidence, India could explore issuing sustainability bonds that combine green and social projects. This approach has been successful in other emerging markets. Additionally, improving transparency in post-issuance allocation reports could attract more investors. Collaborating with multilateral development banks to leverage their credit ratings may also strengthen India’s green bond strategy.

Questions for UPSC:

1. Point out the reasons for India’s limited success in attracting investment for sovereign green bonds.
2. Critically analyse the role of green bonds in financing sustainable projects in emerging markets.
3. Estimate the impact of low greenium on the funding of renewable energy projects in India.
4. What are sustainability bonds? How do they differ from traditional green bonds?

Answer Hints:

1. Point out the reasons for India’s limited success in attracting investment for sovereign green bonds.

1. Weak investor demand due to low greenium, averaging only 2-3 basis points compared to global averages of 7-8 basis points.
2. Limited participation in auctions, often resulting in bonds devolving to primary dealers.
3. Liquidity issues stemming from small issue sizes and lack of secondary market trading.
4. Insufficient ecosystem for social impact funds and responsible investing mandates in India.
5. Delayed post-issuance allocation and impact reports, reducing investor confidence and interest.

2. Critically analyse the role of green bonds in financing sustainable projects in emerging markets.

1. Green bonds provide a dedicated source of funding for environmentally friendly projects, essential for sustainable development.
2. They help governments and corporations raise capital at potentially lower costs through the greenium.
3. Emerging markets often issue bonds that finance both green and social projects, attracting a broader investor base.
4. Challenges include limited market size and investor interest, impacting the effectiveness of green bonds in these regions.
5. Improving transparency and reporting practices can enhance the credibility and attractiveness of green bonds.

3. Estimate the impact of low greenium on the funding of renewable energy projects in India.

1. Low greenium limits the government’s ability to secure cheaper financing for renewable projects, increasing overall costs.
2. Reduced proceeds from sovereign green bonds constrain funding for key initiatives, leading to budget cuts in projects.
3. Initial funding requirements for renewable projects have been lowered due to investor reluctance.
4. Key allocations for projects like grid-scale solar have been slashed, affecting India’s renewable energy targets.
5. Increased reliance on general revenue to bridge funding gaps may divert resources from other critical areas.

4. What are sustainability bonds? How do they differ from traditional green bonds?

1. Sustainability bonds finance projects that combine both green and social benefits, targeting a broader range of issues.
2. They appeal to a wider investor base by addressing social needs alongside environmental goals.
3. Traditional green bonds focus exclusively on environmental projects, limiting their scope and potential investor interest.
4. Sustainability bonds may attract more investment in emerging markets where social projects are equally prioritized.
5. Both types of bonds require transparency in reporting and impact assessments to build investor confidence.