India's Energy Transition - Unravelling Fiscal Challenges and Institutional Concerns

India’s transition towards clean energy is certain to pose significant fiscal challenges. Fossil fuels have traditionally been a significant revenue source for the government, this article by Dr Laveesh Bhandari and Dr Rajat Verma, has been dedicated to the fiscal implications that are to be borne in mind to arrive at equilibrium in the taxes. Policymakers can navigate through these issues and establish a robust fiscal framework by considering a mix of conventional and non-conventional forms of taxes.

- Dr Laveesh Bhandari and Dr Rajat Verma

India has set an ambitious target of reaching net zero by 2070. This transition towards clean energy will pose a significant fiscal challenge for the Government of India, as fossil fuels have traditionally been a significant revenue source for both the Union and state governments. According to our estimates, fossil fuel revenues constituted 3.2% of India's GDP in 2019-20, corresponding to 15.0% and 6.2% of total Union and state governments' budgetary expenditures, respectively (CSEP 2022).

Transitioning away from fossil fuels will be accompanied by the potential loss in revenue if viable alternative taxation options are not explored.

Next, we mention some estimates of fossil revenues which depict the imperativeness of this issue and examine the tax structure in India.

Fossil Fuel Revenues and Tax Structure in India One of our studies computes the contribution of fossil fuel revenues to the total tax revenues of India as it transitions towards green energy. We find that by 2040, the revenues generated by taxing fossil fuels would constitute just 0.9% of the GDP, while non-tax revenues associated with fossil fuels are anticipated to be approximately 0.1% of the GDP. India being a developing country with a large and persistent informal sector has limited avenues for greater tax revenues, and so the challenge of covering this significant fossil revenues gap is serious. By 2070, in alignment with India's net-zero commitments, fossil fuel revenues would be insignificant, highlighting the urgency of exploring alternative taxes to compensate for potential revenues that the government is expected to lose.