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Greening India's Union Budget

January 27, 2023
Vibhuti Garg

Key Findings

Developers want the government to extend the production linked incentive (PLI) scheme to electrolysers to reduce green hydrogen production costs. 

Solar power industry is seeking an exemption of Basic Customs Duty (BCD) on imported solar cells and modules till 2025 or at least a substantial reduction.

The renewable energy industry also expects a reduction in BCD on lithium-ion batteries used as part of battery energy storage systems (BESS) from 10% to 5%.

The Indian economy is witnessing a strong revival, with the World Bank upgrading its growth forecast to 6.9% from 6.5% earlier. The Wholesale Price Index (WPI) has also fallen from a high of 15.8% in June 2022 to 4.95% in December 2022, while Consumer Price Index (CPI) inflation came down from 7.8% to 5.7% during the same period.

While other economies are showing signs of a downturn, the Indian government and the Reserve Bank of India (RBI), through monetary policy tightening and other fiscal measures, have been able to tame inflation. This will ease the pressure on the government to use its budgetary resources for economic development and building more manufacturing bases, promoting more startups and, thereby, creating more job opportunities. With economic development, there will be greater energy consumption. Therefore, it becomes imperative that our choices are sustainable, whether on the supply side, including renewable energy, energy storage, green hydrogen etc.; or on the demand side, including energy efficiency etc.

Industry seeking government support

The Indian government has made an ambitious target for clean energy. It has not merely made announcements but also demonstrated seriousness by providing various budgetary and tax support to develop a clean energy ecosystem. To ensure energy security and reduce reliance on imports, the government is focusing on building the entire value chain through Production Linked Incentive (PLI) schemes, Faster Adaption of Manufacturing of Electric Vehicles (FAME), Green Hydrogen Mission, National Energy Storage Mission, etc. The recent announcement of a capital outlay of Rs197.74 billion (US$2.43 billion) under the Green Hydrogen Mission and RBI’s announcement of the issuance of Sovereign Green Bonds (SGBs) worth Rs160 billion (US$1.96 billion) to fund green infrastructure will channel more investment both from public and private players. While India is making remarkable progress in clean energy deployment, the sector is facing some headwinds. As a result, the industry is looking for more support measures in the upcoming Union Budget.

The PLI scheme has a capital allocation for high-efficiency solar modules, advance chemistry cell (ACC) battery, etc. Developers want the government to extend the scheme to electrolysers to reduce green hydrogen production costs. Further, a cut in the goods and services (GST) rate from 18% currently to 5% can improve the projects’ commercial viability. Prices of renewable energy have gone up in the last two years because of supply disruption due to Covid-19 and the government’s imposition of a basic customs duty (BCD) on imported solar cells and modules. This is derailing the renewable energy deployment and making it difficult for the industry to meet the government’s 2030 goals of 450 gigawatts (GW) of clean energy capacity. While India is building up its domestic manufacturing capacity, it is insufficient to set up 30-35GW of annual renewable energy. As a result, the industry is seeking an exemption of the BCDs till 2025 or at least a substantial reduction. Further, given the high prices of nascent technologies like offshore wind and established technologies like pumped hydro, the government should provide budgetary allocation and tax concessions to scale up their deployment.

The industry is also expecting a reduction in BCD on lithium-ion batteries used as part of battery energy storage systems (BESS) from 10% to 5%. This will be critical as India needs more flexible generation sources for grid integration as renewable energy’s share increases. With the passing of the Energy Conservation Bill in both houses of Parliament, it is crucial to evolve the Indian carbon credit market. While the Renewable Energy Certificate (REC) market exists at power exchanges, there is not much liquidity. To address price risks, the government needs to form a ‘market stabilisation fund’ to encourage industries to invest in clean energy technologies. Since most corporates have decarbonisation goals, this will encourage more players to increase their share of renewable energy deployment or offset it by buying carbon credits.

Need to increase finance availability

The availability of finance will play a crucial role in India achieving its energy transition goal. Therefore, the government should increase budgetary allocation for the Indian Renewable Energy Development Agency (IREDA) for financing new technologies at low concessional rates. Also, allowing institutional investors like insurance and pension companies to invest in companies rated below AAA/AA will increase liquidity in the financial market. Most banks have already exhausted their limit to lending to the power sector by financing thermal power projects. Excluding renewable energy from the power sector and creating a separate category under priority sector lending can bring much-needed capital.

Lastly, scaling up decentralised renewable energy (DRE), including rooftop solar and solar pumps through budgetary sops, should also be a priority. Two viable options are providing preferential rates and credit guarantees through IREDA and REC for these sub-sectors. Government support can play a big role in helping India lay a strong foundation for pivoting to clean energy. Further, India can promote the replication of such measures by other countries in the Global South as part of its G20 presidency.

This article was first published in Financial Express.

Vibhuti Garg

Vibhuti Garg is Director, South Asia, at IEEFA. Vibhuti’s focus is on promoting sustainable development through influencing policy intervention on energy pricing, adoption of new technologies, subsidy reforms, enhancing clean energy access, access to capital and private participation in various areas of the energy sector.

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