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.
OECD Inventory of Support Measures for Fossil Fuels: Country Notes
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India
Energy resources and market structure
Source: IEA (2022), "World energy statistics", IEA World Energy Statistics and Balances (database).
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.
Energy prices and taxes
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.
Figure 2. Total tax rebates and support for fossil fuels in India
1. Fiscal cost of support measures for fossil fuels are based on information reported by countries through official documentation (e.g. budget reports). Support measures for which such information is not available are excluded from the aggregate amount reported in this table. In addition, support measures in certain countries may not have been exhaustively identified.
2. Tax expenditures are estimates of revenue that is foregone due to a particular feature of the tax system that reduces or postpones tax payments (relative to a jurisdiction’s benchmark tax system) to the benefit of fossil fuels’ producers or users. Hence, (i) tax expenditures estimates can increase either because of greater concessions (relative to the benchmark tax system) or because of an increase in the benchmark itself; (ii) cross-country comparisons of tax expenditures can be misleading due to country-specific benchmark tax systems.
3. Support measures for fossil fuels are included in the Inventory without reference to their economic or environmental effects. No judgment is therefore made as to whether such measures are inefficient or ought to be reformed.
4. Data are expressed in nominal local currency. Data for 2022 are on a preliminary basis.
Source: OECD Inventory of support measures for fossil fuels (2023).
Recent developments and trends in support
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 1. Fiscal cost of support measures for fossil fuels (in billions of national currency)
|
2017 |
2018 |
2019 |
2020 |
2021 |
2022 |
|
|---|---|---|---|---|---|---|
|
Tax expenditures |
414.952 |
446.747 |
422.093 |
288.277 |
299.565 |
720.041 |
|
Direct transfers |
373.111 |
566.108 |
308.393 |
160.141 |
12.132 |
58.859 |
|
Total |
788.063 |
1012.855 |
730.486 |
448.418 |
311.698 |
778.900 |
1. Fiscal cost of support measures for fossil fuels are based on information reported by countries through official documentation (e.g. budget reports). Support measures for which such information is not available are excluded from the aggregate amount reported in this table. In addition, support measures in certain countries may not have been exhaustively identified.
2. Tax expenditures are estimates of revenue that is foregone due to a particular feature of the tax system that reduces or postpones tax payments (relative to a jurisdiction’s benchmark tax system) to the benefit of fossil fuels’ producers or users. Hence, (i) tax expenditures estimates can increase either because of greater concessions (relative to the benchmark tax system) or because of an increase in the benchmark itself; (ii) cross-country comparisons of tax expenditures can be misleading due to country-specific benchmark tax systems.
3. Support measures for fossil fuels are included in the Inventory without reference to their economic or environmental effects. No judgment is therefore made as to whether such measures are inefficient or ought to be reformed.
4. Data are expressed in nominal local currency. Data for 2022 are on a preliminary basis.
Source: OECD Inventory of support measures for fossil fuels (2023).
Table 2 highlights a selection of support measures associated with a large fiscal cost. A description of these measures is provided in Table 3.
Table 2. Selected support measures for fossil fuels with a large fiscal cost (in billions of national currency)
|
Measures associated with large fiscal cost in 2022 |
2022 |
2017 |
Variation since 2017 |
|
|---|---|---|---|---|
|
Tax expenditures |
||||
|
Central excise duty on petrol and diesel was reduced |
400.000 |
(Started in 2022) |
400.000 |
|
|
Customs Duties Reductions on Mineral Fuels and Mineral Oils |
320.041 |
325.106 |
-5.066 |
|
|
Direct transfers |
||||
|
LPG subsidy to women of Below Poverty Line (BPL) families |
45.750 |
(Started in 2022) |
45.750 |
|
|
Subsidies to Oil Companies for Transporting Natural Gas to the Northeastern Region |
8.110 |
2.824 |
5.286 |
|
|
Detailed Drilling Non-CIL Blocks |
2.736 |
1.197 |
1.539 |
|
1. Fiscal cost of support measures for fossil fuels are based on information reported by countries through official documentation (e.g. budget reports).
2. Tax expenditures are estimates of revenue that is foregone due to a particular feature of the tax system that reduces or postpones tax payments (relative to a jurisdiction’s benchmark tax system) to the benefit of fossil fuels’ producers or users. Hence, (i) tax expenditures estimates can increase either because of greater concessions (relative to the benchmark tax system) or because of an increase in the benchmark itself; (ii) cross-country comparisons of tax expenditures can be misleading due to country-specific benchmark tax systems.
3. Support measures for fossil fuels are included in the Inventory without reference to their economic or environmental effects. No judgment is therefore made as to whether such measures are inefficient or ought to be reformed.
4. Data are expressed in nominal local currency. Data for 2022 are on a preliminary basis.
Source: OECD Inventory of support measures for fossil fuels (2023).
Table 3. Description of selected support measures for fossil fuels
|
Central excise duty on petrol and diesel was reduced |
The central excise duty on petrol and diesel was reduced by INR 8/litre and INR 6/litre, respectively (these are equivalent to 7.0-8.5% fall in retail prices of petrol and diesel depending on states). This government measure follows the one introduced in last November. The estimated FY22 revenue loss of the states from tax cut is around INR1 trillion (USD 13 billion). |
|
Customs Duties Reductions on Mineral Fuels and Mineral Oils |
Customs duty on goods is levied under the Customs Act, 1962 at rates specified in the First Schedule to the Customs Tariff Act, 1975 (commonly referred to as basic customs duty - BCD). Rates for export duty are given in the Second Schedule to the 1975 act. In addition, the 1975 act also provides for two further duties: countervailing or CV duty and Special Additional Duty, or SAD. These are the “tariff rates”. However, the Customs Act of 1962 delegates powers to the central government to prescribe duty rates lower than the tariff rates (the “effective rates”). Thus, while the first schedule sets out standard rates of duty at 10% (petroleum being a notable exception at 5%), a range of different rates apply. For example, in 2015-16, crude oil, domestic LPG, domestic propane and butane, and kerosene distributed through the Public Distribution System all attracted a zero rating while diesel and gasoline attracted a rate of 2.5%. Custom duty on coking coal was nil until 2013-14 when it was increased to 2.5%, the rate for bituminous coal was reduced from 5% to 2.5% in 2014-15. |
|
LPG subsidy to women of Below Poverty Line (BPL) families. |
The Cabinet Committee on Economic Affairs, chaired by the Honourable Prime Minister Shri Narendra Modi, has approved a subsidy of Rs.200 per 14.2 kg cylinder for up to 12 refills per year to be provided to the beneficiaries of Pradhan Mantri Ujjwala Yojana (PMUY). As of 1 March 2023, there are 9.59 crore PMUY beneficiaries. The total expenditure will be Rs.6 100 crore for financial year 2022-23 and Rs.7 680 crore for 2023-24. Public Sector Oil Marketing Companies namely Indian Oil Corporation Ltd. (IOCL), Bharat Petroleum Corporation Ltd. (BPCL) and Hindustan Petroleum Corporation Ltd. (HPCL) have already been providing this subsidy since 22 May 2022.Subsidy of Rs.200 per 14.2 kg cylinder for up to 12 refills per year to be provided to the beneficiaries of Pradhan Mantri Ujjwala Yojana (PMUY), a scheme to distribute 50 million LPG connections to women of Below Poverty Line (BPL) families. |
|
Subsidies to Oil Companies for Transporting Natural Gas to the Northeastern Region |
This measure was enacted in 2002 and aims to increase the affordability of natural gas in the energy-scarce north-eastern region of India. The central government has pegged the price of natural gas in the said region to USD 2.52 per MBtu, which amounts to 60% of the APM price of USD 4.2 per MBtu. To compensate oil companies for these lower retail prices and for the higher transportation costs involved, the central government provides them with an annual allowance. |
|
Detailed Drilling Non-CIL Blocks |
The second stage of coal exploration – detailed exploration involving drilling and geological assessment – is largely funded by the relevant coal company. However, the Ministry of Coal funds some detailed drilling in captive mining blocks and in blocks not assigned to CIL, which is conducted by CMPDI. The rationale for providing funding is to reduce the time lag between offering the blocks to potential entrepreneurs and their starting operation. The cost of exploration, in turn, will be recovered from entrepreneurs who have been allotted the blocks. |
Data sources
Note on the Methodology
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.