New Delhi, 6 November 2024. ADB Commends India’s Approach to Subsidy Reform and Clean Energy Investment
India made tremendous progress in fossil fuel subsidy reform over the past decade through gradual steps toward reform in subsidies and taxation policies while furthering the country’s renewable energy policy, said a new Asian Development Bank report. These have featured in the ADB’s Asia-Pacific Climate Report in an effort to show that recalibrated “remove, target, and shift” has been instrumental in lowering the fiscal burden while ensuring higher support for cleaner sources of energy.
Since 2010, Indian policy reforms have resulted in an 85% cut in subsidies to the oil and gas sector; from a peak US$25 billion in unsustainably fossil fuel subsidies in 2013 down to US$3.5 billion by 2023. ADB said this was possible because of carefully calibrated adjustments in three important areas: retail prices, tax rates, and selected petroleum products’ subsidies. The country has successfully realigned massive government spending toward renewable energy projects, clean cooking options, and the electrification of rural areas.
Elimination of Subsidies on Petrol and Diesel
The most notable achievements for India have been the gradual elimination of subsidies on petrol and diesel. Between 2010 and 2014, the government had made moves to curtail reliance on fossil fuel subsidy by increasing retail prices, and eventually, it had eliminated subsidies from petrol. By 2014, subsidies on diesel were also eliminated, and the country had taken a completely different approach towards fossil fuel consumption.
From 2014 to 2017, at a time when world prices for crude oil hovered low, the Indian government gradually increased excise duty on petrol and diesel. Tax revenue thus generated served to provide the fiscal space within India to extend support for renewables and EV infrastructure and improvements in the electricity supply, specifically extending coverage in rural, as well as other neglected and remote, areas of India. These tax increases, along with relieving the fiscal burden of subsidies, helped the country move toward cleaner sources of energy, ADB reports.
Increased LPG Subsidies and Clean Cooking Initiatives
India invested some of the added tax revenue in expanding access to LPG among poor rural households besides reforms in petrol and diesel subsidies. To target subsidy reform, the government would focus on LPG as a cleaner alternative to traditional biomass fuels. Therefore, the government aimed to enhance indoor air quality while reducing health risks associated with cooking on open fires.
However, the ADB report now suggests that expanded LPG subsidies may further need to be refined towards effective targeting and support towards the development of non-fossil-fuel cooking alternatives. As the need grows for innovative, cleaner ways of cooking, India may also have to balance the continued subsidization of LPG usage with investments in renewable alternatives like solar-powered cookers furthering its environmental objectives.
Introduce Coal Cess for Fund of Clean Energy
The Indian government has also introduced a coal cess from 2010-2017 for funding its clean energy shift. It taxes the coal produced in the country and imported to the country. Almost 30% of the revenue is kept in the National Clean Energy and Environment Fund, the clean energy project funding pool as well as environmental research funding. It basically helped MNRE in bringing financial help during its startup phase for various significant plans such as the National Solar Mission and the Green Energy Corridor.
The coal cess turned out to be the seed money required to trigger the scaling of utility-scale solar, reducing the cost of light from the sun to a relatively accessible price across the country and enabling finance for many off-grid renewable energy solutions that brought much-needed electricity to remote parts of the country.
However, the ADB report states that the GST, which was introduced in 2017, merged the coal cess into the structure of the compensation cess under GST. As a result, money allocated for clean energy projects diverted to compensate the states for this new taxation system’s losses that it incurred. That further increased the demand for other sources of funding for the clean energy projects of India.
Growth in Renewable Support
The leading incentives of Indian clean energy targets include targeted reforms of fossil fuel subsidies and also rises in investments in renewable energy. “Overall, the fossil-fuel subsidies collapsed between 2014-18”. Renewable energy subsidies hit peak in 2017. Renewable energy financing levels did briefly flatten out. The report says, however that clean energy subsidies are crept upward again.
The government initiatives have placed special emphasis on solar energy-related projects, such as Solar Parks and Distributed Renewable Systems. Encouragement has also been provided to SOEs and privates, and India is now emerging as a global leader in renewable energy development activities. These initiatives will make it possible for India to realize the ambitions of 500 GW Renewable Energy capacity by 2030 that have been part of its commitment in the Paris Agreement.
He said that it is because of the National Solar Mission, the Green Energy Corridor-a program initially funded by coal cess, that utility-scale solar energy has become more price-competitive now. Solar parks, in conjunction with government support to solar on rooftops, have significantly increased the availability of renewable energy across the entire nation and has reduced the dependency on coal-based power generation.
The Path Forward: Challenges and Opportunities
Subsidy reforms in India, especially those related to fossil fuels, have provided opportunities and challenges. Indeed, the country has had tremendous success in aligning fiscal policies with environmental goals; however, according to the ADB report, the momentum of this transition should be maintained through continuous efforts.
The least fossil fuel subsidy that has become available now brings the opportunity of LPG subsidy refining, a push toward alternative sources of energy as a cooking fuel, and innovative financing solutions for renewables. The GST compensation coming from cess on coal will definitely raise question marks on funding clean-energy initiatives in the long term; therefore, the alternative sources of revenue supporting a renewable project will be quite crucial to sustain India’s trajectory of the clean energy economy.
This would be significant as ADB’s Asia-Pacific Climate Report reveals that the fact that effective decrease in India’s fiscal reliance on fossil fuel subsidies during the time it has fostered the investments into renewable energy infrastructure is more because of the type of policy response developed by it. In addition, though this report points towards the need to keep the mechanisms for fine-tuning the subsidy targeting especially in the LPG sector and investment in alternative energy solutions such as solar, wind, electric mobility among others to the fore, the onus would remain on the whether the country is able to achieve its targets for 2030 or not.
With the solid foundation that has been laid out over a decade of fossil fuel subsidy reform, India is well-poised to take the lead in furthering renewable energy as a model for other developing countries in Asia-Pacific.