India's policy challenges will hinder net-zero progress, says Moody's

India's economic development needs will constrain the government's ability to extend sufficient financial support to fund its carbon transition and will leave the path open for the private sector to drive emissions reduction, rating agency Moody's said.

Many large companies have launched a wide range of emission targets through 2050. India's (Baa3 stable) 2070 net-zero target and intermediate goals through 2030 present significant policy implementation challenges for the government.

Nishad Majmudar, assistant vice president and analyst at Moody's said high growth potential, significant economic development needs and a large agricultural sector will likely weaken the government's policy resolve and financial capacity to drive the economy's carbon transition. As such, India's planned emissions reductions will be conditioned upon low-cost, long-term private capital.

Many of the country's large private companies have announced net-zero targets that are well ahead of Indian authorities' goals, while government-linked companies are comparatively behind. Additional policy signals to encourage transition would drive higher private investment.

The pace of India's carbon transition will depend on the extent to which the government can balance energy affordability and reliability needs against its emissions reduction commitments, said Abhishek Tyagi, vice president and senior credit officer, Moody's.

The reduced storage costs and the scalability of renewable projects with storage would support a faster transition.

Referring to climate change goals and the financial sector, Moody's said Indian banks' significant loans to carbon-intensive sectors expose them to transition risks, and they will face pressure to decarbonise their loan books.

At the same time, green financing presents a significant lending opportunity, given banks' dominant role in credit intermediation in the country.

India's pursuit of its targets is conditional upon the country receiving as much as $ 1 trillion in climate finance from external donors, including multilateral development banks and advanced economies – an unlikely prospect. This carves a larger role for the private sector and private capital to drive emissions reduction.

Many of India's largest non-financial companies, for example, have also launched carbon neutrality or net-zero emissions targets of varying stringency in the coming three decades.