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The nexus of climate-finance and MSMEs in India

Every single financial policy has a climate impact, be it direct or indirect. In India, climate change has always been difficult to resolve, especially since climate finance has always posed a problem herein. While many understand the importance of it, few understand the mechanism behind it. So far, the Government of India’s policies were centric towards making a long-term impact on climate change but faced the problem of short-term budgetary cycles. The Short-Term budgetary cycle is a tool exercised by the government annually to finance its objectives. Our climate commitments and projects have been forward-looking, promising, and more importantly, for the “long term”. However, as the state of the economy fluctuates, and priorities of the government re-orient, these cycles remain inconsistent and impractical to address climate change. For instance, India has focused on “coastal sector” in one cycle, and shifted it to “carbon emissions” in the next. Some might argue that this mechanism helps to be responsive and flexible towards pertinent issues which are time sensitive. However, divesting funds from one sector dilutes the net effect and reduces the accountability on the government.

This is concerning, as they could easily abandon previous issues and have no incentive to remain committed to deeper problems. India has not employed advanced mechanisms to assess the fund requirement for tackling climate change. International institutions have attempted to resolve this issue efficiently. They are turning their eyes on India as an emerging partner for clean energy. Partners such as the USA have used the “Climate Action and Finance Mobilisation Dialogue” (CAFMD) to help India in building resilience and flexibility, thus tackling the deficiencies of short-term budgetary cycles. Consequently, India is now the cheapest place to build solar farms, and is one of the most active nations keen on inviting greener solutions. The Common but Differentiated Responsibility and Respective Capability (CBDR–RC) principle, within the United Nations Framework Convention on Climate Change (UNFCCC), is paramount to India; it acknowledges that every country has different responsibilities, and ours should be to cater the needs of MSMEs to make them green. The IMF too, raises concerns on the budgetary cycles and emphasises on “Green Public Financial Management” (Green PFM).

Climate Finance is a lever for various solutions, from carbon taxation to cleaner energies. Moreover, Climate Finance can’t be mechanised in a compact, narrow-led approach since it requires foreseeability and commitment. Since the very nature of these cycles is unstable and unpredictable, corporates are hesitant to invest in our ecosystem despite being receptive to “green financing”. India faces structural problems around this mechanism. This cycle is the “heart” of a plan, as all solutions offered would ultimately revolve around a smooth facilitation Firstly, politics post the 1990s were haphazard and the consequent need for a “bottom-up” approach was clearly felt. A bottom-up approach empowers the ground-level administrators to work for climate change. Moreover, it aims to incentivise them by giving them the freedom to come up with creative and disruptive ideas. A bottom-up approach significantly reduces the burden of state-level actors involved in project monitoring and puts a decentralised structure for change.

Such an approach leads to localisation of solutions. India should be wary of current global approaches because she faces a unique business situation. While approaches like the EU ETS have been successful, India should ensure “the little man”, or MSMEs are not burdened/exploited as predatory practices by large corporations were witnessed in this approach. Secondly, shorter-cycles do not foresee the scalability of existing resources and the need to shift to “cleaner sources''. In the 2000s, there was clearly a lack of emphasis on potential alternatives for green energy. Consequently, most of the MSMEs focused on using conventional sources of energy such as coal, petroleum, and lacked the incentive to explore alternatives. So, a sudden shift in the energy requirements of these industries requires a huge amount of “Green Finance''.

Developed nations have pushed India towards climate-friendly policies but using their persuasive authority comes with a corresponding responsibility. They are responsible for financing MSMEs to cleaner alternatives because they possess the “technical know-how” and are unwilling to offer generous deadlines to develop indigenous sources for green energy. Otherwise, MSMEs will face a mounting pressure from consumers, who are becoming increasingly environment-centric, and the government, which is vouching for ambitious deadlines while it has limited capacity. Supporting MSMEs becomes important as they are highly concentrated and contribute significantly to the GDP (for example, 37.54% of the GDP in 2021). MSMEs are the backbone to the heavy-industrial sector, and are often ignored by foreign investors because of comparatively lesser returns. To elucidate, the MSMEs are burdened, they are unable to secure funding, especially from the developed nations, to “shift” to greener alternatives.

As per a leading report by McKinsey, even consumers wish to associate themselves with them. Thirdly, India has faced the problem of informational asymmetry, lack of transparency and a pluralistic interpretation of green finance. Thus, it needs to establish a green “taxonomy” to facilitate green bonds, foreign funding, and VCs since the focus is on green infrastructure. It reflects environmentally conscious decisions and helps to tap investors from ABS (Assets Backed Securities) because private equity players wish to associate with investor-friendly environment policies. Furthermore, IMF-issued guidelines in regards to accreditations and standardised methods for climate-friendly approaches should be incorporated so that local products could compete on a global scale.

To conclude, the government should focus on MSMEs as the most “relevant” and “vulnerable” stakeholder- burdened to swiftly shift green. The bottom-down administrative approach would also empower local officers to frame objectives and institutional arrangements (for example, asking them to identify climate-friendly clean projects). Assisting MSMEs to greener routes should be a mandatory requirement for conglomerate businesses as part of their “CSR” operations. While the current market is porous for huge investments, the government should categorise MSMEs under a basket of tags, and work on quality reviews relevant with international standards. This would incentivise investors to ambiguously fund the smaller companies. In the end, the public is increasingly becoming cognizant of the effects of climate change. Public Participation in PFM, and their expectations from short-term and medium-term budgetary cycles foster accountability in the government.

Pratul Malthumkar
Undergraduate Student at SRCC

References

IMF-Climate-Sensitive Management of Public Finances—”Green PFM”

OECD Journal on Budgeting

PIB, Government of India-Climate Action and Finance Mobilisation Dialogue (CAFMD)

European Commission-EU ETS review

MSME, Government of India: Annual Report 2020-21

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