Budget 2026: Paving the Way for Decarbonisation and Clean Energy

The Union Budget 2026–27 for the energy sector is anchored around two interlinked strategic themes: decarbonisation and strengthening clean energy supply chains. Together, these themes reflect a long-term structural shift rather than short-term fiscal incentives, indicating the government’s intent to reorient India’s energy economy for the coming decades.

Decarbonisation is evident in targeted support for technologies that address emissions from hard-to-abate sectors such as steel, cement and fertilisers. These sectors account for a large share of India’s industrial greenhouse gas emissions and cannot be fully decarbonised through renewables alone. The Budget’s allocation for carbon capture, utilisation and storage (CCUS), expansion of nuclear energy through small modular reactors (SMRs), and support for battery energy storage systems (BESS) collectively signal a technology-diversified approach to reducing carbon intensity while sustaining growth.

Strengthening supply chains complements this decarbonisation push by focusing on domestic manufacturing, logistics efficiency and critical mineral processing. Customs duty exemptions for inputs such as solar glass materials, permanent magnets, lithium-ion battery manufacturing equipment, and mineral processing capital goods indicate a conscious move to reduce import dependence, especially on China-dominated supply chains. This aligns with India’s broader goals of energy security and strategic autonomy.

The emphasis on inland waterways for mineral logistics further reinforces this vision. By connecting mineral-rich regions with industrial hubs and ports, the Budget integrates infrastructure development with clean energy manufacturing needs. Overall, the Budget reflects a shift from a demand-driven renewable expansion model to a systems-level transformation of the energy sector—one that integrates climate commitments, industrial policy, and geopolitical resilience. This long-term orientation is consistent with India’s net-zero target for 2070 and its aspiration to emerge as a global clean energy manufacturing hub.

The government’s decision to allocate ₹20,000 crore over five years for CCUS reflects a strategic, anticipatory policy approach rather than an assessment of current commercial viability. CCUS is not positioned as an immediate solution but as a future-enabling technology critical for deep decarbonisation of India’s industrial base.

India’s emissions profile is structurally different from many developed economies. A significant share of emissions arises from process-intensive industries like cement, steel and fertilisers, where electrification or renewable substitution alone is insufficient. For such sectors, CCUS remains one of the few viable pathways to achieve substantial emission reductions without undermining industrial output or employment. Early public investment helps overcome the classic “technology valley of death,” where private capital is unwilling to invest due to high costs, technological risks and uncertain returns.

The Budget allocation must also be seen in conjunction with the Department of Science and Technology’s CCUS roadmap released in December 2025. This roadmap emphasises R&D, pilot projects, human capital development and safety frameworks. Funding CCUS test-beds in real industrial environments through public-private partnerships allows India to adapt global CCUS concepts to domestic geological, logistical and economic conditions.

From a strategic standpoint, early investment also prevents future technological lock-in. As global carbon markets evolve and border carbon adjustment mechanisms (such as the EU’s CBAM) become more stringent, Indian industries without decarbonisation options may face competitiveness losses. CCUS preparedness can act as a hedge against such trade-related climate risks. Therefore, the investment is less about immediate deployment and more about building optionality, resilience and technological sovereignty in a carbon-constrained global economy.

The Budget’s nuclear energy provisions represent a strategic reaffirmation of nuclear power as a cornerstone of India’s low-carbon baseload energy mix. By extending customs duty exemptions for nuclear project imports till 2035 and promoting small modular reactors (SMRs), the government aims to overcome longstanding cost and scalability barriers in the nuclear sector.

Nuclear energy offers three key advantages in India’s decarbonisation pathway. First, it provides firm, dispatchable power that complements intermittent renewable sources such as solar and wind. Second, it has a very low lifecycle carbon footprint, making it suitable for achieving deep decarbonisation of the power sector. Third, it enhances energy security by reducing dependence on imported fossil fuels, particularly coal and gas.

The relevance of these measures is amplified by the SHANTI Act, 2025, which opened regulated nuclear generation to private participation. Private sector entry, supported by lower input costs, can accelerate capacity addition, improve project management efficiencies and foster innovation in reactor technologies such as SMRs. SMRs, in particular, are better suited for phased deployment, lower upfront capital requirements and integration with industrial clusters.

From a long-term perspective, the Budget aligns nuclear policy with India’s target of achieving 100 GW of installed nuclear capacity by 2047. This reflects a pragmatic recognition that a renewable-only grid may not be sufficient for a rapidly growing economy. By embedding nuclear power within the broader clean energy transition, the Budget balances climate goals with reliability, affordability and strategic autonomy.

Battery Energy Storage Systems (BESS) occupy a pivotal position at the intersection of decarbonisation, grid stability and industrial policy in the Union Budget 2026–27. Enhanced viability gap funding (VGF) and customs duty exemptions indicate that the government views storage not as an auxiliary technology but as core infrastructure for the energy transition.

On the positive side, BESS enables higher penetration of renewable energy by addressing intermittency and peak demand challenges. The two tranches of the VGF scheme—supporting over 43 GWh of storage capacity—signal a shift towards designing power tenders with integrated storage. This improves grid reliability, reduces reliance on fossil-based peaking power plants, and enhances overall system efficiency.

From an industrial policy perspective, extending customs duty exemptions to lithium-ion cell manufacturing equipment for BESS strengthens domestic manufacturing capabilities. Coupled with support for critical mineral extraction and processing, this reduces exposure to global supply chain disruptions and geopolitical risks. It also aligns with employment generation and value addition objectives under the ‘Make in India’ framework.

However, challenges remain. High capital costs, technology dependence on imported raw materials, recycling concerns, and environmental externalities associated with mining and disposal must be addressed. Without parallel investments in recycling, alternative chemistries and regulatory frameworks, BESS expansion could create new vulnerabilities. Therefore, while the Budget lays a strong foundation, its success will depend on complementary policies focused on sustainability, innovation and circular economy principles.

The Budget’s plan to operationalise 20 new national waterways demonstrates how infrastructure policy can directly support clean energy and critical mineral supply chains. By prioritising waterways that connect mineral-rich districts with industrial hubs and ports, the government aims to reduce logistics costs, emissions and regional disparities.

A case in point is National Waterway-5, which links Odisha’s mineral-rich regions such as Talcher and Angul with ports like Paradip and Dhamra. These regions are central to coal, iron ore and emerging critical mineral supply chains required for steel, battery manufacturing and renewable energy equipment. Water-based transport is significantly more energy-efficient and environmentally benign compared to road and rail, aligning with decarbonisation objectives.

Improved waterways also enhance supply chain resilience by diversifying transport modes. This is particularly important for bulky, low-value, high-volume commodities such as minerals, where logistics costs can determine global competitiveness. For clean energy manufacturing, predictable and cost-effective mineral flows are essential for scaling domestic production of batteries, solar panels and wind turbines.

Beyond economics, the waterways initiative supports regional development by integrating hinterland economies with global trade networks. However, careful environmental impact assessments, stakeholder consultations and governance mechanisms are necessary to ensure that ecological concerns and livelihood impacts are managed effectively. If implemented judiciously, inland waterways can become a strategic enabler of India’s clean energy industrial ecosystem rather than merely a transport project.