With a population of 1.2 billion, India is the second most populated country in the world. The climate in this southern Asian country varies from tropical monsoon in the south to temperate in the north. Its landscape varies from plains to deserts and mountains and 48% of its land is arable. While agriculture only accounts for 17% of the country’s GDP, 49% of its labour force is employed in the sector and there are significant effects from agricultural activities in terms of water pollution, deforestation, soil erosion, overgrazing and desertification. Industry, comprising 17% of the economy, is also responsible for water pollution, air pollution – one of the highest rates in the world – and traffic congestion. A recent report by the World Bank estimates the costs resulting from environmental degradation in India to be about 5.7% of its GDP per year (approximately USD $80 billion). Fuel imports amounted to 109.00 billion USD as of 2010, accounting for 33.3% of total imports.
Overall Fiscal Profile
India has had one of the highest levels of growth in the world over the past few years, but it is expected to slow to reach 4.6 per cent in the 2014 fiscal year due to a slowing of investment and domestic factors such as policy uncertainty, delayed project progress, and supply bottlenecks. One of the challenges in India is persistent inflation owing to rising food prices, a weaker rupee and energy price increases. High fiscal deficits (4.5% in 2013-14), also, pose threats to the country and increase macro-economic imbalances. Revenues accounted for 8.7% of GDP in 2012, of which 7.1% was from taxes, and the government spent 2.4% of GDP on subsidies for food, fertilizer and petroleum in 2011-2012. The Parliament passed a National Food Security Bill in 2013, which aims to provide two-thirds of the population with subsidized food grains. However, tax and subsidy reforms, including the introduction of a Goods and Services Tax and better targeting subsidies to food and fertilizer, are needed to lower India’s fiscal imbalances and create fiscal space for the green economy.
Policy and Legal Framework for a Green Economy
India’s government has tried to mainstream environmental issues throughout its policy and legislative framework. The National Environment Policy, released in 2006, has worked to integrate the environment into all developmental activities. Moreover, the 2009 State of the Environment Report by the Ministry of Environment and Forests (MOEF) highlighted five key challenges faced by India: climate change, food security, water security, energy security, and managing urbanization. The Government of India, through its various policies, has been factoring ecological concerns into the development process so that economic development can be achieved without permanently damaging the environment.
One of the overarching guiding frameworks today is India’s Twelfth Five Year Plan (2012-2017). The plan emphasizes the importance of ensuring inclusive growth at an expected rate of 9% of GDP in a sustainable manner that is aligned with the green economy. The Plan cites the energy sector, the water economy, urbanization, and ensuring environmentally sound growth as priority areas. Also, the manufacturing sector is expected to grow by 12-14 per cent over the medium term, and to contribute to 25% of GDP and create 100 million additional jobs by 2025. More recently, within the national appropriate mitigation actions (NAMA) agency, the Ministry of Environment and Forests announced a commitment to reduce emissions intensity of the economy of GDP by 20-25% by 2020, as compared to a 2005 baseline.
Fiscal Measures for a Green Economy
The government of India introduced a nationwide carbon tax of INR 50 (US$ 0.85) per metric ton of coal in 2010 in an effort to prevent over consumption of carbon intensive fuels. Some of the funds generated (INR 25 million or US$ 0.425 million), are being used to invest in power transmission lines to support clean energy distribution and to support the Clean Energy Fund. The Clean Energy Fund seeks invest in entrepreneurial ventures and research in clean energy technologies. However, it is important to note that in 2009, India was the 4th largest subsidiser in the world of fossil fuels, amounting to US$ 21 billion, thus neutralizing some of the effects of implementing the carbon tax.
Other initiatives include the National Solar Mission, which has been effective since 2010. This is a large scale solar energy programme that will run from 2010 to 2022 and aims to enhance India’s solar generation capacity. Under this program, the government has established a Power Purchase Tariff, with a preferential tariff fixed at INR 18.44 US$ 0.311/kWh for solar PV and INR 13.45 US$0.23/kWh for solar thermal. Tax relief was also introduced under the programme, reducing the customs levy by 5 per cent on machinery, instruments, equipment, and appliances related to solar PV and solar thermal plants. Under the Generation-based Incentives, solar initiatives are provided with accelerated depreciation of 80 per cent, while in the case of wind initiatives, only the windmills installed prior to March 2012 were eligible for this same rate.
India has also implemented renewable energy tariff regulation, which was revised in 2010. The FIT period was set for most technologies at 13 years, while some renewables like hydro are extended for up to 35 years. In terms of pricing, tariff rates vary based on resource intensity. Other incentives to promote renewables include a subsidy launched in 2008 for solar power plants, which was set at a rate of 12 rupees (US$ 0.30) per kilowatt hour for solar PV and 10 rupees (US$ 0.17) per kilowatt hour for solar thermal power fed to the grid. Additionally, a financing scheme, to support investment in wind energy, was introduced in 2008 to support greenfield projects initiated before 2012 through an INR 0.5/kWh payment for 10 years, over and above the tariff determined by regulatory authorities. Complementary fiscal policies include a 100 % accelerated depreciation for tax purposes to manufacturers and users of renewable energy systems, as well as an exemption on excise duty for capital goods and equipment related to renewables.
India has also used some fiscal instruments in other green sectors. Recently, the Water Board increased tariffs on water use for the commercial and industrial sectors. In the commercial sector, the tariffs are set at Rs.40 per kilo litre (0-15 KL usage), Rs. 70 per kilo litre (16-100 usage) and Rs.100 per KL (101-200 usage) and there is also a 35 % sewerage charge, as of 2014. The water tariff is expected to generate Rs.55 crore revenue every month. Consent fees are also charged on discharging sewage and/or trade effluents, as well as air pollution emissions (for industrial units).
In 2011-2012, basic customs duties were reduced by half (from 10% to 5%) on solar lanterns, as well as (from 5% to 2.5%) on agricultural machinery to promote domestic production. At the city level, fiscal instruments are utilized to promote sound waste management. For example, the state of Kerala has exempted taxes on paper bags and increased the plastic bag levy to 12.5%. Additionally, the tax on waste management equipment was reduced to 4 per cent to promote greater activity in the sector.
Fossil Fuel Subsidy Reform
The government subsidizes four major petroleum products: petrol, diesel, kerosene and LPG to protect domestic consumers from price volatility. Fuel subsidies are mainly applied through state-owned oil companies. As of 2010-2011 the total size of under-recovery on the four products was INR 78,190 crore (US$ 17.15 billion). So, while the fiscal subsidy to petroleum companies in 2010-11 was INR 2904 crore (US$ 637 million), the government supported under recovery through an additional INR 41,000 ($8,995 million) in the same year. The amount of cash assistance is determined on an ad hoc basis and its typically greater than 50% of funds necessary. In 2011-2012, the subsidy bill on public distribution of kerosene and domestic LPG amounted to INR30 billion (US$0.59 billion), and under-recovery on the sale of petroleum products was INR1,385.41billion(US$27.06 billion) the same year.
Some reform efforts have taken place, although not all in favour of the advancement of a Green Economy. In 2010, petrol prices were liberalized and the government reported that diesel prices would soon follow suit, though this was placed on hold in 2011 due to food price inflation and the depreciation of the rupee. In addition, customs duties on crude oil were abolished in 2011, signifying a decrease from the 5% duty charged prior. Similarly, petrol and diesel customs duties were reduced from 7.5% to 2.5%, while other petroleum products were reduced from 10% to 5%. The basic excise duty on diesel has also been reduced to zero from INR2/litre. These initiatives indicate that a better transformation is necessary in terms of abolishing and phasing out harmful subsidies. However, electricity subsidy reforms have remained largely unexplored as of 2011.
While subsidies to fossil fuels are quite substantial, it is important to note that petroleum products are also heavily taxed. The total contribution was INR2,25,494 crore (US$49,972 million) which comprises customs duties, excise duties, cess and royalties, dividends, a corporate tax, and a tax on dividends and profits paid to the government. ISD and GSSI report that in practice, progress has been limited in terms of reform.
GIZ and T E R I (2011) Environmental Fiscal Reforms India: Where and How? New Delhi: The Energy and Resources Institute. 136 pp. Retrieved from: http://apgreenjobs.ilo.org/resources/environmental-fiscal-reforms-in-india-where-and-how
GIZ et al (2012) Mitigating Carbon Emissions in India. The Case for green financial instruments. Retrieved from:
IISD, GSI, TERI University (2012). Fossil Fuel Subsidy Reform in India: Cash Transfers for PDS kerosene and domestic LPG. Retrieved from: http://www.iisd.org/gsi/sites/default/files/ffs_india_teri_rev.pdf
IISD/GSI and TERI. A Citizen’s Guide to Energy Subsidies in India. Retrieved from: http://www.iisd.org/gsi/sites/default/files/ffs_india_czguide.pdf
Ministry of Rural Development and UNDP, 2012. Greening rural development in India. Retrieved from: http://www.greengrowthknowledge.org/sites/default/files/downloads/resource/Greening_rural_development_in_India_UNDP.pdf
Planning Commission Government of India, 2012. 12th
Five Year Plan: Retrieved from: http://planningcommission.gov.in/plans/planrel/12thplan/pdf/12fyp_vol2.pdf
World Bank (2012). Indias Economic Growth and Environmental Sustainability. What are the Trade Offs? Retrieved from: http://www-wds.worldbank.org/external/default/WDSContentServer/WDSP/IB/2012/09/24/000158349_20120924145047/Rendered/PDF/wps6208.pdf