Energy Pricing in India: A Study on Taxes and Subsidies

Abstract

Historically, energy prices play a major role in the emerging macroeconomic scene and these have driven energy pricing policies in developed and developing countries. Access to affordable and clean energy is crucial for human survival, welfare, and economic development. While all sections of society require energy for their welfare, the management of energy production and pricing is to be based on three building blocks: basic needs, economic growth, and conservation. In India, the intervention of government in the functioning of market economies to influence the process of resource allocation with policy tools, such as subsidy allocation and tax exemption, remains a matter of debate on political economy. The intention is to achieve socio-economic goals, such as eradication of energy poverty, fair distribution of natural resources to meet demand, and protection of price competitiveness of domestic firms. However, certain products are demanded both for direct consumption and indirect use (feedstocks). In addition to income, the major determinants of demand are prices of both energy- producing and energy-consuming sectors (non-energy purpose). If energy prices go up, direct consumption is expected to go down. For non-energy purposes, the increase in feedstock cost will ultimately be passed on to the consumers in the form of higher prices for the end product and, thus, the demand will reduce. Also, when energy prices increase, government’s tax revenue is expected to increase in nominal terms, but on account of expenditure, the government has to pay more since the subsidy allocation will increase. So, in the backdrop of volatile international oil prices, subsidies should be designed and targeted rationally so that the consumption behaviour of end users remains unaffected; thus, the socio-economic development of the country is not impaired.