At $350 b, India’s fossil fuel sop ‘among top 5 in the world

August 25, 2023
Posted by: OptimizeIAS Team
Category: DPN Topics

At $350 b, India’s fossil fuel sop ‘among top 5 in the world

Subject: Economy

Section: Fiscal Policy

Context: India ranks fourth among the top five nations in fossil fuel subsidies with around $350 billion (over ₹28-lakh crore)

Key Points:

According to a working paper of the International Monetary Fund (IMF) India is ranked 4th in terms of fossil fuel subsidies.
China is at the top, followed by the US and Russia. The European Union and Japan share the fifth spot.
Globally, total fossil fuel subsidies amounted to $7 trillion in 2022, equivalent to nearly 7.1 per cent of global GDP.
Here total subsidy means sum of explicit subsidies (undercharging for the supply costs of fossil fuels) and implicit subsidies (undercharging for environmental costs and forgone consumption tax revenues).
The full gap between efficient prices (the sum of supply, environmental, and other costs) and retail prices multiplied by consumption equals the total fossil fuel subsidy.
In India, explicit or direct subsidy is given for domestic LPG under a scheme called ‘Ujjawala’ while some transport subsidy is also give to take various types of fuel to remote locations.
The paper said sum of both implicit and explicit subsidy in India is estimated at $346 billion which is over 10 per cent of the GDP.
Providing a blueprint to lower subsidy, the paper said fully reforming fossil fuel prices by removing explicit fuel subsidies and imposing corrective taxes such as a carbon tax would reduce global carbon dioxide (CO2) emissions by 43 percent below ‘business as usual’ levels in 2030.
Benefits of cutting fuel subsidies?
- Full fuel price reform would also raise substantial revenues, worth about 3.6 per cent of global GDP.
- These revenues could be used to cut more burdensome taxes such as on those labour, help with debt sustainability, or fund productive investments.
- Further, fuel price reform would avert about 1.6 million pre-mature deaths per year from local air pollution by 2030. Reforming fossil fuel subsidies is in countries’ own interest, even when excluding climate benefits.

Explicit and Implicit Fuel Subsidies

Explicit Subsidies:

Explicit subsidies are direct financial transfers from the government to consumers or producers of fuel.
These subsidies are easily visible in government budgets and are typically administered through mechanisms such as reduced fuel prices, cash payments, or vouchers.
Explicit subsidies are transparent and can have immediate effects on reducing the cost of fuel for consumers.
Advantages:
- Explicit subsidies can provide immediate relief to consumers by reducing the price they pay for fuel.
- They are transparent and can be tracked through government budgets.
Disadvantages:
- Explicit subsidies can strain government budgets, especially during periods of high global oil prices.
- Subsidies might lead to overconsumption of fuel, increasing demand and potentially contributing to environmental issues.
- Subsidies can also distort market dynamics and discourage investment in renewable energy sources.

Implicit subsidies:

Implicit subsidies, also known as hidden subsidies, are not as transparent as explicit subsidies and are often more complex to measure.
They occur when governments intervene in the energy market through policies that affect the cost of production, distribution, or consumption of fuel, without directly providing financial transfers.
Advantages:
- Implicit subsidies might not strain government budgets as directly as explicit subsidies.
- They can promote local production and reduce reliance on imports.
Disadvantages:
- Implicit subsidies can be harder to identify and quantify, making it challenging to assess their impact.
- They can distort market signals, leading to inefficiencies and market imbalances.
- Like explicit subsidies, implicit subsidies can also encourage overconsumption and hinder the transition to cleaner energy sources.
- Examples of implicit subsidies include tax breaks for fuel producers, regulations that keep fuel prices below market rates, and inadequate pricing of externalities like environmental pollution.

Both types of subsidies can have significant economic, social, and environmental implications. While explicit subsidies directly impact government budgets, implicit subsidies can influence market behaviors and environmental sustainability in less obvious ways.

Note: Externality refers to the unintended impact of economic activities on the environment, where the costs or benefits are not fully reflected in market prices.