2024-11-02 10:57:00
India has since 2010 made noteworthy progress on fossil fuel subsidy reform through a calibrated ‘remove’, ‘target’, and ‘shift’ approach, the Asian Development Bank (ADB) said in a new report.
“By carefully balancing the combined effect of three key policy levers – retail prices, tax rates, and subsidies on selected petroleum products – the country was able to reduce its fiscal subsidy in the oil and gas sector by 85 per cent, from an unsustainable peak of $25 billion in 2013 to $3.5 billion in 2023,” it said.
In its ‘Asia-Pacific Climate Report’, ADB said India gradually phased out the subsidy on petrol and diesel (from 2010 to 2014) and carried out incremental tax increases (from 2010 to 2017), which created fiscal space to increase government support for renewable energy, electric vehicles, and strengthening of electricity infrastructure.
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“The additional tax revenues from increases in excise duty on petrol and diesel from 2014 to 2017, a period of low international crude oil prices, were also redirected to improve access and target subsidies for expanding the use of liquefied petroleum gas (LPG) among the rural poor,” it said.
Subsidies for LPG have since grown and “may now require efforts to improve targeting and to incubate non-fossil-fuel cooking alternatives,” it said.
From 2010 to 2017, Government of India introduced a cess (tax) on coal production and imports. Around 30 per cent of the cess collections were channelled to a national clean energy and environment fund that supported clean energy projects and research.
ADB said the cess significantly contributed to strengthening the budget of Ministry of New and Renewable Energy during 2010–2017 and provided the initial funds for the country’s Green Energy Corridor scheme and its National Solar Mission, which helped bring down the cost of utility-scale solar energy and fund many off-grid renewable energy solutions.
“However, with the introduction of Goods and Services Tax (GST) in India after 2017, the cess on coal production and imports was subsumed within the country’s GST compensation cess, the flows of which were redirected to compensate states for revenue losses associated with the new tax regime,” it said.
As a result of India’s subsidy reforms and taxation measures, the country’s fossil fuel subsidies plummeted from 2014 to 2018.
“Its renewable energy subsidies also reached a peak in 2017 but are now once again growing, with major support schemes targeting solar parks, state-owned enterprises (SOEs), and distributed renewable energy,” the report said.
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Asian Development Bank headquarters
**Interviewer:** Welcome to today’s segment where we are discussing the recent findings about fossil fuel subsidies in India as highlighted by the Asian Development Bank. Joining us is Dr. Aditi Sharma, an energy policy expert and researcher at the Institute for Sustainable Development. Thank you for being here, Dr. Sharma.
**Dr. Aditi Sharma:** Thank you for having me.
**Interviewer:** The ADB report notes that India has made significant strides in reducing fossil fuel subsidies. Can you elaborate on the ‘remove, target, and shift’ approach that has been effective in this reform?
**Dr. Aditi Sharma:** Absolutely. Since 2010, India has implemented this strategic approach to gradually phase out unsustainable subsidies. The ‘remove’ aspect focused on eliminating subsidies for petrol and diesel over a few years, while ’targeting’ involved redirecting those fiscal savings to support renewable energy initiatives and help the rural population access liquefied petroleum gas, or LPG.
**Interviewer:** That’s impressive progress! The report mentions an 85% reduction in fiscal subsidies in the oil and gas sector from a peak of $25 billion in 2013 to $3.5 billion in 2023. How has this impacted the renewable energy sector?
**Dr. Aditi Sharma:** The fiscal space created by reducing fossil fuel subsidies has been crucial. The additional tax revenues that came from increased excise duties were reinvested into renewable projects and initiatives like the National Solar Mission. This funding has not only helped lower the cost of solar energy but has also facilitated investments in energy infrastructure.
**Interviewer:** However, the report also highlights challenges, especially with the growth of LPG subsidies. Can you tell us more about the current situation and the need for targeting in this regard?
**Dr. Aditi Sharma:** Yes, while LPG subsidies have benefited many rural households, there’s an increasing need to improve how these subsidies are targeted. We must ensure that they reach the most vulnerable populations effectively. Furthermore, there’s an opportunity to explore alternative cooking methods that do not rely on fossil fuels, aligning with our long-term sustainability goals.
**Interviewer:** Interesting! Also, with the implementation of the Goods and Services Tax, how has that affected the cess on coal production and the funding for renewable energies?
**Dr. Aditi Sharma:** After GST was introduced, the cess on coal was integrated into a new tax regime, which unfortunately diverted those funds from clean energy projects towards compensating states for revenue losses. This shift has certainly put a strain on the financial support previously allocated for renewable energy initiatives.
**Interviewer:** As we look ahead, what are the key areas India should focus on to balance fossil fuel use and renewables?
**Dr. Aditi Sharma:** First, India needs to continue refining its subsidy mechanism to support disadvantaged communities while transitioning towards cleaner energy. Second, increasing investment in advanced renewable technologies, like battery storage and grid improvements, will be critical. Lastly, public awareness and education campaigns on the benefits of renewable energy can also drive community support and participation.
**Interviewer:** Thank you, Dr. Sharma, for sharing your insights on this important topic. It’s clear that while India has made remarkable progress in subsidy reform, there’s much work to be done for a sustainable energy future.
**Dr. Aditi Sharma:** Thank you! It’s essential we keep the conversation going on sustainable policies as they shape our energy landscape.
