India
India is one of the world’s fastest growing energy markets. It is the world’s second-largest coal producer, and the second largest coal net importer to meet its coal demand, behind the People’s Republic of China. India also had proven oil reserves of 4.4 billion barrels in 2020 and relies heavily on imports which account for 87% of crude oil supply. Most crude oil and natural gas reserves are located along the country’s western continental shelf.
Coal India Ltd. (CIL) occupies the bulk of coal extraction in the country, and together with other public entities, accounts for about 95% of the total market, a virtual monopoly. In response to rising domestic shortages, external imports of coal have surged so much in the last five years that in January 2020, the government announced the opening of coal mining to all companies, to attract more investments into the sector. Unlike CIL however, private investors will be required to bid for mines.
State-owned companies also command a large share of the market in all segments of the oil and gas sector. In the past, the regulated pricing of petroleum products discouraged the entry of private companies into the downstream segment. However, in 2002, the government liberalised the petroleum sector by allowing private sector in retail. This act was followed in 2007 with the establishment of an independent domestic regulator (PNGRB) to regulate the Indian midstream and downstream sectors.
In a push for universal electrification, the Government launched the Pradhan Mantri Sahaj Bijli Har Ghar Yojana (SAUBHAGYA) in October 2017, reducing the number of unelectrified households to less than 0.01% of the total population. Most electricity distribution companies, predominantly publicly owned, remain financially strapped with frequent delays in paying to generators.
In India, the Government regulates energy prices to protect domestic consumers from international volatility. Coal prices inside the country are not aligned to international prices. The Ministry of Coal allocates coal supplies to priority sectors such as electricity generation. As prescribed by the 2003 Electricity Act, tariffs for electricity generation and transmission charged by companies owned by the central government are regulated by the Central Electricity Regulatory Commission, whereas those for generation, transmission and distribution charged within the state are determined by each state’s Electricity Regulatory Commission. Natural gas is priced according to the new domestic pricing guidelines, in effect since April 2014, which differ from the previously more restrictive Administrative Pricing Mechanism (APM) in that benchmark global gas rates are now taken into consideration.
On 1 June 2017 India implemented a major tax reform introducing a Goods and Service Tax (GST) regime to replace several indirect taxes including the Central Excise Duty and Value Added Tax. This implied a change in taxation for coal products, kerosene, liquefied petroleum gas (LPG) and petrochemical products. However, this reform did not cover crude oil, natural gas and key petroleum products including gasoline (locally known as petrol), diesel and aviation fuel. The Government has been periodically increasing excise duties on gasoline and diesel with significant increases implemented in May 2020, taking advantage of the low international crude oil prices to generate additional tax revenues to support economic recovery from the impact of COVID-19. Conversely, the government slashed taxes in November 2021 and again in May 2022, when crude oil prices surged upwards. A coal cess (tax), introduced in 2010, has since been revised three times and currently stands at USD 5.36 per tonne of coal consumed.
Most of the support for fossil fuels in India is targeted towards consumers in the form of direct transfers for the purchase of petroleum products such as kerosene and LPG. The support has decreased sharply since its peak in 2012 because of the reform process initiated by the government in order to reduce fiscal deficits. The price of petrol and diesel has been de-regulated, with the government progressively increasing prices until levels were achieved to eliminate subsidies in the second half of 2014. In 2014, the government introduced direct benefit transfers (DBT) to support individual households purchasing LPG cylinders for cooking purposes. In May 2016, the government launched the Pradhan Mantri Ujjwala Yojana (PMUY) scheme to provide LPG connections to Below Poverty Line families. As of January 2020, over 80 million households have been connected having met the revised targets. Consequently, these schemes, along with high crude oil prices, led to a sharp increase in LPG consumer subsidies between 2017-2020. When the crude oil price crashed in April 2020, the government suspended DBT for all domestic LPG consumers and sustained it for two years despite crude oil price recovery. In May 2022, it was reintroduced only for the PMUY beneficiaries. Even though the government has provided three free LPG cylinder refills to PMUY beneficiaries for household relief during COVID-19 induced lockdowns, the net LPG subsidies have reduced by 85% between 2019-20 and 2020-21 and a further 99% by 2021-22. In the same period, consumer subsidies to kerosene have been completely phased out with no future allocation budgeted. Since November 2021, there have been long periods of price freeze for gasoline and diesel which have sparked concerns of under-recoveries re-emerging in 2022. Continuing PM Garib Kalyan Anna Yojana, the government has introduced reduction in fuel costs to almost the levels before Russia’s war of aggression against Ukraine, which sent crude oil prices soaring.
The fiscal cost of support measures for fossil fuels in India was estimated at INR 778.90 billion in 2022 (Table 1). Ninety-nine per cent (99%) was directed at end user beneficiaries, as opposed to 1% directed to firms. Support was mainly given out in the form of tax expenditures (INR 720.04 billion) accounting for 92% of the total fiscal cost of support measures. Direct transfers amounted to INR 58.86 billion.
The fiscal cost of support measures for fossil fuels has decreased by 1% since 2017. Since last year, tax expenditures have increased by 146%, from INR 299.57 billion to INR 720.04 billion and direct transfers increased by 29%, from INR 12.13 billion to INR 58.86 billion. All growth rate percentages above are expressed in terms of nominal national currency amounts.
Table 2 highlights a selection of support measures associated with a large fiscal cost. A description of these measures is provided in Table 3.
Aggregate numbers from the Inventory represent the fiscal cost of support measures for fossil fuels. They should not be interpreted as a level of support for fossil fuels, nor as an indicator of the extent to which the considered policies are favourable or unfavourable to climate mitigation.
The Inventory reports tax expenditures as estimates of revenue foregone due to measures that reduce or postpone tax payments relative to a jurisdiction’s benchmark tax systems to the benefit of fossil fuels producers or users. Tax expenditure estimates can thus increase over time due to either an increase in the offered concession (relative to benchmark tax systems) or an increase in the benchmark itself. Cross-country comparisons of tax expenditures can also be misleading due to differences in countries’ benchmark tax systems.