India's Green Energy Push: Subsidies Soar, But Fossil Fuels Still Rule – What This Means for Your Investments!

India's Energy Subsidies Shift Amidst Lingering Fossil Fuel Dominance

A new report from the International Institute for Sustainable Development (IISD) reveals a significant shift in India's energy subsidy landscape, with clean energy support surging by 31 per cent year-on-year to approximately Rs 32,000 crore in the 2023-24 financial year. Concurrently, subsidies for fossil fuels saw a 12 per cent reduction, narrowing the fiscal gap between the two to its lowest point in five years. This development marks progress in India's commitment to cleaner energy sources.

Shifting Subsidies Landscape

The report highlights that despite the substantial increase in clean energy subsidies, government support for fossil fuels continues to be approximately five times higher than spending on clean alternatives. This persistent imbalance underscores the immense challenge India faces in fundamentally transforming its energy system and phasing out reliance on traditional, carbon-intensive fuels.

Non-Fossil Capacity Milestone

The changing subsidy dynamics have played a role in advancing India's renewable energy goals. Non-fossil fuel sources have now surpassed 50 per cent of the country's installed electricity capacity, achieving this milestone in 2025. This is five years ahead of the target set under India's updated Nationally Determined Contribution (NDC 2.0), signalling robust growth in renewable capacity.

Persistent Fossil Fuel Investment

However, the IISD warns that public investment patterns remain heavily skewed towards fossil fuels, potentially jeopardizing longer-term climate objectives. In the 2023-24 fiscal year, a striking 83 per cent of capital expenditure by central government energy-related public sector undertakings (PSUs) was directed towards fossil fuel activities. These investments span areas such as coal mining, refinery expansion, and oil and gas development.

The report indicates that the diversification of state-owned enterprises into clean energy sectors remains limited in scale. This trend carries the risk of locking in infrastructure that is misaligned with India’s ambitious long-term energy transition plans.

Expert Call for Policy Change

Swasti Raizada, a senior policy advisor at IISD, commented on the findings. "While budgetary support for clean energy is improving, public enterprises are still committing the bulk of capital to fossil assets," she stated. Raizada emphasized the need for stronger policy signals to effectively steer state-owned enterprises towards meaningful diversification into cleaner energy avenues.

Financial Institutions' Role

Public financial institutions, including the Rural Electrification Corporation and the Power Finance Corporation, have been noted for expanding their lending portfolios to support renewable energy projects and power sector reforms. Despite these efforts, the IISD report suggests that these positive changes have yet to translate into a broader, systemic reorientation of PSU investment strategies away from fossil fuels.

Strain on Power Sector Finances

The report also points to significant fiscal pressures within the power sector. Electricity subsidies reached an unprecedented Rs 2.1 lakh crore in 2023-24, marking an 18 per cent increase. This surge occurred even as electricity demand grew by a more moderate 7 per cent, highlighting underlying inefficiencies.

The persistent and widening gap between the cost of supplying electricity and the tariffs consumers pay continues to strain state finances. This situation is largely attributed to ongoing inefficiencies within electricity distribution companies across various states.

Fossil Fuels' Continued Revenue Dominance

Despite the decline in subsidies, fossil fuels remained a major source of government revenue. In 2023-24, they generated nearly Rs 9 trillion, accounting for approximately 16 per cent of total revenues for both central and state governments. Fossil fuels still constitute around 90 per cent of energy-related revenues, leaving public finances vulnerable to fluctuations in global fuel prices.

Furthermore, consumers bear the brunt of fossil fuel taxation, accounting for nearly 79 per cent of the revenue derived from this sector. The report notes that recent tax adjustments, such as the removal of the GST compensation cess on coal and reduced taxes on internal combustion engine vehicles, have weakened the application of the polluter-pays principle.

Recommendations for Sustained Progress

To maintain and accelerate progress towards its climate goals, the IISD proposes several key reforms. It recommends better targeting of electricity subsidies through mechanisms like smart metering and direct benefit transfers to reduce fiscal leakage. The institute also calls for a fundamental reorientation of PSU capital expenditure towards clean technologies, emphasizing areas like offshore wind, battery storage, and green hydrogen.

The report further suggests a gradual diversification of government revenues by implementing instruments such as green taxes and carbon pricing. Without these crucial reforms, the IISD warns, India's energy transition risks being undermined by the continued heavy public investment in fossil fuel infrastructure, even as clean energy capacity continues its upward trajectory.

Impact
This news has a significant impact on India's energy sector, affecting companies involved in both renewable and fossil fuel industries, as well as financial institutions. Government policy shifts in subsidies and investment priorities can influence capital allocation, profitability, and market competitiveness for these entities. Investors monitoring the energy transition and PSU performance will find this highly relevant. The continued reliance on fossil fuels poses risks to long-term energy security and climate commitments.

Impact Rating: 8/10

Difficult Terms Explained

• Clean energy: Energy derived from sources that do not produce significant greenhouse gas emissions or pollutants when used, such as solar, wind, and hydropower.
• Fossil fuels: Natural fuels formed in the geological past from the remains of living organisms, including coal, oil, and natural gas. Their combustion releases greenhouse gases.
• Subsidies: Financial assistance provided by governments or public bodies to reduce the cost of goods or services, making them more affordable for consumers or businesses.
• International Institute for Sustainable Development (IISD): A global research and policy organization that provides practical solutions to build a more sustainable world.
• Nationally Determined Contribution (NDC 2.0): India's updated commitment under the Paris Agreement to reduce greenhouse gas emissions and adapt to climate change.
• Public Sector Undertakings (PSUs): Commercial enterprises owned and operated by the government of India.
• Capital Expenditure (capex): Funds used by a company to acquire, upgrade, and maintain physical assets such as property, buildings, technology, or equipment.
• Electricity subsidies: Government financial support aimed at making electricity more affordable for consumers, often provided through tariffs or direct payments.
• Polluter-pays principle: The environmental principle that those who cause pollution should bear the costs of managing it to prevent damage to human health or the environment.
• Offshore wind: Wind turbines located in bodies of water, usually the ocean, to capture wind energy.
• Battery storage: Technologies that store electrical energy generated from intermittent sources like solar and wind for later use.
• Green hydrogen: Hydrogen produced using renewable energy sources through electrolysis, resulting in a clean fuel with zero emissions.
• Carbon pricing: A policy tool that puts a price on carbon dioxide emissions, encouraging emitters to reduce their emissions by making them more expensive.