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India’s Struggles with Sovereign Green Bonds (SGrBs)
Context
India, like many emerging markets, has turned to sovereign green bonds to help fund its transition to a low-carbon economy, but investor demand for these bonds remains weak, hindering their effectiveness.
What are Green Bonds?
- Green bonds are debt instruments issued by governments or corporations to raise capital for projects that promote environmental sustainability, such as reducing emissions or enhancing climate resilience.
- Green Premium (Greenium): The cost advantage of green bonds, where investors are typically willing to accept lower yields in exchange for supporting sustainable projects.
- Why Are Green Bonds Important?
- Sovereign Green Bonds (SGrBs) are issued by government entities, like India’s government, to fund energy-efficient projects, renewable energy, electric locomotives, metro projects, afforestation, etc.
- India has raised almost Rs 53,000 crore through SGrBs since 2022, with funds used for green projects like energy-efficient railways and renewable energy schemes.
Challenges in India’s Green Bond Market
- Low Investor Demand: India’s green bonds have not attracted significant interest, limiting the ability to raise funds efficiently.
- The greenium (expected lower borrowing cost) is much lower in India compared to global markets (India: 2-3 basis points, Global: 7-8 basis points).
- Liquidity Issues: Small issue sizes and lack of secondary market trading have reduced the appeal of India’s green bonds.
- Many investors prefer to hold bonds until maturity, limiting market liquidity.
- Lack of Ecosystem: There is a lack of social impact funds and responsible investing mandates in India, which are key drivers for green bond demand in other countries.
Impact of Low Demand
- The funding shortfall has led India to rely on general revenue to make up the difference. For example:
- The government initially planned to raise Rs 32,061 crore through green bonds in 2024-25, but this was lowered to Rs 25,298 crore.
- As a result, funding for key projects like grid-scale solar was drastically reduced from Rs 10,000 crore to Rs 1,300 crore.
Possible Solutions
- Explore Sustainability Bonds: Combining green and social projects into a single bond could attract more investor interest, as it has in other emerging markets.
- Improve Transparency: Better reporting and the publication of post-issuance allocation and impact reports could increase investor confidence.
- Partner with Multilateral Banks: Collaborating with development banks (e.g., the World Bank) to back green bonds with their credit ratings could enhance India’s attractiveness in the global market.
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