India ill-prepared to meet net-zero emissions target by 2070 as announced by PM Modi at Glasgow summit

Prime Minister Narendra Modi announced at the Glasgow UN climate change conference that India will meet a target of net-zero emissions by 2070. This means that India will face a major energy transition challenge moving away from fossil fuels, which accounts for a significant share of Indian government’s tax revenue.

The Centre for Social and Economic Progress has come out with a new technical paper identifying India’s fiscal challenges that will accompany the energy transition from fossil fuels to green energy like solar, electric vehicles, wind and hydel power.

With the Indian government beginning to depend less on fossil fuels relative to the size of its budget, it will be crucial to explore other sources of revenue. Needless to state that the overall impact across India’s states will vary widely, necessitating separate targeted energy transition strategies.

According to the CSEP technical paper, the government, both at the Centre and the states, imposes taxes, cesses and duties on all fossil fuels. That apart, there are non-tax revenues including royalties from domestic mining operations as well as dividends from public sector fossil fuel companies. This non-tax and tax revenues have been growing steadily over time.

This study is part of the efforts to mitigate fiscal impacts of net-zero transitions and findings of the task force on climate, development and the IMF.

The study points out that the current revenue from fossil fuels in India is more than double the entire defence expenditure. It is three times the health expenditure of the Central and state governments.

However, through 2040, fossil fuel revenues would fall significantly as a share of the overall government revenue — from 13.3 per cent in 2019 to just 3.8 per cent at the lowest bound.

States across India will face vastly different challenges as some rely heavily on fossil fuel revenues. But the Centre will face the brunt with it being the greatest beneficiary of fossil fuel taxes.

Moreover, the study says that adding a carbon tax would not be sufficient to off-set any budgetary pressure from the decline in fossil fuel revenues.

One estimate suggests that the Central and state governments put together earn a tax revenue of nearly Rs 6 lakh crore. With gradual reduction in fossil fuel and moving towards green energy, we will see considerable reduction in this mammoth revenue from just one source.

If fuel is brought under GST, the reduction in revenue is going to be even more pronounced. This is precisely the reason for which India will have to carry out drastic tax reforms to ensure the net is widened and broad-based so that it does not overly depend on just one source.

As it is, India is still far from OECD recommendation of direct tax, considered to be the progressive tax, at about 60 per cent of tax revenue. Indirect tax is considered as a regressive tax now, yet accounts for nearly 55 per cent of India’s tax revenue.

This is not a happy situation as the poorer sections of the society pay a higher proportion of their income as taxes if the indirect taxes are higher.

In case of direct taxes, the rich proportionately pay much more taxes in view of the slab system.

That apart, agriculture income is not taxed in India, so there is no equity in direct tax system.

Also, with the plethora of tax exemptions to attract investments, there is a huge loss in possible direct tax revenue sources. As it is, corporate taxes are low in India and exemptions make them even lower. PLI and SEZ schemes provide incentives to investments and these are too, in a way, revenue foregone by the government.

One estimate suggests that the revenue foregone by way of tax exemptions is as high as Rs 6 lakh crore at one point of time, which is equivalent to the total revenue earned by Central and state governments through taxes and cesses on fuel. This is not a happy situation.

It is precisely for this reason that the government should expedite the ongoing process to bring in a new direct tax code which is more equitable and broad-based, so that while the government revenue goes up on one side, on the other, imposition of tax is not too high on the poor and the middle classes.

Unfortunately, India’s rich do not pay as much tax as the rich in advanced nations in view of all sorts of exemptions and avoidance. Also, the rich farmers do not pay any tax on their agricultural income unlike in the advanced economies. This is an issue that has been debated on several occasions, but the government seems to be reluctant to make any headway as the rich farmers have a very powerful political lobby in India.

Also, India would have to move towards a single rate of GST, which again is a difficult task as it is nearly impossible to bring about a consensus at the GST Council.

The task of reforming the direct and indirect taxes is not going to be all that easy, but the exchequer will certainly have to think out of the box to augment its tax revenue, as the share from taxing fossil fuel starts decreasing.

But the fiscal challenges that may arise as a result of the energy transition are real and solutions would have to be found sooner or later.

An IPCC (Intergovernmental Panel on Climate Change) report on climate impacts underscores that the next decade requires decisive action to reduce irreversible consequences. Transitioning away from fossil fuels requires finding new sustainable revenue streams, and countries rapidly implementing climate policies, like carbon taxes, can have spillover impacts on other economies, particularly emerging market and developing economies.

A coordinated global approach will be crucial to ensuring a swift and inclusive green transition.

With its mandate to maintain international financial stability, the IMF is uniquely positioned to lead in a new era of climate-resilient development, as the Global Development Policy Centre has said.

(IPA Service)

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