India’s MSMEs must pare emissions and climate finance may be the nudge they need

Traditional funds are not enough for the MSME sector to achieve decarbonisation; we need to unlock international climate funds as well

The Micro, Small and Medium Scale (MSME) sector contributes around 30 per cent to India’s gross domestic product and employs around 120 million people. But at the same time, it generates around 110 million tonnes of CO2 equivalent, according to a report by the Center for the Study of Science, Technology & Policy (CSTEP) published in 2018.

Countries across the globe were urged to come forward and make commitments to attain net zero carbon emissions by 2050 during the 26th Conference of Parties (CoP26) to the United Nations Framework Convention on Climate Change at Glasgow, Scotland in 2021.

India also attended the conference and committed to two major goals. First, it would supply 50 percent of its energy needs through renewable sources by 2030. Achieving net zero carbon emissions by 2070 is the second goal.

The only way to do this is to gradually phase out the use of coal, increase investment in renewable energy sources, stop deforestation and speed up the transition to electric vehicles.

The STECF report also highlighted that the sector used 13 per cent (81 million tonnes) of the total coal / lignite, seven per cent (8.5 million tonnes) of petroleum products and eight per cent (3.3 billion cubic meters) of the natural gas supplied in India in 2015-16.

The MSME sector needs a push to adopt new technologies that quickly minimize its carbon footprints and make it less vulnerable to climate change and risk.

The sector can achieve this transformation with the help of climate finance. The credit gap is huge. Traditional funds alone cannot help the sector to become decarbonised.

Why climate finance?

The MSME sector in India faces a huge credit gap, which means the difference between the total supply of credit from formal channels in the country and the addressable demand.

According to a study conducted by the International Finance Corporation on ‘Financing India’s MSMEs’ in 2018, it was found that the credit gap was around $ 37 billion in 2010 and reached $ 3,30,75,60,00,000 in 2017. In 10 years, the gap compounded annually at a rate of 37 percent.

GRAPHSource: International Finance Corporation, 2018 Report

The report also highlighted the status of finance flow in the MSME sector. The overall debt demand of the sector is $ 8,88,42,60,00,000. But the irony is only $ 1,39,73,80,00,000 (16 percent) is catered to by the formal sector (commercial banks and government institutions) and the remaining $ 7,48,68,80,00,000 is catered to by the informal sector (including family, friends and family business).

Climate finance is money paid by developed countries (which are responsible for most of the historic emissions) to developing countries to help them pay for emissions reduction measures and adaptation.

Climate finance will open doors and enable the transfer of technology and expertise from developed to developing nations, which requires these resources and capacity to combat climate change at the rate that the world currently demands.

Accessing climate finance

Climate finance is still a fantasy for MSMEs, as many still struggle to obtain traditional financing. The challenges are caused by the following factors:

1. Lack of awareness: The MSME sector does not have awareness regarding climate finance structures and policies. Their knowledge of how their businesses may earn profit from climate finance is constrained by a lack of awareness on the subject and a lack of financial literacy.

For example, they would be unaware of the existence of modern, affordable carbon emission reduction technology or how using climate finance can help them manage some of their business risks.

2. Formal Financing structure: Only about 16 per cent of MSMEs in India have been found to be financed through the country’s formal banking system. Given that most climate finance in India is routed through formal financial frameworks with strict guidelines, this also imposes a major barrier on the sector to avail the benefit.

3. Comprehensive Procedural needs: Comprehensive procedures are needed to avail international climate funds procedures. These include the creation of a detailed project, energy and emission audit reports, etc. Many small and micro-businesses cannot implement these because they lack the means or the ability to do so.

Two people from the Center for Science and Environment, New Delhi, attended a roundtable on Financing Low Carbon Transitions for India’s MSME sector June 14.

The roundtable was attended by the people from the Union environment ministry, Small Industries Development Bank of India (SIDBI), United Nations Industrial Development Organization and various other renowned stakeholders who are working in the field of the MSME sector.

“The financial needs of the sector require innovation, such as incentives and blended-based financing in order to achieve low carbon pathways,” said Ruchika Drall, deputy secretary of the environment ministry. Drall added, “Digital means of finance and revamping of technologies will help the sector to grow.”

“For the MSME sector to grow, a blended approach is required; financial and technological aspects to be merged together, ”said Rajiv Kumar, general manager of SIDBI.

Debajit Das, national project coordinator at UNIDO, said, “Huge capacity building and awareness is required for the sector and MSMEs need to be linked with the digital framework.”

Way forward

The Indian government needs to work on strategies and try to bring finance to MSMEs so that the sector can decarbonise. In other words, climate finance should be routed to the MSME sector.

The sector needs to be connected with a more formal financial credit system, which will enable them to achieve climate finance and bridge the huge credit gap.

In addition to this, the major focus should be on the most accelerated aspects of decarbonisation like cleaner fuel, common combustion facilities and energy efficiency technologies that can achieve a high level of decarbonisation in the sector.


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