Overview

This working paper develops a comprehensive Green Budget Framework for Rajasthan and outlines concrete strategies for mobilizing green and climate finance to support its implementation. While anchored in Rajasthan's context, including its FY26 Green Budget and structural vulnerabilities such as water stress, agrarian risk, and climate-induced livelihood challenges, the framework is designed to be replicable across other Indian states pursuing climate-aligned fiscal planning.

The paper is structured in two interlinked sections. The first builds a conceptual understanding of green budgeting, draws comparative lessons from existing practices in Assam, Bihar, and Odisha, and proposes a five-step framework tailored to Rajasthan. The second translates this framework into a finance mobilization strategy, identifying sector-specific pathways across seven priority areas (Transport, Water Management, Waste and Pollution Management, Adaptation and Resilience, Land Use and Marine Resources, Energy, and Buildings) to crowd in private capital and unlock new sources of climate finance.

Key Highlights

• Green budgeting must move beyond expenditure tagging. The comparative analysis of Assam, Bihar, and Odisha shows that while all three states have institutionalised some form of tagging, gaps remain in green finance integration, standardised taxonomies, and deeper fiscal alignment. Assam and Bihar use the Rio Marker methodology, while Odisha's Climate Change Impact Appraisal (CCIA) model is more evolved, linking climate vulnerability to fiscal planning.
• Five core objectives anchor green budgeting: mainstreaming environmental sustainability into fiscal processes, enhancing transparency and accountability, enabling policy innovation, mobilizing green finance, and progressively raising allocations toward sustainability.
• Proposed five-step framework for Rajasthan: (1) identify climate-vulnerable sectors and relevant departments, (2) map objectives and scope of schemes/policies, (3) classify and tag activities using internationally recognised taxonomies, (4) categorise budget codes as 'green' for expenditure tracking, and (5) establish a feedback mechanism via a Green Budget Cell for continuous policy refinement.
• Rajasthan's FY26 Green Budget allocates about ₹2,78,538 lakh (11.34% of total state budget) across 63 departments, classified under Climate Mitigation & Adaptation or Environmental Sustainability, though the state has not yet articulated an explicit methodology.
• Sector-wise alignment with Climate Bonds taxonomy shows about 60% of green budget items overlap across multiple themes (energy, water, waste), and 8.5% have no clear alignment, indicating the need for a standardised classification system.
• Sector-specific finance mobilization pathways combine centrally sponsored schemes, MDB/BFI concessional credit (World Bank, ADB, AIIB, NDB, KfW), DFI funding (PFC, REC, IREDA, NABARD, NaBFID), Green Bonds, PPPs, InvITs, REITs, DMFT funds, and ringfenced state funds, tailored to each of the seven priority sectors.
• Project bundling is a key enabler for financial viability. Bundling by place, theme, asset type, scale, or stage reduces transaction costs, diversifies risk, and improves price discovery, making fragmented small projects attractive to private investors.

Recommended priorities: develop long-term investable project pipelines; enhance creditworthiness of state PSUs through guarantees, escrow mechanisms, and partial credit guarantees; empower PDCOR Ltd. or set up a dedicated transaction advisory body in collaboration with NIIF/NaBFID; align green investments with FRBM thresholds; and explore Green-SDLs, thematic bonds, carbon credits, and ecosystem-service payments to broaden the financing mix.