India Cuts Subsidies and Increases Taxes on Fossil Fuels
Posted July 2, 2010
While oil continues to gush from the gulf and the U.S. Congress continues to dither, the Indian government is taking steps to move forward to constrain greenhouse gas emissions and to enhance energy security. On June 25, Prime Minister Manmohan Singh announced that the Indian government would stop subsidizing gasoline, and reduce subsidies for diesel, kerosene and natural gas. The government's decision was based on recommendations of an expert group headed by former Planning Commission member Kirit Parikh.
The leaders at the G20 meeting in Toronto this week welcomed the announcement. Besides India, Mexico and the United States are the only other G20 countries that have already started phasing out fuel subsidies to varying degrees, in pursuance of their commitments at the 2009 G20 summit.
The end of gasoline subsidies will help significantly reduce India’s budget deficit, which is currently 5.5% of the country’s GDP. As a result of the cutback, even the remaining subsidies for diesel, kerosene, and natural gas will be reduced to approximately $11.5 billion, down from $16.7 billion the previous year. In the short term, there are estimates that this may lead to a rise in inflation by 0.9%, taking India’s inflation rate from the current 10.16% to 11.15% in the next quarter. However, analysts predict that within nine months, this will actually lead to lower prices than in the absence of such reforms. There are some preliminary indications that the fuel price rise will lead to shifting consumer preferences towards fuel efficient cars, towards reduced distances being driven and also towards increased reliance on public transport. The government is reportedly going to spend much of the money saved on social development projects, primary education and creating more rural jobs.
This week, India also starts levying a new tax on coal, at the rate of Rupees 50 per every ton of coal. This is estimated to generate annual revenue of nearly $535 million, which would be used entirely to set up a National Clean Energy Fund, to finance renewable energy projects including those in the National Solar Mission (one of India’s eight missions under its National Action Plan on Climate Change). Starting this week, the cess – an Indian term for tax or levy - comes into effect, marking a notable milestone in India’s path to energy security and clean technology innovation.