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Rethinking India’s Energy Subsidies Needed During Uncertain Times

A recent conversation with an oil industry executive—amid the COVID-19 crisis and the concurrent fall in oil demand, the oil price crash, and the economic slowdown—veered to a recurring theme: will the recovery from the pandemic slow down efforts to transition to a climate-resilient economy that prioritizes clean air and public health? When the ongoing pandemic abates, a massive stimulus package will be needed, but what does an economy like India turn to, to finance this stimulus?

Over the last four years, the International Institute for Sustainable Development and the Council on Energy, Environment and Water have been mapping India’s energy subsidies. The trend indicates a decline in India’s overall energy subsidies over the last five years, thanks largely to lower oil prices in this period. In 2018–19, some of the major subsidies for energy in India amounted to INR 1,74,400 crore or nearly 1 per cent of its GDP. Subsidies to electricity consumption and oil and gas account for more than 85 per cent of this number.

This is higher than the INR 1,70,000 crore COVID-19 relief package that was recently announced and just a shadow less than the annual public spending on health. When an economic downturn hits, focusing resources on the poor (thereby increasing their demand) and driving growth that is benign to the environment can pay rich dividends on public spending. Energy subsidy reform is a good starting point.

Perversely, India’s extant energy subsidy largely relies on high taxes levied on energy commodities. Taxing fossil fuels at these rates was a necessity for India, given the large import dependence and forex drain from imported petroleum products. Nearly 20 per cent of central government revenue comes from taxes, cesses, and dividends related to the production and consumption of petroleum products.

When international prices fall, the government raises taxes and mops up surpluses. Even now, the steep increase in excise duty for petrol and diesel is being diverted to create additional resources to tide the COVID-19 pandemic.

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