• UGI USER
  • Jul 26, 2024
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TAXONOMY FOR CLIMATE FINANCE WILL PUT INDIAN STANDARDS ON A GLOBAL PLATFORM

Relevance: GS – 3 – Indian Economy and issues relating to planning, mobilization, of resources, growth, development and employment; Climate Finance; Conservation, environmental pollution and degradation, environmental impact assessment.

Why in the news?

  • India’s plans to develop a taxonomy for classifying climate finance aim to highlight relevant agendas and present Indian standards globally, according to Ajay Seth, Secretary of the Finance Ministry’s Department of Economic Affairs.
    • The government’s approach to developing the climate finance taxonomy.
    • Strategies to improve India’s sovereign credit ratings.
    • Efforts to recalibrate the infrastructure financing framework.
    • Simplifying overseas investment routes for foreign investors.

India’s Climate Finance Taxonomy

  • India’s high population and per capita income contrast with countries having smaller populations and higher per capita incomes (over $50,000).
    • The dynamics of climate finance will differ for India compared to such countries.
    • The planned standards for classifying climate finance will address these unique dynamics.
  • Standards and Disclosures:
    • Standards will require disclosures on both investment-related and usage-related issues.
    • Decisions and guidelines will need to be provided to address these issues.
  • Finance Minister Budget Speech:
    • Announced the development of a taxonomy for climate finance.
    • The goal is to enhance the availability of capital for climate adaptation and mitigation. This initiative will support India’s climate commitments and green transition.
    • Climate Finance Taxonomy Objectives:
      • To identify assets, activities, and projects necessary for a low-carbon economy.
      • Ensure alignment with the Paris Agreement’s goals on mitigation, adaptation, and finance commitments.

Improving India’s Credit Rating

  • Government Efforts:
    • The government is in regular talks with credit rating agencies to push for better ratings based on the Indian economy’s strength.
    • Post-pandemic, India’s economic health has seen significant improvement.
  • Current Ratings:
    • Sovereign credit rating measures a government’s ability to repay its debt.
    • Higher ratings lead to greater trust and lower borrowing costs.
    • India’s current ratings:
      • S&P and Fitch rate at BBB-
      • Moody’s at Baa3 (lowest possible investment grade).
    • In May, S&P Global raised India’s outlook to positive from stable after 14 years, sparking hopes for a ratings upgrade.

  • Future Plans and Goals:
    • The next goal is a ratings upgrade.
    • The government aims to manage debt sustainably, ensuring fiscal policy space for future crises.
    • The focus is on inclusive, fast-paced economic growth.
    • The potential exists to sustain high debt long-term, but not at the current level of 56%.
    • Central government’s debt stood at just over 56% of GDP at the end of FY24, down from 57.1% at the end of March 2023.

Committee on Infrastructure Financing Framework

  • Headed by Bibek Debroy, Chairman of the PM-EAC, with Ajay Seth as a member.
  • It conducted a comprehensive assessment of the characteristics and parameters defining the infrastructure financing framework.
  • The final report from the Debroy-led committee is expected this year.
  • Focus:
    • Evaluating the approach for public versus private financing.
    • Exploring ways to incentivize private sector investment.
    • Preparing a framework for infrastructure financing under both public and private setups. Developing broad approaches for various sectors including roads, railways, and ports.

Easing FDI Rules

  • Upcoming Changes:
    • Expected easing of overseas investment rules within the next three months.
    • Aimed at simplifying investment norms for foreign portfolio investors (FPIs) and overseas arms of Indian companies.
  • Current Regulations:
    • Most sectors already allow 100% FDI under the automatic route.
    • The inflow of capital regulated under FEMA (Foreign Exchange Management Act) includes complex rules and regulations.
    • Proposed Simplifications:
      • Discussions ongoing with RBI and SEBI, with common grounds found.
      • Simplified rules to be notified by the government.
      • Regulatory changes to be implemented by the respective authorities.
    • Specific Changes:
      • Currently, FPIs can hold up to 10% of stocks in an Indian company.
      • Beyond this, shareholding must be diluted or reclassified as foreign direct investment (FDI) with additional compliance.
      • Lack of norms for investments by overseas companies of Indian entities in India without parent linkages will be addressed.

Way Forward

  • Climate Finance Taxonomy:
    • Develop and implement clear standards and disclosures for classifying climate finance.
    • Ensure alignment with the Paris Agreement’s goals on mitigation, adaptation, and finance.
    • Promote transparency and accountability in climate-related investments.
  • Improving Sovereign Credit Ratings:
    • Maintain regular dialogue with credit rating agencies to highlight economic improvements.
    • Implement fiscal policies to manage debt sustainably.
    • Focus on inclusive and fast-paced economic growth to support higher ratings.
  • Infrastructure Financing Framework:
    • Finalize and implement the comprehensive framework developed by the Debroy-led committee.
    • Balance public and private financing approaches for different infrastructure sectors.
    • Incentivize private sector investment through policy and regulatory reforms.
  • Easing FDI Rules:
    • Simplify regulations under FEMA to facilitate easier capital inflow.
    • Finalize and notify changes in FDI rules in consultation with RBI and SEBI.
    • Establish norms for investment by overseas arms of Indian companies without parent linkages.
    • Streamline compliance processes for FPIs to enhance investment attractiveness.

Alternative articles

https://universalinstitutions.com/climate-finance-a-hard-fact-amidst-shifting-commitments/

https://universalinstitutions.com/climate-financing/

https://universalinstitutions.com/financing-indias-green-future/

Source: https://www.livemint.com/news/india/developing-taxonomy-for-climate-finance-will-put-indian-standards-on-a-global-platform-ajay-seth-11721901405069.html

Mains question

Discuss the implications of India’s plans to develop a climate finance taxonomy. Explain what is the effect of easing FDI rules on the country’s economic growth and sustainable development. (250 words)