A year ago, the Chief Economic Advisor of India notably observed that economic growth, fiscal sustainability and climate action constitute a trilemma for India. All three cannot be pursued simultaneously. It was a stark admission of the brutal trade-offs facing a developing economy. At present, while the framing remains largely intact in the Economic Survey 2025-26 and the Union Budget, there are early indications that this trade-off may not be as rigid as it once appeared.Understanding the trilemmaClimate action requires money. According to the Centre for Social and Economic Progress, at least USD 54 billion per year (1.3% of the Gross Domestic Product [GDP] annually) will be needed for the mitigation of just four key sectors – power, steel, road transport and cement – up to 2030. Meanwhile, the annual adaptation bill ranges from USD 14 billion to USD 67 billion, according to the Climate Policy Initiative. Being largely a public good, aimed at protecting people from the severity of climate impacts, the adaptation is predominantly expected to be funded by the government. For mitigation or decarbonisation, while some green technologies have reached price parity, many still require government support to be adopted at scale or de-risked, particularly because the cost of capital for private players remains very high. All this together puts a significant strain on fiscal stability and public funds available for other development goals.Although global negotiations on climate finance for the Global South have centred on international financial flows from the Global North, these flows have been unreliable and insufficient for impactful climate action. National and sub-national governments have been expected to plan public finances to fill the climate finance gap, in addition to their existing development and fiscal stability responsibilities. Studies show that public financial support may not be able to meet the required financing, suggesting that increased domestic private savings must play a key role, supported by a policy push. Consequently, if climate action is a priority, countries like India must shift their focus towards strengthening their own domestic financial systems and enabling them to mobilise the required finance.Where is private sector money stuck?India is one of many developing economies with high savings, although the savings rate has declined since 2008, after reaching a peak of 38% of GDP. Household savings, which constitute the largest share, have historically been parked in low-risk instruments, such as short-term bank fixed deposits and illiquid gold and real estate assets. According to the Reserve Bank of India’s ‘Financial Stocks and Flow of Funds of the Indian Economy’ report, the gross cumulative value of household-owned financial assets as of 2022-23 is Rs 340 lakh crore, of which nearly 50% (Rs 165 lakh crore) is held as deposits and other shorter-term instruments (which grew by Rs 14.05 lakh crore from 2021-22). While these investments are aligned with the risk-averse nature of households (providing stable, risk-free returns), their short-term and illiquid nature prevents them from being utilised for climate action and other long-term development projects. Further, savings had not been channelled into long-term debt securities that could fund climate and development. Households held only about Rs 4.5 lakh crore in debt securities cumulatively over decades – a stock equal to just one year’s estimated mitigation needs.However, they held Rs 107 lakh crore with long-term guarantee institutions (LTGIs), including insurers, pension funds, and other standardised guarantee providers. The long-term nature of those holdings makes them a perfect match for the 20-40-year lifespans of climate and development projects. But without secondary markets, LTGIs cannot price or sell them, making them too risky to invest in. Consequently, they default towards standard, safer, medium-term securities, such as government bonds with a ~10-year maturity.A game-changing financial reform that isn’t a carbon tax?To direct household savings more effectively in service of the trilemma, one of the ways proposed in the Economic Survey is tax rationalisation of debt instruments. Income earned from debt securities (whether through interest earned or capital gains) is currently included with taxable income and taxed at the appropriate income tax slab rate (30%-42%). However, rationalisation would imply that long-term capital gains and interest income from debt securities would be taxed at 12.5%, similar to how equity holdings are taxed. Equity holdings are not compatible with the requirements of long-term climate and development finance because they have no maturity period, do not guarantee returns, and can be risky. The tax rationalisation would make debt securities much more attractive than deposits, thereby incentivising households to shift more of the Rs 165 lakh crore towards debt securities directly, creating a significant secondary market.This will create a multiplier effect, as stronger demand for debt securities boosts LTGIs’ confidence and encourages them to channel a larger share of their Rs 107 lakh crore into bonds supporting climate and development projects. Together, they can significantly improve the flow of domestic private savings towards climate and development with nearly no additional public expenditure.While the 2026 Union Budget does not adopt this tax rationalisation measure, it signals movement in the same direction by proposing a market-making framework for corporate bonds and introducing instruments, such as total return swaps, to improve liquidity and price discovery in debt markets.A silver lining for mitigationIndia’s climate action narrative has always been shaped by a development-first approach, with adaptation increasingly coming into focus over the past few years. For a developing country with a large vulnerable population already facing severe climate impacts, this emphasis on development and adaptation is entirely understandable. This year’s Economic Survey and Union Budget, while still firmly aligned with this broader narrative, have quietly laid the foundations for successful mitigation and decarbonisation. Mitigation activities, much like long-term infrastructure, require large upfront capital and deliver stable returns over time; therefore, they stand to benefit from deeper capital markets and lower taxation of debt instruments. So, although these reforms are not explicitly about climate change mitigation, they may be the most consequential step India can take to fund its green transition.Krithika Ravishankar is a senior associate and Ramya Natarajan is a research scientist in the Climate Change Mitigation team at the Center for Study of Science, Technology and Policy (CSTEP), a research-based think tank.