FY25 target to fund projects via green bonds pruned 27%

The government has cut its FY25 target for financing projects and schemes through the green bond proceeds by 27% from the budget estimate and intends to maintain this level next fiscal as well amid muted investor appetite, a senior official said.

Sovereign green bonds debuted in FY23 to signal the government's increased commitment to deepen the country's green financing market. It was also part of the broader efforts to reduce the country's carbon footprint and contribute to its ambitious 2070 net zero emissions target.

The revised financing target for FY25 has been curtailed to ₹25,298 crore from the budget estimate of ₹32,061 crore. For the next fiscal, the government intends to use the funds mobilised via such bonds on projects worth ₹25,342 crore, the official said, citing the finance ministry's expenditure plan for FY26.

This means the green bond issuance in the next fiscal would be around the same level as in FY25. The government decides on the issue size of green bonds just when it finalises its borrowing plan for the next fiscal. But the funding requirement for the earmarked projects indicates the bond issuance size. The funding needs have been prepared based on proposals submitted by various ministries.

Inadequate greenium

However, while the government raised ₹16,000 crore in FY23 and ₹20,000 crore in FY24, the bonds barely attracted the so-called "greenium"-the premium over the borrowing cost of similar non-green instruments-that it expected. The official said the greenium has been negligible since FY23.

This is a disincentive for the government, which has to deploy resources to ensure that the proceeds raised via this route are spent only on green projects.

Project allocations

Railways account for close to 60% of the proposed spending on green projects for the next fiscal, followed by new and renewable energy (almost 21%) and housing & urban affairs (20%).

The government's annual budgetary spending on green projects across sectors would far exceed this level. But such expenditures are not strictly segregated and classified as per the environment-friendly nature of the projects.