Mapping India's Energy Policy 2022

Oil and gas subsidies fell by 28% in FY 22—but this does not account for foregone revenue from cuts in excise and VAT on fuel.

Subsidies to oil and gas in FY 22 were substantial, totalling INR 44,383 crore (USD 5.9 billion), primarily subsidies to domestic liquefied petroleum gas (LPG): preferential GST rates and losses by India’s state-owned oil marketing companies (OMCs) due to fixed LPG pricing. The Center committed to reimbursing OMCs for their losses on sales of domestic LPG between June 2020 and June 2022, with a bailout of INR 22,000 crore (USD 3 billion). While LPG subsidies were sizable in FY 22, they were lower than those provided in FY 21. Total oil and gas subsidies fell from FY 21 to FY 22 due to a reduction in funding for two consumer LPG programs: the Direct Benefit Transfer-LPG (DBTL, also known as Pratyaksh Hanstantrit Labh, PAHAL) and the Ujjwala (LPG connections for the poor) schemes.

However, these numbers do not tell the full story. The prices of petrol and diesel have been frozen since November 2021, with only a minor adjustment of INR 10 (USD 0.1) per litre in March 2022, despite large increases in the international price of oil (see chart below, "Petrol and Diesel Prices"). This could have resulted in large losses for the OMCs. Instead, the fuel price freezes were absorbed in FY 22 by cuts in excise by the Central Government (see chart below, "Petrol and Diesel Prices"), and cuts in VAT on fuel by the States and Union Territories (UTs). Remarkably, we observed no net OMC under-recoveries for petrol and diesel in FY 22. Significant under-recoveries were observed in the first quarter of FY 23, but these might be recovered if international oil prices continue to fall. At the time of writing, prices remained frozen and this was expected to continue, given ongoing tight oil supplies.

The revenue loss associated with the reduced excise was forecast by the Minister of Finance to be INR 1.2 lakh crore (USD 14.7 billion) per year for the November 2021 cut and INR 1 lakh crore (USD 13.4 billion) per year for the May 2022 excise reduction. Our estimates accord with this forecast: INR 49,559 crore (USD 6.65 billion) in FY 22, that is, around half of the full year estimate provided by the Minister for the November tax cut. We were unable to accurately estimate foregone revenue from VAT given all states and UTs have different VAT rates.

We do not include the fuel tax cuts in our subsidy totals given India applies a flexible approach to fuel taxation as part of its tax system. The variable approach to excise and VAT on fuel  results in the absence of a clear benchmark for determining subsidies. The foregone revenue estimates by the Minister of Finance and IISD use the October 2021 excise rate as the benchmark and cannot be considered the default tax rate, which changes regularly.

Coal subsidies increased 15% and domestic coal prices remain unchanged for a fourth year in a row.

Government subsidies for coal amounted to INR 15,933 in FY 22 (USD 2.1 billion), largely due to GST concessions on coal sales. Coal subsidies remained relatively unchanged from FY 18 to FY 22. However, the prices set in consultation with the Central Government for domestically produced coal have not been raised in 4 years, despite rising international coal prices and input costs, such as diesel. Coal India Limited, which mines over 80% of domestic coal, has sought to raise coal prices, but government shareholders were reluctant to do so during a period of high inflation. Meanwhile, spot market prices were 150% above regulated prices. This has capped input costs for thermal power generation, but we were unable to quantify this price support.

PSUs are ramping up their capital expenditure, which provides a historic opportunity to diversify into clean energy.

India’s energy sector is dominated by PSUs. Decisions taken by energy PSUs are hugely influential in shaping India’s energy market, with substantial consequences for energy supply, government revenue, jobs, communities, and emissions. PSUs remain heavily invested in fossil energy. Between FY 14 and FY 20, India’s seven largest PSUs invested 11 times more in fossil projects than clean energy.

As part of its post-COVID-19 economic stimulus strategy, the Central Government directed energy sector PSUs to increase their capital expenditure (capex). Combined capex of these PSUs was INR 1,46,321 crore (USD 19.6 billion) in FY 22, the vast majority of which (88%) comes from the seven largest PSUs, who primarily operate in the fossil fuel sector. However, there is room for growth, as aggregate investment across the PSUs was still below pre-COVID-19 levels.

The capex push provides an opportunity for the fossil-dominated PSUs to diversify into clean energy and capture new markets. The major energy PSUs have announced investment goals in clean technology like EVs and green hydrogen along with new partnerships. Gas Authority of India Limited and Indian Oil Corporation Limited have pledged to achieve net-zero in their own operations by 2040 and 2046, respectively. Moving from goals to investments is urgently needed. Fossil-dominated business models and revenue streams face significant financial risks in a net-zero by 2070 aligned pathway, including from stranded assets and falling income from fossil fuel consumption. For example, in a detailed analysis, it was estimated that Coal India Limited’s financial risk from increased climate ambition could be offset by increasing its targeted solar PV capacity installations by 4.4 times.