RBI Governor Sanjay Malhotra recently observed that “the impact of climate change risks is not limited to the financial system alone but extends to the real economy,” pointing to how extreme weather events are straining resources in infrastructure, agriculture, and disaster management. In 2023, the RBI also estimated that India will need to spend $1.03 trillion by 2030 just to help industries adapt to climate norms — a figure that underscores the enormous financial commitment required to build economic resilience.
Given this context, the role of states becomes critical. They hold the contextual knowledge of local climate vulnerabilities and oversee the very sectors most exposed to climate risks. But addressing these risks requires more than policy intent; it demands a steady flow of sufficient finances. States therefore need ways and means that can help to mobilize sustainable sources of finance to scale up their climate action.
One such tool gaining traction is the green budget. At its core, green budgeting integrates environmental and climate priorities into the budget-making process and fiscal decisions. It is not limited to tagging expenditures under “green” categories but instead seeks to create a systematic framework where sustainability becomes a guiding principle for public finance. Importantly, when designed well, a green budget could position states to attract green finance from both domestic and international sources. For India, this approach is still new but evolving quickly, with several states piloting their own versions and offering lessons for others.
Several Indian states have already taken early steps towards green or climate-responsive budgeting, though their approaches vary. Assam has adopted a five-step methodology that identifies budgetary expenditure on climate-vulnerable sectors in the state. Bihar classifies expenditures as principal, significant, or non-significant based on environmental impact. However, Bihar’s framework does not identify specific vulnerable sectors, making the exercise an all-department effort rather than a targeted one.
Odisha, by contrast, has gone beyond tagging through its Climate Change Impact Appraisal (CCIA) model. This method assesses the climate vulnerability of expenditure in five priority sectors and assigns responsibility to the concerned departments, making the process more sector- and department-specific. Rajasthan has also joined the list of frontrunners by presenting its first Green Budget in FY 2026 by undertaking a detailed activity-level review of alignment with climate mitigation, adaptation and environmental sustainability across departments. These approaches are commendable and demonstrate that states are actively experimenting with green budgeting. At the same time, they reveal key limitations. Too much emphasis remains on expenditure tagging, with little progress on linking budgets to strategies for mobilizing green finance. The absence of a standardized taxonomy also makes it difficult to compare practices across states or measure progress consistently.
What is clear, however, is that Indian states are willing to adopt and evolve green budgeting as a climate action & public finance tool. To make each iteration more robust, states will need greater institutional capacity, standardized taxonomies and relevant integration with financing strategies.
Though green tagging of expenditures is an essential starting point, but on its own it does not unlock the full potential of the green budget as a tool to identify and mobilise financial resources. To be effective, green budgeting must go beyond classification and evolve into a mechanism that connects climate priorities with funding opportunities.
The reason states need to link their green budgets with financing strategies is simple: climate action cannot be delivered within the limits of routine budgetary allocations alone. A key limitation here is the absence of an internationally recognised taxonomy. Without a uniform framework for identifying and categorizing projects across states, green tagging remains an exercise with fragmented approaches. One state may classify renewable energy subsidies as a green expenditure, while another may tag rural electrification or irrigation schemes, making it inconsistent. The lack of an agreed taxonomy means states are unable to communicate their green spending credibly to external stakeholders—whether domestic investors, multilateral funds, or ESG-oriented capital markets.
Finally, the exercise must become more focused. A meaningful framework should prioritize sectors most vulnerable to climate change and extreme weather events within a state. In principle, this should be guided by the State Action Plan on Climate Change (SAPCC). Yet in practice, few SAPCCs clearly map vulnerabilities to specific sectors, outline institutional responsibilities, or estimate financing needs. The absence of this clarity—compounded by the missing taxonomy—limits the actionability of green budgeting as a planning and financing tool.
Addressing the above mentioned limitations requires clear prerequisites: identifying vulnerable sectors, assigning institutional responsibility, and quantifying financial needs. Only then can the green budget serve as both a fiscal framework and a financing roadmap.
One promising development is India’s upcoming Climate Finance Taxonomy, expected in 2026. This taxonomy will provide a standardized way to classify and report climate-relevant activities. While striving for alignment with international frameworks and taxonomies to the extent possible, the Indian taxonomy for Climate Finance will reflect and allow flexibility considering the country's context, development priorities and national climate goals. Equally important is ensuring interoperability of this taxonomy with other existing international taxonomies. Without such interoperability, classification risks becoming siloed and inconsistent, reducing its effectiveness as a tool to connect local green budgets with national and international flows of finance.
To make green budgeting more effective, states must move beyond simple tagging and adopt a more integrated approach. This means applying standardized taxonomies such as the forthcoming Indian climate taxonomy, embedding financing strategies like green bonds and public-private partnerships into their budgeting processes, and building institutional capacity through mechanisms such as dedicated Green Budget Cells for regular review and coordination. Technology can also play a central role. Leveraging Finance Management Information Systems to tag and track green budget codes, combined with tools like interactive dashboards, can improve transparency and help departments monitor allocations more effectively. Another crucial step is bundling smaller projects, which reduces transaction costs, provides pipeline visibility, and makes projects more attractive to investors.
Green budgeting in India can act as a key instrument. States have shown willingness to experiment, but the next phase demands moving from ad-hoc tagging toward a structured, finance-linked approach. The forthcoming Indian Climate Finance Taxonomy, if designed with interoperability and state-level applicability in mind, could provide the common language needed to make green budgeting credible, comparable, and investable.
Ultimately, success will depend on how well states integrate this taxonomy with financing strategies and institutional capacity. Doing so will help states to tap into the growing pools of global green finance. Green budgets, then, are not just about classifying expenditures—they are about signaling seriousness, building trust with investors, and ensuring that climate priorities translate into bankable, funded action.
