Green financing needs more incentives for greening the wheels

Some concrete steps needed to reduce the emission intensity of the transport sector

The total number of vehicles plying on Indian roads has seen a six-fold increase since the start of this decade, amounting to ~14 percent of transport sector emissions. Reducing the sector’s emission intensity is thus crucial to attaining India’s goal of Net Zero emissions by 2070, as announced at the 26th Conference of the Parties at Glasgow in 2021, with a five-pronged agenda — termed Panchamrit (five elixirs). Given the arduous Panchamrit targets, the government is focussed on changing the inter-modal composition, currently dominated by roads, towards railways and waterways. The shift will be more cost-effective, too, and thus a double win.

The Transportation Plan

The National Rail Plan, for one, aims to increase the modal share of rail to 45 percent of the logistics market by 2030-31 from 26 percent at present. Shifting of freight from road to rail is expected to bring down the logistics cost from 13-14 percent of gross domestic product (GDP) currently to a global average of 8 percent by 2030 as, alongside being more emissions efficient, railways has the least cost per tonne-km in the transport sector.

The development of Gati Shakti multi-modal cargo terminals and dedicated freight corridors (DFCs), with focus on proliferating the growth of railway cargo traffic, are thus steps in the right direction. The DFCs will help decongest the road network and are expected to save 450 million tonne of CO₂ in the first 30 years of operations. On the waterways front, the union ministry of ports, shipping and waterways (MoPSW)’s Rs 5,000 crore package will facilitate the construction of vessels for inland waterways through ‘Make in India’. Given that greenhouse gas footprint for a unit distance of cargo transported by waterways is almost half compared to railways and about one-tenth compared to road freight, the construction of vessels presents an opportunity to decarbonise the sector.

Coming back to roads, the policy framework needs to be accompanied by a behavioural shift towards more sustainable modes of transportation. While awareness for transitioning towards greener modes is increasing, it is imperative to continue passenger-level incentivisation and the enabling policy environment. With the increasing penetration of electric vehicles — which crossed the 1 million mark in India this September — it is important not to discount the role of schemes such as the Faster Adoption and Manufacturing of (Hybrid &) Electric Vehicles (FAME-II) and support for the development of 22,000 charging stations (via oil PSUs) across the country. With the exponential expansion in clean technology manufacturing, it is imperative to provide support for capacity expansion to original equipment manufacturers to reduce ramp-up time and improve productivity optimisation through early equipment management. Along with the government’s push to Make in India, the country’s supplier potential comprising core commodities, innovative enterprise, and a sizable young skilled workforce puts it in a sweet spot between Europe and China to be a clean technology manufacturing hub, with a potential opportunity of $300 billion by the end of the decade.

Investment Requirement

However, for this shift to happen, significant investment is required from both government and industry. CRISIL estimates infrastructure spend to double from an estimated Rs 66.7 lakh crore over fiscals 2017-2023 to ~Rs 142.9 lakh crore between fiscals 2024 and 2030. Of this, ~Rs 36.6 lakh crore is expected to be green investments, marking a 5x rise. With more than two-thirds of the contribution towards core infrastructure spending expected to be contributed by the central and state governments during fiscals 2024-2030, developing new avenues of financing is an inevitable imperative. Key learnings from the successful monetisation in the power and mining sectors need to be followed for the roads and renewables sectors, which account for ~44 percent of the infrastructure capex.

Development of the domestic green bond market needs to continue, backed by the promise shown by the raising of Rs 160 billion in 2 tranches by the government of India, though green bond issuances constitute only ~0.7 percent of the total bond issuances in India since 2018. We expect Indian companies to raise ~3.3 times the current level from green bonds and external commercial borrowings. The development of climate information architecture for batteries, modules, and electrolysers will help in better classification systems for funds, with the usage of uniform labels and taxonomies, reduce the associated concentration risks and mitigate greenwashing.

An enhanced limit for priority sector lending will also incentivise banks to increase lending in the green financing segment. The enhanced limit needs to be facilitated by access to low-cost capital. The creation of loan loss reserve to cover default due to specific risks will bolster the investments and help in multiple structuring options for risk underwriting, debt and equity with or without first loss guarantee, among others. The entry into new and emerging areas involves significant risks for investors and can be spurred by the sharing of these risks between the government, regulators and industry. A recent example is the provision of viability gap funding of Rs 3,760 crore for 4 MWh of battery energy storage systems.

Government support needs to be accompanied by tax incentives for investment in green bonds. These tax incentives can take the shape of inclusion of green mobility funds for corporate social responsibility investments and coverage of additional issuance costs (green certification) for issuers. Additionally, guarantee structures and commitments signifying the extension of term loans through interest waiver mechanisms or term relaxation measures will enable the development of robust viability assessment measures. Thus, while sustainable mobility and transportation is rapidly gaining pace in India, the opportunities offered by the identification of avenues for green financing for sustainable transportation need to be capitalised upon. This requires us to forge new partnerships among government, academia and industry.

Jagannarayan Padmanabhan is Senior Director and Global Head and Supa Ray is Associate Director, Transport, Logistics and Mobility, CRISIL Market Intelligence and Analytics. Views are personal, and do not represent the stand of this publication.