Fossil fuel subsidies are intended to protect consumers by keeping prices low. Still, it comes with sizable fiscal costs, promoting inefficient allocation of an economy’s resources and encouraging pollution without being targeted at people with low incomes. Fossil fuel subsidy removal also reduces energy security concerns related to volatile fossil fuel supplies.
Recent estimates reveal that renewable energy subsidies in India fell by 59% to Indian Rupees (INR) 6,767 crore (USD 846 million) after peaking at INR16,312 crore (USD 2.039 billion) in financial year (FY) 2017. This was because deployment slowed during COVID-19 pandemic-induced lockdowns, and grid-scale solar photovoltaics (PV) and wind achieved cost parity. It is also worth noting that electric vehicle (EV) subsidies have more than tripled since FY 2017 to INR 849 crore (USD 106 million) in FY 2021.
India’s subsidies for fossil fuels, such as coal, oil, and gas, have dropped by 72% to INR 68,226 crore (USD 8.528 billion) between FYs 2014-21. However, subsidies in FY 2021 are still nine times higher than renewable energy subsidies. Notably, India provided more than INR 540,000 crore (USD 67.500 billion) to support the energy sector in FY 2021, including nearly INR 218,000 crore (USD 27.250 billion) of subsidies. (https://carboncopy.info/subsidies-for-fossil-fuels-nine-times-higher-than-renewable-energy-study/)
Coal subsidies have also fallen from INR 22,327 crore (USD 2.790 billion) in FY 2014 to INR12 976 crore (USD 1.622 billion) in FY 2021. The most significant chunk of subsidy, worth INR 12,268 crore (USD 1.533 billion) in FY 2021, was a concessional 5% general sales tax (GST) rate against a benchmark of 18 % applied to other minerals, which reduces input costs for coal power generation. It is noteworthy that coal does not require government subsidies because it is a fully established energy technology. Instead, subsidies appear driven by a desire to keep electricity affordable.
India faced a power crisis linked to coal shortages in October 2022. Experts found that the crisis was due to poor demand projections by distribution companies, high international coal prices, inadequate stockpiling by power plants, and supply disruptions due to a longer-than-expected monsoon. As India appears to be battling another power crisis and coal shortage, it is considering reopening coal mines. In the budget for FY 2023, plans were announced to support four pilot projects for coal gasification and conversion of coal into chemicals. Such plans, however, may emit even higher levels of CO2 than burning coal directly.
Oil and gas subsidies also fell from INR 2, 24,199 crore (USD 28.025 billion) in FY 2014 to INR 55,250 crore (USD 6.900 billion) in FY 2021. This is partly due to variations in international crude prices since FY 2014 but also because of fossil fuel subsidy reforms, including removing diesel and kerosene subsidies.
Significant oil and gas subsidies include the lower GST rate of 5% for domestic LPG, against the benchmark rate of 18% worth INR 14,721 crore (USD 1.840 billion), and LPG connection subsidies to Pradhan Mantri Ujjwala Yojna (PMUY) beneficiaries worth INR 9,235 crore (USD 1.154 billion). In May 2022, India reintroduced liquefied petroleum gas (LPG) subsidies for the beneficiaries of the PMUY scheme in an attempt to target subsidies to low-income consumers.
While the data above includes only central-level oil and gas subsidies, significant subsidies also exist at the sub-regional levels. Fuel subsidies for fishermen and farmers, who use diesel pumps for fishing activities and irrigation, have seen a jump of 142%, from INR 304 crore (USD 38 million) in FY 2016 to INR 736 crore (USD 92 million) in FY 2019. While oil and gas subsidies have fallen significantly, 2023 will be a critical year for maintaining existing reforms as the energy crisis becomes a global concern in response to the war in Ukraine. As mentioned earlier, renewable energy subsidies have fallen by 59% after peaking in FY 2017. However, the study pointed to several existing policies and new commitments suggesting a rise in manufacturing subsidies, decentralised renewables, and green hydrogen.
In contrast to renewables, EV subsidies have more than tripled since FY 2017. During the year, India announced a production-linked incentive program to attract investments in domestic manufacturing of EVs and components. With manufacturing receiving a boost, clean energy financing will be the next step to further scale-up deployment.
Among public finance institutions (PFIs), it’s not easy to identify any data on annual lending for fossil fuel and clean energy due to a lack of data availability. For power, the three biggest PFIs alone disbursed INR190,116 crores (USD 23.765 billion) in FY 2021. Among financial institutions (FIs), public sector banks (PSBs) had the lowest outstanding credit for clean energy at only 4.3% of all energy-related outstanding credit.
In FY 2021, India’s seven leading public sector undertakings (PSUs) invested 11 times more in fossil projects than renewable energy, risking lagging behind their private sector counterparts, who are announcing bold plans to capture a share of future clean energy markets.
Notably, the private sector banks have stopped financing coal power with the Reserve Bank of India (RBI); India’s central bank data also suggests that private sector banks are providing a larger share of clean energy finance than their public counterparts sector. Despite the concerns of large-scale asset stranding, no PFIs appear to have concrete and firm plans to phase out finance for fossil fuels.
At COP 26 in Glasgow, India committed to taking its non-fossil energy capacity to 500 GW by 2030 and achieving the net zero target by 2070. In August 2021, India surpassed 100 GW of installed renewable energy capacity, excluding large hydro. With the country’s visibly fast-expanding power consumption trends and demand, India needs predictable financial resources to meet domestic demand and industrial activities. India may target its fossil subsidies primarily towards the large swathe of its poor and vulnerable population in the lead-up to 2024, India’s parliamentary elections, occupying the government’s electoral attention. (https://www.iea.org/reports/fossil-fuels-consumption-subsidies-2022)
Fossil fuel subsidies are also, per se, an intricate function of domestic politics and geopolitics, including broader foreign policy imperatives beyond energy economics and climate action pathways. As a result, India is no exception to this predicament.
This Post was submitted by Climate Scorecard India Country Manager Pooran Chanra Pandey