Blended finance will be key to supporting India's energy transition through its ability to drive more private capital to high-impact climate projects, says an IFC report published today.

The report, Blended Finance for Climate Investments in India, highlights blended concessional finance as an innovative financing approach to catalyze private sector investment into mitigation and adaptation projects with high development impact.

Blended finance, the blending of concessional funds from governments or philanthropic sources with funds from development finance institutions (DFIs) such as IFC, can crowd in private sector investment to support projects with high development impact that are on the threshold of commercial viability, but need additional financial support to de-risk, incentivize, or rebalance the risk-return profile to attract private sector investors.

India aims to reduce the emissions intensity of its GDP by 45 percent by 2030, from the 2005 level, and attain 50 percent of its power capacity from non-fossil fuel sources. However, greenhouse-gas emissions are a major deterrent, with the energy sector accounting for about 75 percent of the country's total emissions, followed by manufacturing industries and construction at 18.68 percent, and transport at 13 percent, according to a government analysis. 

To address this challenge, the report identifies a range of critical sectors—energy, transport, waste management, agriculture, biodiversity, health, and others—where investments should be prioritized to support the country's climate mitigation and adaptation objectives. However, India will need to significantly scale up climate investments—from $18 billion to $170 billion annually until 2030—to achieve its net-zero targets. The current investment available for climate action in India is only $44 billion annually, according to the Climate Policy Initiative, 2022.  

"We have a significant climate finance gap that highlights the urgent need for innovative financing and partnerships that can crowd in private sector solutions," said Shalabh Tandon, Regional Head of Operations & Climate and Interim South Asia Director, IFC. "The blended finance market in India is growing and at a critical inflection point. There is an urgent need for blended finance to support climate investments in agriculture, land and water management, power, transport, infrastructure, health, industry, and circularity—in alignment with India's net-zero ambitions as well as the government's short, medium, and long-term development priorities."

With positive regulatory changes for tax exemptions related to blended finance already underway, the report features case studies to demonstrate the role IFC can play in increasing blended concessional finance climate investments in India. Still, other challenges hinder the market's potential, including knowledge gaps on deal structuring and the absence of a regulatory framework.

 
"While blended finance can expedite and stimulate markets, its effectiveness hinges on appropriate regulations that incentivize low-carbon alternatives, accelerating the growth of green markets and adoption of new technologies," said Amitabh Kant, G20 Sherpa, India.

The report emphasizes the need to address regulatory hurdles, engage donors and DFIs, build capacity, and create a regulatory sandbox. Pilot transactions using existing structures can also be initiated to jumpstart the market while regulatory changes progress.

IFC is one of the world's largest implementers of blended finance. From fiscal year 2010 to 2023, IFC has deployed $4.6 billion of concessional donor funds to support 457 high-impact projects in over 90 countries, enabling $13.2 billion of investments from its own account and $9.7 billion of commercial third-party capital.

For more information, please visit IFC's blended finance website.