India increased its clean energy subsidies by 31 percent to nearly Rs 32,000 crore in the 2023-24 financial year, marking the sharpest rise in recent years. At the same time, fossil fuel subsidies dropped by 12 percent, narrowing the gap between the two types of support to its smallest margin in five years.
Despite this progress, government backing for fossil fuels still stands at roughly five times the level of clean energy spending, according to a report released on December 16 by the International Institute for Sustainable Development.
The report, titled Mapping India’s Energy Policy 2025, shows that the decline in fossil fuel subsidies resulted mainly from temporary drops in global fuel prices rather than deliberate policy changes. This means subsidies could climb again if international prices rise.
The shift in subsidy patterns has helped India cross a major threshold. Non-fossil sources now account for more than 50 percent of the country’s installed electricity capacity in 2025, reaching a target set under India’s updated climate commitments five years ahead of schedule.
But the report warns that public investment patterns tell a different story. State-owned energy companies continue to channel the bulk of their capital into fossil fuel projects, creating a mismatch between India’s climate goals and where public money actually flows.
Govt Support Reaches Rs 6.3 Lakh Crore
Total quantified government support to energy in India reached at least Rs 6.3 lakh crore in 2023-24, growing by 15 percent over the previous year. This growth rate was more than double the country’s average real GDP growth of 6.5 percent for the same period.
Energy subsidies stood at Rs 3.6 lakh crore, representing about 2 percent of GDP. Of this amount, Rs 2.6 lakh crore came as direct budgetary transfers from central and state governments.
State Companies Bet Big on Coal and Oil
In 2023-24, central government energy-related public sector undertakings directed 83 percent of their capital spending toward fossil fuel activities. These investments went into coal mining, refinery expansion, and oil and gas development.
Clean energy diversification by state-owned enterprises remains limited, the report says. This heavy concentration in fossil fuels raises concerns about locking in infrastructure that may not align with India’s long-term transition plans.
“India’s budget shows encouraging signs of a gradual shift toward clean energy, but larger public financial flows reveal a deeper issue,” said Swasti Raizada, senior policy advisor at IISD and a lead author of the report. “New investments in fossil assets are increasingly moving onto the balance sheets of India’s state-owned enterprises due to weak market signals.”
State-owned enterprises invested Rs 2.7 lakh crore in new energy projects during 2023-24, with Rs 1 lakh crore going to oil and gas alone. A single refinery project in Rajasthan accounted for Rs 44,266 crore of this spending.
Capital expenditure in coal-based power generation by state-owned companies reached Rs 15,764 crore, while coal mining investments stood at Rs 8,533 crore. India plans to add at least 80 gigawatts of new coal-based capacity by 2031-32, requiring a minimum expenditure of Rs 6.7 lakh crore.
Some public financial institutions have begun expanding their lending for renewable energy projects. The Rural Electrification Corporation and Power Finance Corporation increased financing for clean energy, disbursing loans worth Rs 62,867 crore to renewable energy in 2023-24.
Electricity Subsidies Hit Record High
Electricity subsidies climbed to an all-time high of Rs 2.1 lakh crore in 2023-24, an 18 percent increase from the previous year. This jump came even though electricity demand grew by only 7 percent during the same period.
These subsidies represent 59 percent of all energy subsidies in India. State governments provide most of this support to farmers and residential consumers, though the report notes that poorly targeted subsidies often benefit high-use consumers rather than only those in need.
The widening gap between the cost of supply and what consumers pay continues to strain state finances. The report indicates that efficiency gains and financial reforms in the power distribution sector have failed to contain the rising subsidy burden.
Distribution companies remain financially weak. In 2023-24, while total subsidies booked stood at Rs 2.1 lakh crore, actual subsidies received by distribution companies was Rs 2.05 lakh crore, leaving a gap of Rs 6,000 crore. Only 16 out of 25 states disbursed the booked subsidies in full or in excess.
Fossil Fuels Still Dominate Govt Revenues
India collected nearly Rs 9 lakh crore from fossil fuels in 2023-24, representing about 16 percent of total government revenue across central and state levels. Fossil fuels account for roughly 90 percent of all energy-related revenues through excise duties, value-added tax, and goods and services tax collected on coal and petroleum products.
Oil and gas alone contributed around 76 percent of this total, while coal added another 14 percent. Three tax measures, excise and value-added tax on petrol and diesel, and the GST compensation cess on coal, contributed nearly 50 percent of these revenues in 2023-24.
This heavy dependence exposes public finances to global fuel price volatility and makes it harder for governments to create stable, long-term funding mechanisms for clean energy.
“Fossil fuel use imposes significant social costs, but 79 percent of India’s fossil fuel tax revenue is paid by consumers,” said Saumya Jain, policy analyst at IISD and co-author of the report.
Jain pointed to recent tax changes that have weakened environmental pricing. The government removed the GST compensation cess on coal, which contributed Rs 51,218 crore in 2023-24, and reduced taxes on internal combustion engine vehicles. These moves diluted the polluter-pays principle, she said.
External Costs Exceed Revenues
The report estimates that fossil fuel externalities, including climate change costs and public health impacts from air pollution, outweigh revenues by at least three times. Coal externalities alone are estimated to represent 71 percent of its true cost, with the supply price covering only 29 percent.
For every tonne of coal consumed, mortality from air pollution accounts for 22.7 percent of the true cost, while carbon dioxide emissions represent 47.4 percent. These externalities amount to real costs imposed on society that are not reflected in coal prices.
“The government should align fossil fuel taxation measures to better reflect social and environmental costs, while exploring other goods and services where tax cuts can increase buying power for consumers,” Jain added. “Some of the revenues from higher fossil taxation can be used to scale clean energy.”
Path Forward Requires Policy Shifts
The report outlines three main recommendations to redirect government support toward clean energy while supporting development goals.
First, India needs to improve how it targets electricity subsidies. Better delivery through smart metering, direct benefit transfers, and performance-linked grants to states can maintain affordability while controlling fiscal costs. These reforms would also strengthen distribution company finances and enable better integration of renewable energy.
As of July 2025, only 2.4 crore smart meters were implemented against 20 crore sanctioned, highlighting gaps in the supply chain.
Second, state-owned enterprises should shift capital expenditure toward clean energy priorities. As India expands offshore wind, battery storage, and green hydrogen, these companies can play a catalytic role by diversifying their portfolios and adopting sustainability metrics.
Third, the government should build fiscal resilience through revenue diversification. Introducing targeted carbon pricing, green taxes, and broader tax-base adjustments can gradually reduce reliance on volatile fossil revenues while supporting social and environmental objectives.
The report notes that India aims to host COP 33 in 2028 and is finalizing its updated nationally determined contribution for 2035. It also targets becoming energy-independent and self-reliant by 2047.
Without such reforms, India risks undermining its energy transition despite expanding clean energy capacity, the report warns.
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