Bridging Gaps: Financial Inclusion as a Tool for Climate Resilience in India

Policy Update
Mukti Bari

In a developing country such as India, climate change has disrupted lives to an extent far greater than we can imagine. We are already aware of the large financial disparity that persists in our nation, and that those who are least responsible for our climate dilemma are the most susceptible to it. 

Increasing frequency and spread of disease, low crop yields, and water scarcity are all issues that most of India’s population, barring the small percentage of well-to-do elites, are already facing. According to the World Economic Forum, developing countries have a window of opportunity to put mitigating policies in place. Hence, the path to resilience may lie in a surprising place: financial inclusion. Could the key to a sustainable future be as simple as access to a bank account?

Background

Financial inclusion is necessary in ensuring that every individual has access to essential financial services, while effective climate change policies are crucial for building a sustainable future. The intersection of these two areas presents an opportunity for our country to strive to develop resilient yet inclusive growth strategies that can withstand the adverse effects of climate change. While financial inclusion has been a key area of focus for past and present governments, there is some mention of climate-related mitigation in most of them. 
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Figure 1. Financial Inclusion and Climate Adaptation in Low-Income households

A study by Chhatre et al. (2023) showed that financial inclusion relieves rural households of the burden of retaining liquid assets, a benefit that grows in proportion to climatic risks. Each household is also able to reallocate resources to purposes that are most suitable for and closely connected with individual livelihood portfolios thanks to such a decentralized benefit. With public investments in adaptation, a central planner cannot achieve the cumulative economic benefits of a distributed pattern of investments, especially in light of the lack of detailed knowledge about household-level risks and possibilities (Figure 1). 

The Pradhan Mantri Jan Dhan Yojana has been making significant strides in bringing banking services to the unbanked population. Moreover, initiatives such as the PM Surya Ghar Muft Bijli Yojana (2024) have been a step in the right direction, as a transformative initiative aimed at providing up to 300 units of free electricity each month to one crore households for rooftop solar installations. This ensures that there is usage of clean and affordable energy in households in India. The scheme is expected to produce 1000 billion units of electricity, contributing to a substantial reduction in CO2 emissions. It not only promises significant savings on electricity bills for households but also offers opportunities to earn income through surplus power generation.

Intersection of Financial Inclusion and Climate Change

The intersection of financial inclusion and climate change policies offers an opportunity to build a more inclusive economy where most of the country’s population has the tools to safeguard themselves from the ill-effects of climate change. Financial inclusion ensures that even individuals and businesses in remote or underserved areas have access to essential financial resources, letting them invest in sustainable practices. This access facilitates the adoption of green technologies, improvements in energy efficiency, and measures to mitigate climate risks.

For instance, microfinance institutions have played a pivotal role in financing solar power projects in rural regions previously. By providing small loans, these institutions help reduce dependence on fossil fuels, thereby promoting clean energy and contributing to environmental sustainability. Hence, financial inclusion is a good pathway to climate mitigation. 

Infact, a study conducted in India found that while farmers adjusted to weather fluctuations (monsoons) by changing irrigation and crop choices, they only recovered 15% of profits lost. Substantial financial barriers may prevent farmers from adapting effectively to harmful impacts of climate change (IPA, 2024). For example, farmers may not have capital or credit available to invest in better seeds or technology such as irrigation. Additionally, they might not have access to affordable insurance products that can mitigate losses caused by extreme weather patterns.

Hence, access to financial services, such as insurance, significantly improves the resilience of vulnerable populations to climate-related shocks. Crop insurance, for example, can protect farmers from the financial losses caused by extreme weather events. This allows them to recover and rebuild their livelihood more quickly, without further losses. Similarly, access to credit empowers individuals and small businesses to invest in climate-resilient infrastructure. This can include flood-resistant housing or drought-resistant crops, thereby improving their capacity to withstand the negative impacts of climate change.

The National Action Plan on Climate Change (NAPCC), launched in 2008, serves as our overarching framework for addressing climate challenges. It comprises eight national missions, each focusing on different aspects of climate action, including the promotion of solar energy, enhancing energy efficiency, and sustainable agriculture. Infact, the first mission amongst the 8 is: ‘Protecting the poor through an inclusive and sustainable development strategy, sensitive to climate change’. Hence, it is imperative that the government comes up with more such strategies that make finance more accessible to the most climate vulnerable populations. So far, there is no explicit link between these two. 

Performance and Impact

Programs like the PMJDY have made significant progress in expanding access to financial services, but their impact on climate resilience remains limited. This is because evaluating the effectiveness of these initiatives requires a more nuanced approach that considers both financial access and environmental sustainability, as we are looking at policies that serve the purpose of financial inclusion, but not necessarily climate mitigation.

For instance, while the PMJDY has enabled millions of people to open bank accounts, it is unclear how many of these accounts are being used to finance climate-related projects. Similarly, while the NAPCC’s missions have promoted the use of clean energy and energy-efficient technologies, their impact on financial inclusion is less evident. To better understand the effectiveness of these policies, it is essential to track not only the number of people who gain access to financial services but also how these means are being used to support climate resilience.

Way Forward

  1. Policy Collaborations: Improvement of policy understanding and foster collaboration between financial and environmental ministries. When these ministries work together, they can create and implement policies that support both financial inclusion and climate resilience. For instance, introducing dedicated climate finance products like green bonds or low-interest loans for sustainable projects, could make a significant difference. Targeting these products at low-income households and small and medium-sized enterprises (SMEs) through existing financial inclusion initiatives, such as the Pradhan Mantri Jan Dhan Yojana (PMJDY), would ensure broader access.
  2. Public-Private Partnerships: Encouraging public-private partnerships can be good for developing financial products that serve both inclusion and sustainability goals. Collaboration between government agencies and companies could harness their individual strengths (access and knowledge of the government paired with the efficiency and sector expertise of private sector businesses) to create solutions addressing the dual challenges of climate change and financial exclusion.
  3. Financial Literacy:  Increasing awareness of climate risks are essential steps toward empowering citizens to make informed decisions. Financial literacy programs should be integrated into climate education, especially in rural areas, helping people understand how financial services can play a role in building climate resilience. 

To encapsulate, by equipping individuals with the knowledge, skills and resources to access and effectively use these services, we can foster a society that is both more resilient and inclusive. But before that, the government needs to recognize that this is a possibility for tremendous positive and impactful change, by empowering communities to be financially prepared to face challenges that may or may not be avoided by our own actions in the future. 

References

About the Contributor: Mukti Bari is a research intern at IMPRI. She is a student of Economics pursuing her B.A. at Symbiosis School for Liberal Arts.

Acknowledgment: The author would like to thank Dr. Arjun Kumar, Aasthaba, Meenu, and Srishti for their help and guidance with this article 

Read more at IMPRI:

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