India’s Clean Energy Support Rises, but Progress Hinges on PSUs’ Diversification and Electricity Reforms—New Report

December 16, 2025, New Delhi — Government support for fossil fuels in India fell to five times the level of clean energy in financial year (FY) 2024—the smallest gap in 5 years—as clean energy subsidies rose sharply, according to a new report released today.

Clean energy subsidies increased by 31% year-on-year to nearly INR 32,000 crore (USD 3.9 billion) in FY 2024, reflecting continued policy support for renewables, according to Mapping India’s Energy Policy 2025, a report by the International Institute for Sustainable Development.

Fossil fuel subsidies, by contrast, fell by 12%—the sharpest decline since the pandemic—although this drop was driven by temporary price dynamics rather than strategic policy reforms. Together, these trends have helped lift India’s non-fossil electricity capacity above 50% in 2025, 5 years ahead of schedule and a key milestone under India’s updated nationally determined contribution 2.0.

These trends signal progress in energy transition, but sustaining the momentum hinges on diversifying major energy-related public sector undertakings (PSUs). India’s public financial institutions, such as the Rural Electrification Corporation and Power Finance Corporation, are already expanding lending for renewables and distribution reforms. However, among PSUs, total capital allocation remains heavily skewed toward fossil fuels. In FY 2024, 83% of capital expenditure by central energy-related PSUs continued to flow into fossil fuel sectors, including coal mining, refinery construction, and oil and gas development. Clean energy diversification among state-owned enterprises (SOEs) remains limited in scale, raising the risk of locking in energy infrastructure that may not align with India’s long-term climate objectives.

“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. “New investments in fossil assets are increasingly moving onto the balance sheets of India’s state-owned enterprises due to weak market signals. As critical state actors in ensuring a just and equitable energy transition, SOEs will need stronger policy signals and robust diversification plans to actively participate in India’s clean energy transition.”

The report also finds that electricity subsidies climbed to an all-time high of INR 2.1 lakh crore (USD 25 billion) in FY 2024—an 18% increase, despite electricity demand growing by only 7%. This widening gap between the cost of supply and consumer tariffs continues to strain state finances, indicating that efficiency gains and financial reforms in the power distribution sector are unable to contain rising subsidy burdens.

At the same time, India continued to rely heavily on revenue from fossil fuels, which brought in nearly INR 9 lakh crore (USD 108 billion)—about 16% of all government revenue across the centre and states. Fossil fuels still make up 90% of the country’s energy-related revenues, through excise duties, VAT, and GST collected on coal. This heavy dependence exposes public finances to global fuel price volatility and makes it harder for governments to create stable, long-term funding for clean energy.

"Fossil fuel use imposes significant social costs, but 79% of India’s fossil fuel tax revenue is paid by consumers,” said Saumya Jain, policy analyst at IISD and co-author. “The recent removal of the GST compensation cess on coal and reduction of taxes on ICE vehicles has diluted the polluter-pays approach. 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. Some of the revenues from higher fossil taxation can be used to scale clean energy.”

The report sets out three priority recommendations to help redirect government support toward clean energy while supporting India’s development goals:

1. Improve targeting of electricity subsidies

   Better subsidy delivery—through smart metering, direct benefit transfers, and performance-linked grants to states—can help maintain affordability while containing fiscal growth in subsidy outlays. These reforms also strengthen distribution company finances and enable renewable energy integration through improved price signals.

2. Guide SOE capital expenditure toward clean energy priorities

   As India expands offshore wind, battery storage, and green hydrogen, SOEs can play a catalytic role by diversifying portfolios, adopting sustainability metrics, and reinvesting in emerging clean-tech supply chains. Shifting a part of SOE capital expenditure from fossil fuel expansion to clean infrastructure can accelerate India’s long-term energy independence goals.

3. Build fiscal resilience through revenue diversification

   Introducing next-generation measures—such as targeted carbon pricing, green taxes, and broader tax-base adjustments—can help gradually reduce reliance on volatile fossil revenues while supporting social and environmental objectives.

Media Contacts:

Swasti Raizada, senior policy advisor,  [email protected] 

Madhulika Verma, senior communications officer, [email protected]