India Faces Clean Energy Challenges as Energy Demand Soars and Global Fossil Fuel Subsidies Rise

India’s growing energy demand has led the country to adopt a hybrid approach, expanding all forms of supply in 2023. This approach pushed India’s total energy subsidies to a 9-year high of INR 3.2 lakh crore (US$39.3 billion) for the fiscal year ending 2023 (FY 2023), new research suggests.

In recent years, India has positioned itself as an international climate leader, steering the G20 under its presidency to call for global renewable energy capacity to triple by 2030 while also funding decarbonisation measures to decouple the fast-growing economy from greenhouse gas emissions and reach net-zero targets.

However, clean energy subsidies accounted for less than 10% of total energy subsidies in FY 2023, while coal, oil, and gas subsidies contributed around 40%. The majority of the remaining subsidies were for electricity consumption, particularly in agriculture.

In 2023, like many countries, rising energy demands and the impact of the international energy price crisis following Russia’s invasion of Ukraine led India to put several measures in place that significantly increased support for fossil fuels.

With an aim to protect low-income households, India responded to peaking fossil fuel prices in 2022/2023 by capping retail prices of petrol, diesel, and domestic liquefied petroleum gas; cutting taxes; providing direct budgetary transfers to businesses and consumers; and supporting existing energy supplies.

As a result, oil and gas subsidies rose by 63% in FY 2023 compared to FY 2022, according to a report by the International Institute for Sustainable Development (IISD).

The report, titled Mapping India’s Energy Policy: A Decade in Action, reveals that subsidies for coal also rose by 17% over the same period. The latest figures from the International Energy Agency also show that coal accounts for 45% of India’s total primary energy supply in 2022, up from 43% in 2020. Altogether, fossil fuel subsidies were five times greater than clean energy subsidies.

Rapid economic growth, on course to drive India to become a USD 5 trillion economy by 2027, means that the government is investing in all forms of energy supply. In FY 2023, both clean energy and fossil fuel subsidies grew by around 40%.

“While fossil fuel subsidies have reduced by 59% since their peak in 2013/2014, without further targeting and a return to a market-based pricing regime, they could mount again, resulting in budgetary impacts. This is undesirable, as untargeted fossil fuel subsidies are an inefficient way of supporting low-income households, and they shrink the fiscal space available for supporting clean energy technologies,” said co-author of the report Swasti Raizada, Policy Advisor at IISD.

“The current approach not only perpetuates dependence on price-volatile and geopolitically risky fossil fuels but also delays India’s own clean energy goals for 2030. Clean energy solutions can instead deliver sustainable economic growth and reinstate India’s global climate leadership as an agenda-setting country with a practical vision for eliminating pollution and meeting essential climate goals.”

The report also recommends that the government could consider earmarking a portion of its fossil fuel tax revenues to support its emerging just transition needs.

Deepak Sharma, Policy Analyst at the IISD, said: “Previous studies show that India will require significant investment to make its energy transition just, sustainable, and inclusive. India’s state-owned enterprises will be a critical part of this shift. As their majority shareholder, the government should ensure that all fresh capital going to these entities is linked to India’s net zero commitments.”