India has made substantial strides in fossil fuel subsidy reform since 2010, employing a strategic approach labeled as ‘remove,’ ‘target,’ and ‘shift,’ according to a recent report by the Asian Development Bank (ADB).
The ADB report highlights that India successfully balanced key policy levers—retail prices, tax rates, and subsidies for select petroleum products—resulting in an impressive 85% reduction in fiscal subsidies for the oil and gas sector. This decline marks a drop from a peak of $25 billion in 2013 to approximately $3.5 billion in 2023.
The ‘Asia-Pacific Climate Report’ from ADB outlines how India gradually phased out subsidies on petrol and diesel between 2010 and 2014, while also implementing incremental tax increases from 2010 to 2017. These measures created fiscal space for increased government investment in renewable energy, electric vehicles, and enhancements to electricity infrastructure. The additional revenue generated from excise duty hikes on petrol and diesel during a period of low international crude oil prices was redirected to improve access to and target subsidies for liquefied petroleum gas (LPG) usage among rural populations.
However, the report notes that the rising subsidies for LPG may necessitate improved targeting and the promotion of non-fossil fuel cooking alternatives.
Between 2010 and 2017, the Indian government also introduced a cess (tax) on coal production and imports. Approximately 30% of the revenues from this cess were allocated to a national clean energy and environment fund, which supported clean energy projects and research initiatives.
The ADB states that this cess significantly bolstered the budget of the Ministry of New and Renewable Energy during 2010–2017 and provided initial funding for the Green Energy Corridor scheme and the National Solar Mission. These initiatives have played a crucial role in reducing the costs of utility-scale solar energy and financing various off-grid renewable energy solutions.
However, following the introduction of the Goods and Services Tax (GST) in India after 2017, the cess on coal was absorbed into the GST compensation cess, which redirected funds to compensate states for revenue losses related to the new tax structure.
Consequently, India’s subsidy reforms and tax measures resulted in a notable decline in fossil fuel subsidies from 2014 to 2018. Although renewable energy subsidies peaked in 2017, they are currently experiencing renewed growth, supported by major initiatives aimed at solar parks, state-owned enterprises, and distributed renewable energy solutions.
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