Centre must help states cope with fiscal cost of faster EV adoption

India, the fourth largest emitter of carbon dioxide after China, the US and the EU, has made the commitment in COP 26 to get 50 per cent of its energy from renewable sources by 2030 and to be net-zero by 2070.

Such a commitment by a lower middle come country, despite her per capita CO2 emission (1.9 tonnes) being only 12.2 per cent of that of the US (15.5 tonnes), is a reflection of India`s commitment to sustainability.

Given the prime role of state governments in accomplishing this national commitment, many of the state governments have proactively responded. The states are competing among each other to make their budgets greener than ever before.

The key strategy being the promotion of Electric Vehicle (EV) through policies involving substantial tax concessions and subsidies. The key question is whether the environmental sustainability through EV is at the cost of fiscal sustainability of states.

In keeping with the Paris Agreement to strengthen the global response to global warming through reduced carbon emissions, decarbonisation of the transport sector, which accounts for about 37 per cent of the total emission, is at the central stage. A global campaign, EV30@30, was initiated at the instance of Clean Energy Ministerial with an objective to reach  30 per cent sales share for EVs by 2030 wherein India`s presence is prominent.

Among other initiatives, the Government of India launched a subsidy programme through FAME-India (Faster Adoption and Manufacturing of (Hybrid &) Electric Vehicles in India) for the development of EV manufacturing ecosystem and market. This is in sync with India`s advocacy of "Panchamrit" at COP26 where it espoused its target net-zero emissions by 2070.

States have been upholding the agenda of green budget, inter alia by incentivising transition to electric vehicles. The policies include supply side measures to enhance the EV manufacturing base and demand side measures like price subsidy, cut in registration fees, road taxes, parking charges, and even vehicle purchase taxes.

More than 15 Indian states in the last two years have rolled out EV policies,and the states are racing to get the title of India`s `EV Capital`.

Considering the great Vertical Fiscal Imbalance (VFI) in India wherein the states account for 62.4 per cent of the total expenditure, although their share in combined revenue of the centre and states is only 37.6 per cent, the observed EV race between states could have adverse effect on the fiscal health of states.

This is because motor vehicle taxes, cess, and excise duty on fuels accounts for a significant share of the state`s own tax revenue. With the state governments competing among each other in cutting these taxes and providing subsidies, the already stressed fiscal position of the states is bound to go from bad to worse.

The fiscal outcome, however, will vary across states. First, there are states with a sound EV manufacturing base which are likely to benefit through their enhanced tax base. The second category includes states that are those fiscally stressed and with limited EV production base. For them, the EV agenda could adversely affect their revenue on account of the revenue forgone by way of reduced vehicle taxes registration fee for EV on the one hand and the potential reduction in revenue from petrol and diesel on account of increased EV diffusion.

Kerala could be badly affected because Kerala Infrastructure Investment Fund Board (KIIFB), which funds large public infrastructure projects, is built on cess on petroleum products and motor vehicles tax.

There is also an equity issue. EV owners are mainly the wealthy living in urban areas where charging facilities and maintenance networks are readily available. Further, in spite of the taxes and subsidies, the price of an electric car is much higher than that of a petrol/diesel car, making it a product for the rich that need not be subsidized by the poor.

The great potential of electric vehicles towards environmental sustainability along with savings on fossil fuels worth $100 bn annually cannot be ignored. However, it is important to ensure that the national commitment to environmental sustainability is not at the cost of fiscal sustainability of states.

As India is emerging as a global leader, especially with its G20 presidency and COP26 commitments, it could play an important role in international climate policy making and fund sourcing for the developing countries.

The climate fund that India gets must be effectively distributed among states to ensure that EVs are not subsidised by the poor instead by the global rich. Until such commitments from the centre is in place, it may be prudent for states with a stressed fiscal position to hasten slowly in their EV-driven low carbon/green budget agenda.

(K.J. Joseph and Rju Mohan are Director and Ph.D. scholar, respectively, at the Gulati Institute of Finance and Taxation, GIFT, Thiruvananthapuram