India’s Energy and Fiscal Transition

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At the United Nations Climate Change Conference in Glasgow, India’s Prime Minister Narendra Modi announced India will meet a target of net-zero emissions by 2070. Now, over the next few decades, India faces a significant energy transition, as fossil fuels account for a significant share of Indian government revenues.

Currently, the Indian government, both the Center and the States, imposes a multitude of taxes, cesses and duties on all fossil fuels. Moreover, non-tax revenues include royalties from domestic mining operations, as well as dividends from public sector fossil-fuel companies. These non-tax and tax revenues are considerable and have been growing steadily over time.

A new technical paper from researchers at the Centre for Social and Economic Progress (CSEP) and members of the Task Force on Climate, Development and the International Monetary Fund identifies the fiscal challenges that will accompany India’s energy transition. It uses the International Energy Agency scenarios for India and studies how both tax revenues and non-tax revenues for national (Central) and sub-national (State) governments would be affected.

Key findings:
  • Current revenue from fossil fuels in India is higher than previously estimated. It is:
    • More than double the entire defense expenditure.
    • Three times the health expenditure of the Central and State governments.
    • Comparable to the entire public sector expenditure on education, sports, art and culture.
  • Through 2040, fossil fuel revenues would fall significantly as a share of overall government revenue, from 13.3 percent in 2019 to just 3.8 percent at the lowest bound.
  • States across India will face vastly different challenges, as some rely heavily on fossil fuel revenues and others do not. The Central government is the greatest beneficiary of fossil fuels and would face the brunt of the pressure.
  • A carbon tax would not be sufficient to off-set any budgetary pressure from the decline in fossil fuel revenue.

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