As the urgency to tackle climate change grows, countries around the world are working to reduce emissions and transition to net-zero economies. At COP26 in Glasgow, India pledged to achieve net-zero emissions by 2070. This ambitious target raises two key questions: What pathways can lead to this goal, and how will they be financed? A working paper titled Inspecting the Impact of Financial Inclusion on Emissions in India by Saon Ray and Vasundhara Thakur of ICRIER focuses on the latter—highlighting the vital role of the financial system in mobilising resources for a sustainable transition.
A strong financial system is central to economic growth and development, notes the working paper. Governments have prioritised financial inclusion to broaden access to banking services, savings instruments, and credit. As more individuals and businesses participate in the financial system, the volume of financial resources grows. However, the way these resources are allocated is critical. When directed toward carbon-intensive sectors, emissions increase. In contrast, channeling funds into green investments can accelerate the shift to a low-carbon economy—demonstrating the complex link between financial inclusion and environmental outcomes.
This study examines how financial inclusion affects carbon emissions in India. Specifically, it investigates whether expanding access to financial services promotes sustainability or contributes to rising emissions. The analysis reveals a long-term relationship between financial inclusion and higher emissions in India, suggesting that increased access has largely financed carbon-intensive activities. We also explore whether financial development—measured as the efficiency and depth of financial institutions—modifies this relationship. The results show no statistically significant moderating effect.
Reluctance among banks and financial institutions to fund green projects—due to risks, uncertainty, or lower returns—further complicates the issue. This underscores the need for policy interventions that steer financial flows toward sustainable initiatives. India must adopt a dual strategy: continuing to expand financial inclusion while ensuring that additional financial resources support low-carbon investments. Removing barriers that discourage green financing is essential, stresses the working paper.
Meeting India’s net-zero commitment requires a comprehensive financing strategy that is both sustainable and just—promoting equity, inclusion, and economic opportunity. Financial literacy plays a key role in this transition. Initiatives like the National Centre for Financial Education and the National Strategy for Financial Education (2020–2025) aim to build financial knowledge and empower individuals and enterprises to make informed, sustainable investment decisions.
In conclusion, the working paper says, as India works toward its 2070 net-zero target, the financial system will play a pivotal role. While financial inclusion enhances access, the environmental impact depends on where financial resources are directed. Our findings suggest that current financial inclusion trends in India are associated with higher emissions, and financial development does not offset this effect. For a just and sustainable transition, India must align financial inclusion with climate goals—through better financial literacy, targeted policy incentives, and a stronger focus on sustainable finance. Doing so can unlock the potential of the financial system to drive inclusive, low-carbon economic growth.
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