By Swasti Raizada, Tara Laan, Medha Manish, Balasubramanian Viswanathan
India’s energy subsidies fell by 3% in FY 22, but this hides important trends: subsidies for clean energy increased, while fuel tax cuts shielded consumers from soaring oil prices.
India’s energy sector is changing rapidly in response to increasing demand, the rise of clean energy, and the energy security imperative. Government policies—particularly financial support—are hugely influential in determining how the sector develops, including the direction of private sector investments, energy access, and the benefits and costs for the people of India. Mapping India’s Energy Policy is a resource to help the Government of India and others make the energy sector more equitable, secure, and aligned with the government’s target to achieve net-zero emissions by 2070.
This review presents an update of our last estimates of government support for energy in India, extending the data to include FY 22 for the first time. We find that subsidies for fossil fuels, renewables (RE), and electric vehicles (EVs) in India totalled INR 2.25 lakh crore (USD 30 billion) in FY 22. In addition to subsidies, we estimate capital expenditure by public sector undertakings (PSUs, also known as state-owned enterprises) (INR 1.5 lakh crore, or USD 20 billion) and lending by public finance institutions (PFIs) (INR 1.3 lakh crore, USD 18 billion). Together, these three forms of support totalled at least INR 5 lakh crore (USD 68 billion) in FY 22. To provide a more complete picture of the impact of energy on government budgets, we also provide updated data on government revenues from energy and estimates of key social costs associated with energy production and consumption. For details on our methodology, see Mapping India’s Energy Policy, 2022.
Subsidies for RE doubled in FY 22, the first increase since FY 17, driven by a 155% jump in the installation of solar photovoltaic (PV).
In FY 22, we identified 28 Central Government policies subsidizing renewable energy, totalling INR 11,529 crore (USD 1.5 billion). This includes a one-time capital infusion to the Indian Renewable Energy Development Agency (IREDA) and the Solar Energy Corporation of India (SECI) amounting to INR 2,500 crore (USD 0.3 billion) to increase their operations in the renewable sector.
Subsidies to renewables peaked in FY 17 at 41% above FY 22 levels (INR 16,312 crore, or USD 2.2 billion) but fell in response to policy uncertainty. This uncertainty was due to the ending of the first tranche of subsidies under the Jawaharlal Nehru National Solar Mission (national program); the imposition of the Goods and Services Tax (GST) on renewable energy projects in 2017; a safeguard duty on solar cells and modules from 2018; and an on-again-off-again imposition of Basic Customs Duty on PV cells and modules. In FY 22, we see a rebound in response to greater policy stability and the post-COVID-19 economic resurgence.
In October 2021, the Government of India set a target of 450 GW of renewable energy capacity by 2030 and later at the 26th Conference of the Parties (COP 26) to the UN Framework Convention on Climate Change, the Prime Minister announced a revised goal of 500 GW of non-fossil capacity by 2030. Ultimately, the government adopted a more flexible target of 50% cumulative electric power installed capacity from non-fossil fuel-based energy resources (i.e., including nuclear) by 2030 under its revised Nationally Determined Contributions (NDC). The 450 GW of renewable capacity target has been retained domestically and features in national planning documents.
Meeting the commitment to achieve 450 GW of renewable capacity by 2030 will require more than tripling current capacity (~160 GW in 2022). While the growth of RE is driven by private capital (see the section on PFIs), public capital needs to play a bigger role to accelerate installations to achieve the government’s target and for nascent technologies like battery storage and green hydrogen until they become commercially viable and attract more private capital.
Subsidies for EVs increased 160% from FY 21, reaching a record high of INR 2,358 crore (USD 0.3 billion) in FY 22.
The post-COVID-19 economic resurgence was evident in the increased uptake of EVs, and an associated uptick in EV subsidies. In 2021, electric vehicles (EVs) accounted for 1.1% of total vehicle sales but this share is expected to reach 39% by 2027. Around 95% of EVs registered in 2021 were two- and three-wheelers.
The main EV subsidy program is the Faster Adoption and Manufacturing of (Hybrid and) Electric Vehicles scheme, which paid out a record high (for the program) of INR 800 crore (USD 0.1 billion) in FY 22. But the majority of the program’s INR 10,000 crore (USD 1.3 billion) funds allocated in FY 20 were unspent by end FY 22 and the program has been extended to FY 24, using existing funds. Other major EV subsidies were GST concessions on vehicle sales.
Subsidies for the domestic manufacturing of EVs and advanced batteries are likely to increase from FY 23 as the Central Government implements its Production Linked Incentive (PLI) Scheme for Automobile and Auto Component Industry and PLI scheme for Advanced Chemistry Cell Battery Storage, which were allocated INR 25,938 crore (USD 3.5 billion) in FY 22 and INR 18,100 crore (USD 2.4 billion) in FY 21, respectively, each to be dispersed over 5 years.
Electric vehicle charging station in Jamshedpur, Jharkhand, India. (iStock)
Electric vehicle charging station in Jamshedpur, Jharkhand, India. (iStock)
Despite the positive news on clean energy support, subsidies for fossil fuels remained over four times higher than subsidies for clean energy in FY 22.
Subsidies for coal, fossil gas, and oil totalled INR 60,316 crore (USD 8.1 billion) and have fallen by 76% between FY 14-FY 22 in real terms. But they remain more than four times the subsidies for renewables and EVs at INR 13,887 crore (USD 1.9 billion). Continued support for fossil fuels is out of step with India’s energy access, energy security, and climate change objectives.
Renewables are the lowest-cost source of electricity and, together with EVs and electric cooking, can reduce reliance on price-volatile and geopolitically risky international energy markets. The long-term solution to the energy crisis lies in reducing demand for fossil fuels and increasing investment in renewable energy and other low-emissions technologies. One way to achieve this change is to shift subsidies from fossil fuels to renewables and emerging clean technologies, also known as a fossil fuel to clean energy swap.
Oil and gas subsidies fell by 28% in FY 22—but this does not account for foregone revenue from cuts in excise and VAT on fuel.
Subsidies to oil and gas in FY 22 were substantial, totalling INR 44,383 crore (USD 5.9 billion), primarily subsidies to domestic liquefied petroleum gas (LPG): preferential GST rates and losses by India’s state-owned oil marketing companies (OMCs) due to fixed LPG pricing. The Center committed to reimbursing OMCs for their losses on sales of domestic LPG between June 2020 and June 2022, with a bailout of INR 22,000 crore (USD 3 billion). While LPG subsidies were sizable in FY 22, they were lower than those provided in FY 21. Total oil and gas subsidies fell from FY 21 to FY 22 due to a reduction in funding for two consumer LPG programs: the Direct Benefit Transfer-LPG (DBTL, also known as Pratyaksh Hanstantrit Labh, PAHAL) and the Ujjwala (LPG connections for the poor) schemes.
However, these numbers do not tell the full story. The prices of petrol and diesel have been frozen since November 2021, with only a minor adjustment of INR 10 (USD 0.1) per litre in March 2022, despite large increases in the international price of oil (see chart below, "Petrol and Diesel Prices"). This could have resulted in large losses for the OMCs. Instead, the fuel price freezes were absorbed in FY 22 by cuts in excise by the Central Government (see chart below, "Petrol and Diesel Prices"), and cuts in VAT on fuel by the States and Union Territories (UTs). Remarkably, we observed no net OMC under-recoveries for petrol and diesel in FY 22. Significant under-recoveries were observed in the first quarter of FY 23, but these might be recovered if international oil prices continue to fall. At the time of writing, prices remained frozen and this was expected to continue, given ongoing tight oil supplies.
The revenue loss associated with the reduced excise was forecast by the Minister of Finance to be INR 1.2 lakh crore (USD 14.7 billion) per year for the November 2021 cut and INR 1 lakh crore (USD 13.4 billion) per year for the May 2022 excise reduction. Our estimates accord with this forecast: INR 49,559 crore (USD 6.65 billion) in FY 22, that is, around half of the full year estimate provided by the Minister for the November tax cut. We were unable to accurately estimate foregone revenue from VAT given all states and UTs have different VAT rates.
We do not include the fuel tax cuts in our subsidy totals given India applies a flexible approach to fuel taxation as part of its tax system. The variable approach to excise and VAT on fuel results in the absence of a clear benchmark for determining subsidies. The foregone revenue estimates by the Minister of Finance and IISD use the October 2021 excise rate as the benchmark and cannot be considered the default tax rate, which changes regularly.
Energy OMCs have been permitted to adjust retail petrol and diesel prices daily in line with costs since 2014, which marked the end of a long period of fuel price fixing that had huge financial costs. For example, in FY 11 under-recoveries on fuel totalled INR 78,190 crore (USD 17 billion). Between FY 14 and FY 21, fossil fuel subsidies decreased 72%, mostly due to market-based pricing of gasoline and diesel.
The re-emergence of price freezes, an ad hoc approach to price setting, and cuts in fuel excise are therefore major concerns. The longer price freezes continue, the more politically challenging can be the return to dynamic pricing. Future fossil fuel prices are difficult to predict and could remain above historical averages, resulting in long-term revenue losses or under-recoveries. It is also harder to ensure good governance of subsidies that are conferred through tax cuts and under-recoveries, and to track their flow-on impacts on government budgets, which may take place through bailouts, reduced dividends, and lower tax revenue. Instead, the Central Government should allow the OMCs to return to market-based pricing and put in place a transparent and revenue-neutral mechanism to adjust taxes temporarily to respond to high international prices.
The government’s motive in fixing prices—to protect consumers and the economy from high global prices—is understandable. And India is not alone in using tax reductions to shelter households and businesses from the energy crisis. But all countries need to put in place better ways to support households and businesses that do not involve supporting polluting fossil fuels. These include temporary cash transfers, improved public and clean transport options, and diversification into clean energy. Maintaining tax rates can generate the revenue required to fund such alternatives. This is not the world’s first energy crisis—but it ought to be the last one in which the main coping mechanism is fixing fossil fuel prices.
Coal subsidies increased 15% and domestic coal prices remain unchanged for a fourth year in a row.
Government subsidies for coal amounted to INR 15,933 in FY 22 (USD 2.1 billion), largely due to GST concessions on coal sales. Coal subsidies remained relatively unchanged from FY 18 to FY 22. However, the prices set in consultation with the Central Government for domestically produced coal have not been raised in 4 years, despite rising international coal prices and input costs, such as diesel. Coal India Limited, which mines over 80% of domestic coal, has sought to raise coal prices, but government shareholders were reluctant to do so during a period of high inflation. Meanwhile, spot market prices were 150% above regulated prices. This has capped input costs for thermal power generation, but we were unable to quantify this price support.
Main bazaar in Paharganj, India. (iStock)
Main bazaar in Paharganj, India. (iStock)
Electricity subsidies remain very large at INR 151,500 crore (USD 20.3 billion), dwarfing all other subsidy categories.
The largest subsidy for electricity transmission and distribution (T&D) was below-cost electricity pricing to support consumers, funded through state government subsidies to power distribution companies (DISCOMs: for more detail see Unpacking India’s Electricity Subsidies). T&D subsidies remained about the same as FY 22 and consistent with the FY 17 to FY 22 average of INR 131,000 crore (USD 17.6 billion) per year. This indicates that, despite schemes to reform subsidies, progress has been slow.
Subsidized electricity pricing has caused tremendous financial strain on state governments. In FY 22, the state debt was between 18% (Maharasthra) and 53% (Punjab) of state GDP, with the power sector accounting for much of the financial burden. The Central Government provides financial support through debt restructuring and infrastructure schemes. The 2015 Ujjwal DISCOM Assurance Yojana scheme is a Central Government bailout that required DISCOMs to improve their financial performance. However, DISCOM finances continue to worsen, with gross debt estimated to be INR 6 lakh crore (USD 80.5 billion) in FY 22. The 2021 Revamped Distribution Sector Scheme is a Central Government initiative that will provide budgetary support of INR 97,631 crore over 5 years for electricity supply infrastructure, but only INR 1,000 crore (USD 134 million) was allocated in FY 22.
India’s electricity generation is forecast to grow by 1.6 times from 2021 to 2030 and by almost four times by 2050 (based on modelling by the International Energy Agency that assumes India’s climate and clean energy pledges are met). Without reform, T&D subsidies will also expand, putting even more pressure on government budgets. A major review of the effectiveness of existing subsidies at helping the poor and assessment of alternatives is needed, such as that outlined in How to Target Electricity and LPG Subsidies in India. Options include improved targeting of support toward low-income households and the replacement of low-priced electricity with cash payments (direct benefit transfer for electricity).
PSUs are ramping up their capital expenditure, which provides a historic opportunity to diversify into clean energy.
India’s energy sector is dominated by PSUs. Decisions taken by energy PSUs are hugely influential in shaping India’s energy market, with substantial consequences for energy supply, government revenue, jobs, communities, and emissions. PSUs remain heavily invested in fossil energy. Between FY 14 and FY 20, India’s seven largest PSUs invested 11 times more in fossil projects than clean energy.
As part of its post-COVID-19 economic stimulus strategy, the Central Government directed energy sector PSUs to increase their capital expenditure (capex). Combined capex of these PSUs was INR 1,46,321 crore (USD 19.6 billion) in FY 22, the vast majority of which (88%) comes from the seven largest PSUs, who primarily operate in the fossil fuel sector. However, there is room for growth, as aggregate investment across the PSUs was still below pre-COVID-19 levels.
The capex push provides an opportunity for the fossil-dominated PSUs to diversify into clean energy and capture new markets. The major energy PSUs have announced investment goals in clean technology like EVs and green hydrogen along with new partnerships. Gas Authority of India Limited and Indian Oil Corporation Limited have pledged to achieve net-zero in their own operations by 2040 and 2046, respectively. Moving from goals to investments is urgently needed. Fossil-dominated business models and revenue streams face significant financial risks in a net-zero by 2070 aligned pathway, including from stranded assets and falling income from fossil fuel consumption. For example, in a detailed analysis, it was estimated that Coal India Limited’s financial risk from increased climate ambition could be offset by increasing its targeted solar PV capacity installations by 4.4 times.
Achieving India’s climate ambitions will require a major step up in international and domestic public sector financing to crowd in private investment.
Meeting the government’s earlier commitment to achieve 450 GW of renewable capacity by 2030 has been estimated to require INR 2.1 lakh crore (USD 28 billion) per year in investments from 2022 to 2029, a doubling from the current level of INR 1.1 lakh crore (USD 14.5 billion) in FY 22. Public sector financing—both international and domestic—have a major role to play in crowding in private investment.
Based on our analysis, as of January 2022, multilateral climate funds pledged to provide INR 8,700 crore (USD 1.2 billion) toward energy projects in India. Less than half of this pledged financing (44%) had been received—67% in the form of concessional loans and 29% as grants. Further, out of the total debt financing for new-build renewable energy projects in India between 2019 and 2021, only 6% came from domestic PFIs, as defined in Mapping India’s Energy Policy 2022).
The Government of India has stepped in to support domestic lending. As the largest government financier of renewable energy, IREDA has increased its lending to clean energy projects by 64% in FY 22 over last year. In January 2022, the Central Government allocated INR 1,500 crore (USD 0.2 billion) to IREDA which partly led to this credit growth in renewable energy and EVs.
Energy revenues from the Central Government, States, and UTs totalled INR 9 lakh crore (USD 120 billion) in FY 22, up 7% from FY 21.
Energy revenue from the Central Government, States, and UTs was 19% of all government revenue. The majority (69%) of energy revenue was derived from two measures: Central Government excise and state-level VAT on diesel and petrol. Revenues from these two measures have doubled in real terms since FY 15 (the first year for which full data are available) from INR 3.1 lakh crore (USD 41 billion) to INR 6.2 lakh crore (USD 83 billion).
Revenue from excise would have been higher had the Central Government not reduced the excise rate on petrol and diesel (in November 2021 and again in May 2022) to ease consumer prices (see oil and gas section). The revenue losses in FY 23 will be partially offset by revenue from the Central Government’s windfall profits tax (see Policy Insight: India’s windfall profits tax, below).
Revenues from renewable energy more than doubled in FY 22, reaching INR 3,510 crore (USD 0.47 billion), reflecting an uptick in installations. Revenues are likely to increase further in FY 23 with the imposition of the Basic Customs Duty on solar PV parts and components, as long as the duty does not dampen demand.
India’s windfall profits tax
On 1 July 2022, India imposed a windfall profits tax on oil producers and refiners that were benefiting from high international oil prices: INR 23,250 (USD 312) rupees per tonne on oil producers; and export duties of INR 6 (USD 0.08) per litre on gasoline and jet fuel and INR 13 (USD 0.17) per litre on diesel. Restrictions were also put in place requiring oil companies exporting gasoline to sell 50% of production to the domestic market and 30% for diesel.
The taxes were adjusted several times over the following months. Additional revenue from the windfall taxes could be in the range of INR 30,000 crore to INR 40,000 crore (USD 40 billion to USD 53 billion) in FY 23. This revenue should not just offset gasoline and diesel under-recoveries, but also be used to accelerate the transition to renewable energy and EVs, which offer a long-term solution to dependence on international oil.
Social costs of energy were at least four times higher than government revenues.
Energy is a source of revenue but also of costs. External costs (or “externalities”) are those not captured in market prices, such as the financial impact of air pollution and climate change. Mapping India’s Energy Policy provided an estimate of several key externalities of fossil fuels and renewables in India. For FY 22, we used updated consumption and emissions data to estimate externalities of fossil fuels between INR 14 lakh crore and INR 35 lakh crore (USD 200 billion to USD 500 billion), with the range reflecting uncertainty about the extent and cost of impacts.
The single largest externality was the impact of climate change from the combustion of coal, which was estimated to be between INR 595,000 crore and INR 1,906,000 crore (USD 80 billion to USD 256 billion) per year. The social cost of air pollution was also large, estimated at between INR 241,000 crore and INR 490,000 crore (USD 32 billion to USD 36 billion) per year. Renewable energy social costs were primarily related to grid-integration costs and were estimated to be between INR 12,900 crore and INR 17,900 crore (USD 1.8 billion to USD 13.7 billion).
Despite these high external costs, the government has rolled back coal-washing mandates and pushed back compliance dates for pollution caps from thermal plants. These measures to support the coal business can cost several times more in social damages.
Many externalities were not quantified, and, therefore, even the less-conservative estimate is likely to understate the cost of all energy externalities. Please see Mapping India’s Energy Policy for externalities considered, methods, and assumptions.
Align energy policies with the Net Zero by 2070 target in three ways:
- Shift government support from fossil fuels to clean energy
- Mandate state energy companies and financial institutions to implement net zero plans
- Maintain fossil fuel revenues and use them strategically to help people and businesses transition.
© 2022 The International Institute for Sustainable Development
Published by the International Institute for Sustainable Development.
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