Analysis Subsidy Regime India Focus On Petroleum Subsidy Economics Essay

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A subsidy (also known as a subvention) is a form of financial assistance paid to a business or economic sector. Most subsidies are made by the government to producers or distributors in an industry to prevent the decline of that industry (e.g., as a result of continuous unprofitable operations) or an increase in the prices of its products or simply to encourage it to hire more labour (as in the case of a wage subsidy).

Examples are subsidies to encourage the sale of exports subsidies on some foods to keep down the cost of living, especially in urban areas; and subsidies to encourage the expansion of farm production and achieve self-reliance in food production. Subsidies can be regarded as a form of protectionism or trade barrier by making domestic goods and services artificially competitive against imports. Subsidies may distort markets, and can impose large economic costs. Financial assistance in the form of a subsidy may come from one's government, but the term subsidy may also refer to assistance granted by others, such as individuals or non-governmental institutions, although these would be more commonly described as charity. A subsidy is a grant of money from an outside third party to either the buyer or the seller of a commodity. The effect of subsidy is opposite of the effect of a tax. A cash subsidy is the opposite of a direct tax while a subsidized commodity is the opposite of a taxed commodity. Hence, subsidies are sometimes called negative taxation. Providing minimum consumption entitlement to the poor by subsidizing the items consumed by them is an extremely important welfare dimension of fiscal policy. However, subsidies can generate negative effects also. Once received, people become dependent on the subsidies. Hence, subsidies are sometimes termed as sweet poison.

2. INTRODUCTION TO PETROLEUM SUBSIDIES

India is one of the leading consumers of crude oil and petroleum products (standing at 5th position in 2008), with product consumption growing by around 5%. In conformity with its high GDP growth, India is projected to register the world's highest annual primary oil demand growth of 3.9% by 2030 (World energy outlook, 2009, International energy agency, OECD, Paris). At the same time, domestic production accounts for only 20% of the total crude oil requirements of the country. With high GDP growth and stagnant domestic production, India's dependence on oil imports is expected to increase to 90% by 2030.

Given this background, it becomes really imperative on part of the state to subsidize the 4 key petroleum products viz. Petrol, Diesel, Kerosene and LPG due to the sheer importance of these products in the growth and development of the economy, in particular to promote the welfare of the masses.

Kerosene, used for lighting, is a necessity for the people who do not have access to electricity and is thus distributed through the Public Distribution System (PDS). LPG, a clean cooking fuel which serves as a merit good for the consumers, is associated with a number of social and environmental externalities. In the wake of highly capricious International crude oil prices, it becomes the responsibility of the government to protect the domestic economy from fluctuations in international prices, thus giving rise to the need of government intervention in fixing the price of these products through subsidies.

In 2008-09, the total amount of under- recoveries of oil marketing companies (OMC's) and compensation by upstream companies and the government stood at a staggering 1, 03,292 crores which was shared by the upstream oil companies (ONGC, GAIL etc) and the government which issued oil bonds.

The predicament is to arrive at an optimal pricing strategy for petroleum products which fulfils multiple objectives viz.:

The fiscal burden of the government is reduced.

The redistributive and welfare objectives of the state are accomplished.

The economy is insulated from fickle International crude oil prices.

The domestic oil industry becomes financially healthy and competitive.

To achieve these, different pricing models have been followed by the government at different points in time. In 1976, the Government replaced Import parity price (IPP) of the 1960s by cost-plus pricing which came to be known as Administered Pricing Mechanism (APM), and was applied to the entire oil sector. APM was abandoned in 2002 due to its inability to induce competition in the marketplace and generate adequate financial resources for the oil sector companies for project development and capacity addition. A new pricing framework was adopted where market forces played a dominant role. Under the new regime:

The price of indigenous crude oil was market determined.

The prices of petroleum products produced by the refineries were based on Import Parity Price.

The consumer prices of all other products except domestic LPG and PDS kerosene was market determined.

There were flat rate subsidies on PDS kerosene and domestic LPG.

During April 2002 to January 2004 oil companies changed the domestic consumer prices of petrol and diesel and domestic LPG based on market factors. However, kerosene price was not changed. As oil prices started moving upward in 2004, the question of smoothing the volatility in international prices assumed importance. To deal with the same, distinct policy phases were witnessed from 2004 to 2008. First of all, the price band mechanism was adopted, in which the oil marketing companies (OMC's) were given limited freedom to set the retail prices of petroleum products within a band of +/-10% of the mean of rolling average of last 12 months and last 3 months of international C&F prices (Cost and freight prices). However, as oil prices rose sharply and there was uncertainty in international oil markets, the price band mechanism was abandoned. Subsequently, in 2005, after the recommendations of Rangarajan committee, the formula of Trade Parity Price (TPP) for petrol and diesel at refinery level as well as at retail level came into existence. The formula was a weighted average of import parity and export parity prices, in which the percentage share of import/export of these products provided the weights. With the continuous increase in International crude oil prices and stagnant retail prices of petroleum products, the under recoveries of public sector oil marketing companies reached unsustainable levels in 2008 and hence Chaturvedi committee was appointed to deal with the crisis. It suggested the implementation of FOB (free on board) export prices to arrive at the refinery gate prices of Petrol, Diesel, Kerosene and LPG.

3. Objectives of the Policy recommendations

In the context of petroleum subsidies explained in the last section, the Kirit Parikh policy recommendations aim at the attainment of the following objectives:

Reduction in the fiscal burden of the government.

Accomplishment of the redistributive and welfare objectives of the state

Insulation of the economy from fickle International crude oil prices and protection of the poor consumers.

To enable the domestic oil industry become financially healthy and competitive.

To enable use of more kerosene and LPG and less of bio-mass fuels.

4. Keys Points of the Kirit Parikh Report

It becomes quite evident that coming up with an optimal pricing strategy for petroleum products has been the single most important challenge for the government in the past. In this context, Kirit Parikh along with other members of the expert committee has proposed a viable and a sustainable pricing system of the four key petroleum products - Petrol, Diesel, Kerosene and LPG- in his report.

PETROL

Petrol is mainly an item of final consumption and is largely used in motorized vehicles. An analysis of the trend of petrol consumption by automobile owners reveals that an increase in prices of petrol can be borne by motorized vehicle owners (see annexure). The report argues that most of the vehicle owners are economically well off and belong to the upper two/ three deciles of the population. So there is no need to subsidize this class of consumers.

Hence, Kirit Parikh recommends that the price of petrol should be market determined, both at the level of refinery gate as well as retail.

Higher petrol prices are expected to lead to less driving, more fuel efficient vehicles and an efficiency increase by 20%. Consumers would use petrol judiciously and therefore, the additional cost would be that much less in the long run.

The recommendations, if accepted, will be highly beneficial for Oil marketing companies (HPCL, BPCL and IOC), upstream oil companies (ONGC, GAIL and OIL) and private players such as Reliance, Essar and Shell. The upstream companies would be able to devote their resources for exploration and production purposes and the under recoveries of OMC's would decline significantly. If the proposal is accepted, the petrol prices would increase by around Rs.3.9/L. The entire burden would be shifted on to the consumers leading to nil under recoveries on part of the OMC's.

The private players would be on the same level playing field as their public sector counterpart and consequently the oil sector would become highly competitive leading to better delivery of products and services on part of the consumers and enhancement of the entire system.

The acceptance of the recommendations would considerably improve the fiscal health of the government and the resources thus saved could be diverted for developmental activities.

DIESEL

At present there is 2.5 percent custom duty on Motor Spirit and diesel and The Group has recommended an additional excise duty on diesel-driven vehicle.

Under-recoveries due to petrol and diesel will be nil if the recommendations are implemented.

Price of diesel should also be market determined both at the refinery gate and at the retail level.

Diesel price increase will get reflected in MSP (minimum support prices) for major crops.

Higher Diesel price will lead to judicious use of ground water for irrigation by farmer.

Government should keep PDS price of food grain constant to poor consumer.

Additional subsidy burden on PDS would be 1/8th due to present diesel policy.

The report tries to justify the inflationary impact on automobile industry and the stakeholders involved, in statistical terms.

KEROSENE

The under-recovery on kerosene has grown from Rs. 3,751 crore in 2003-04 to Rs.28, 225 crore in 2008-09.

Only 1.3% of rural households use kerosene for cooking. Among the poorest four deciles, less than 1% used it for cooking but 60% used it for lighting.

Since kerosene subsidy is going largely for lighting, the allocations should be reduced as more and more BPL households are connected to the electricity grid. Such connections under the RGGVY are subsidized and continuing kerosene supply to such households amounts to double subsidy.

Issue of smart cards for kerosene distribution.

The report states that PDS Kerosene prices have not been raised from around Rs.9 per litre since March 2002.

Based on the data from the Central Statistical Organisation, during 2002-03 to 2008-09, the per capita agriculture GDP at current prices has increased by around 60% (at an annual compound growth rate of 6%) and by 2009-10, the increase is likely to be 66%.

As per the report, a 66% increase in kerosene price would keep the share of expenditure on kerosene at the same level as in 2002-03. Thus, the report recommends that the price of PDS kerosene could be raised by 66% to reach a level of around Rs. 15/litre. They state that this step would not put undue pressure on the poor.

The report thus, suggests that the price of kerosene be increased by 6 Rs/litre and in should be in line with the nominal growth in agricultural GDP.

LPG

Since LPG is used largely in urban areas, its price should be determined on the basis of growth of total GDP. This will keep the share of expenditures on Kerosene and LPG in the total consumption expenditure of rural and urban households at the same levels as in 2002 and 2004.

The consumer subsidy on domestic LPG has grown from Rs 5,523 crore in 2003-04 to 17,600 crore in 2008-09 and is estimated to be around Rs 14,152 crore in 2009-10.

It is seen that rural households use from 5.17 to 7.91 cylinders per year. The LPG-using rural households belonging to the four poorest deciles use less than 6 cylinders per year and the richer households use more.

3 decile in urban areas, comprising some 22 million households, use nearly 40 per cent of LPG and spend less than 5 per cent of their total expenditure. These households get a large part of the subsidy even when they have the capacity to pay the market price for LPG and will use LPG even when the price is raised. Since providing universal subsidy through price below the cost misdirects the subsidy to the relatively affluent, a strong case can be made for subsidizing LPG as a clean cooking fuel for the poor.

A smart card system or transfer on entitlement based on the UID platform can be used which entitles a household a fixed quantity of LPG at subsidized price beyond which the market price would be charged. The intra-household distribution problem can be addressed to some extent by transferring cash to the account of woman of the household.

Raise the price of domestic LPG. As households have flexibility in absorbing certain additional Costs on LPG by adjusting expenditure on discretionary items. Since LPG is used largely in urban areas its price should be determined on the basis of growth of total GDP (in contrast to agricultural GDP considered for kerosene).

The Group recommends as follows:

As a clean cooking fuel, LPG is a merit good and subsidy to poor households may be needed and justified. The level of subsidy should be fixed by the Government on the basis of ability to pay, and should be paid out directly from the Budget.

A long term viable system of pricing of domestic LPG and effective targeting of subsidy can be ensured through a transparent distribution system based on the UID/Smart Card framework. Under this framework, a single price of LPG for all consumption purposes can prevail in the market, which will eliminate the scope for diversion to unintended uses.

Subsidies to the targeted group such as the BPL rural households can be delivered as entitlements or through direct cash transfers to be given to the woman of the household.

Since the above mechanism is yet to be made operational, an interim measure needs to be put in place. While companies would weed out multiple connections and create a scientific data base for effective monitoring, there is a strong case to increase the price of 14.2 kg LPG cylinder by at least Rs. 100 per cylinder.

Thereafter, the price of domestic LPG should be periodically revised based on increase in paying capacity as reflected in the per capita income. The subsidy on domestic should be discontinued for all others except the BPL households once an effective targeting system is in place.

5. RAPID FRAMEWORK

LINKS

Who are the key stakeholders?

The key stakeholders are as follows:

OMCs (Oil Marketing Companies) like BPCL, HPCL and Upstream Companies like ONGC

Kirit Parikh Report

Urban Population (Lower Income)

Urban Population (Middle Income)

Urban Population (Higher Income)

Rural Population

Environment

Government

Experts

Industries

Transportation Sector

Politicians

Analysis of Key Stakeholders:

Participant

Interest

Strength

Weakness

Potential

Oil marketing companies

(HP, BP, IOC)

1. To earn profits in their business

2. To come out of the debt trap

They have the requisite manpower and skill

Being a PSU, they are forced to function as per the dictum of the government

Provided free market environment, can function efficiently and smoothly

Upstream companies

(ONGC, GAIL, OIL)

1. To earn profits

2. To have enough resources so as to be able to perform their core function of exploration and production

Have the requisite resources in terms of manpower and skill.

PSU and government protocol

Can play a crucial role in enhancing indigenous oil production

Private Players

(RELIANCE, ESSAR, SHELL)

To have free market conditions so that they are at the same level playing field as the PSU's

Are professional, efficient and can provide quality products and services

As per the present policy, they are not given any subsidy or compensation, making it impossible for them to operate.

Can make the entire oil industry competitive.

Government

1. To make sure that they do not lose their vote bank

2. To promote the welfare of the masses

3. Growth and development of the economy

Have the decision making power

Lack of political willingness

Resistance from different corners

Can refurbish the oil sector industry, providing it with a fresh lease of life

Consumers

To get the products and services at the cheapest cost possible

In a democratic set up, politicians and policymakers cannot afford to antagonize them

They tend to be driven by populist views and suffer from myopia

Can create social chaos and topple the government

Expert committee spearheaded by Kirit Parekh

To make sure that their recommendations are accepted

Experienced, knowledgeable and experts

1. Can only make recommendations, cannot implement them.

2. Do not see the political infeasibility

Can give its recommendations for policy reforms in other related areas of the economy

Who are the experts?

The experts would be eminent economists like Dr. Kirit Parikh and his committee members and policy researchers.

We can also consider the Rangarajan Committee, the Chaturvedi Committee and the Vijay Kelkar Committee as experts in this field since they have been a part of expert committees formed earlier.

What links and networks exist between them? AND

What roles do they play? Are they intermediaries between research and policy?

The experts are directly responsible for deciding upon the matters that affect the stakeholders. The experts are the ones coming up with the policy recommendations and hence their role is very vital. It is very essential that the views of the stakeholders especially the common man are considered critically by the experts so that they can come up with a recommendation that takes into account the interests of all the various stakeholders.

There is a direct link between the Government and the policy researchers since the policy making committee is directly answerable to the Government.

In this particular report, we feel that the committee has not taken the view points of the stakeholders into consideration. For e.g. the report states that since the agricultural GDP has increased, the poor people will be able to sustain the increase in the price of kerosene by 6 Rs/Litre. However, the report has not mentioned anything about this share of the GDP actually reaching the farmers. It is an assumption that this increase would not put undue burden on the poor.

Whose evidence and research do they communicate?

There have been committees which have been formed earlier to deal with the same issue like the Rangarajan Committee, the Chaturvedi Committee and the Vijay Kelkar Committee.

The Kirit Parikh Committee has taken into consideration the recommendations given and research undertaken by these committees to come up with the current policy.

As far as the collection of evidence is concerned, there is no specific survey that has been conducted for this purpose. However, the committee has taken data from secondary sources like NSSO, CSO, Petroleum Planning and Analysis Cell, MOPNG (Ministry of petroleum and natural gas) etc.

Which individuals or institutions have a significant power to influence policy?

The following institutions can significantly influence the policy:

Central Govt (Cabinet ministry), Ministry of Petroleum and Natural Gas, Oil Marketing companies like BBCL, HPCL, IOCL and upstream companies like ONGC and GAIL.

Also, individuals like Mr. Murali Deora, Minister for Petroleum and Natural Gas, Mr. Jitin Prasada, Minister of State for Petroleum and Natural Gas, Mr. S Sundareshan, Petroleum Secretary, Dr. Manmohan Singh and Ms. Sonia Gandhi and also the Opposition parties have the power to influence the policy at the formation level.

Unfortunately, this policy does not give any powers to the common man to influence the policy decisions.

Are these policy actors and networks legitimate? Do they have a constituency among the poor?

The policy actors and the networks are legitimate. However, as a group we feel that the policy actors have not really given enough thought to the needs and opinions of the common man.

CONTEXT

Is there a demand for research and new ideas among policymakers?

There is a dire need to come up with an ingenious, viable and sustainable pricing policy for petroleum products which is compatible with the need for the attainment of multiple objectives of the Government.

What are the sources of resistance to evidence based policymaking?

Since this policy has a huge number of stakeholders with varied interests, there is resistance from the various groups like Consumer groups, opposition parties and even from some of the members of the ruling Government like Ms. Mamata Banerjee, Mr. M .Karunanidhi etc.

To quote, Trinamul Chief, Ms. Mamata Banerjee has said that while she has no "quarrel" with the UPA, she had to protest as the hike would hit the common man hard.

What is the policy environment?

The Government formed an expert committee under the leadership of Dr. Kirit Parikh to come up with recommendations to control the fiscal deficit and under-recoveries caused due to the subsidies given on Petroleum products. This policy aims at reviving the languishing oil sector and to insulate the economy from fickle international crude oil prices.

This policy has come up with a number of recommendations that are directly going to impact the common man's pockets like increase in the prices of Petrol, Diesel, Kerosene and LPG by 3.9 Rs/Litre, 3.2 Rs/Litre, 6 Rs/Litre and Rs. 100 per cylinder respectively.

EVIDENCE

What is the current theory or prevailing narratives?

At present the domestic prices of Petroleum products do not completely reflect the fluctuations in the International crude oil prices. The Government artificially manages the pricing strategy so as to insulate the common man from the fluctuations.

As a result of the current policy, the under-recoveries of the OMCs (including the compensation by upstream companies and the Government) stood at 1,03,292 Crores in 2008-09 and Petroleum subsidies are also a major contributor to the rising fiscal deficit of the country.

Is there enough evidence (research based, experience and statistics)?

The policy does not mention any evidence based on research or experience. However, data from secondary sources have been considered for drafting the recommendations.

What type of evidence exists?

The report takes into consideration statistical data along with logical economic explanations to come up with its recommendations.

These recommendations, however, ignore the political feasibility in a democratic setup. Also, in the economic explanations, the underlying assumptions with respect to the affordability of the common man might not hold true.

Is the evidence relevant? Is it accurate, material and applicable?

The evidence is relevant and accurate as it has been taken from reliable sources like the NSSO, CSO etc. and it is applicable in the given context.

Has any information or research been ignored?

Important parameters like the consumer feedback, feedback from the common man etc have been ignored in the policy.

EXTERNAL ENVIRONMENT

Who are main international actors in the policy process?

Around 66% of the total crude oil supply is from the Organisation of Petroleum Exporting Countries (OPEC). So, International crude oil prices are heavily dependent on the crude oil policies set by the OPEC countries. Also, policy frameworks of other oil exporting countries which are not a part of OPEC such as Russia need to be considered.

What influence do they have? Who influences them?

These countries do not have any direct role in the policy making process of our country. But the steps that we take need to take into account the fact that the supply of crude oil in the world market and consequently the international crude oil price is influenced by the policies of OPEC and other oil exporting countries.

Are there exogenous shocks and trends that affect the policy process?

Yes, there are exogenous shocks and trends that affect the policy process. As mentioned earlier, the entire supply of crude oil is concentrated in the hands of few countries. If these countries want, artificial supply shocks can be created to increase the crude oil prices. Myriad oil crises that the world has witnessed in the past are a testament to this.

6. IMPACT ON OTHER INDUSTRIES

Aviation fuel prices hiked

Domestic airlines will have to pay more for filling up aviation turbine fuel (ATF) in their aircraft. The increase in ATF prices, combined with the implementation of the Budget 2010-11 proposals of imposing a 10 per cent service tax on all passengers, is likely to see domestic flying become more expensive. The domestic oil companies increased ATF prices with the increase in price ranging from Rs 1.32 a litre in Delhi to Rs 1.42 a litre in Chennai. Flying with private sector airlines could prove to be a bit more expensive for domestic travellers compared to travelling with Air India. Already, Jet Airways and Kingfisher Airlines are increasing the fuel surcharge by Rs. 300 for flights longer than 750 km, while short-distance flying will become dearer by Rs 200.

Every Re 1 hike in diesel to cost Railways Rs 234 Crores annually

Indian Railways - the single largest high speed diesel consumer in the country at 2.35 billion litres a year - will have to take a hit of about Rs 234 crore annually for every one rupee increase in price of diesel. The total annual traffic earnings of the Railways are almost Rs 80,000 crore, with an annual diesel consumption expense of almost Rs 8,000 crore. The per litre high speed diesel price of the Railways is linked to the price at which the oil marketing companies supply the fuel to their retail outlets.

Petrol car sales may get boost

If the recommendations are accepted, diesel cars could become costlier by as much as Rs 1.8 lakhs. The Government-appointed panel wants an additional excise duty on diesel cars, besides de-regulation of petrol and diesel fuel prices. This will push up the price of diesel cars. Currently, one of the main reasons for the high popularity of diesel cars is that the fuel is cheaper, which translates into low running costs. "They (the recommendations) will certainly help the sale of petrol vehicles in the country. We will obviously be benefited by such a move," said a senior official from Honda Siel Cars India, adding that the Japanese company, which recently recalled 8,523 units of the 2007 City model, has not faced any drop in sales. According to the Society of Indian Automobile Manufacturers (SIAM), carmakers with higher proportion of petrol models are likely to see a spike in sales, while those with a diesel bias may see a reverse trend.

Changes in crude oil market affect vegetable oils

The relationship between crude petroleum oil and vegetable oil via the biodiesel route is by now well established. Changes in the crude petroleum market fundamentals are sure to impact vegetable oils including palm oil. In petroleum which is a normal market, currently high prices are lifting supplies while slowing demand; and the development will have implications for palm oil this year, according to Dr James Fry, Chairman of the UK-based global consultancy LMC International Ltd.

At the Palm and Lauric oils Price Outlook 2010 organised by Bursa Malaysia and CME Group here, he was speaking on the theme: 'Is it smooth sailing or choppy waters ahead'. Because high prices are lifting supplies and slowing demand in the petroleum sector, prices will eventually drop to more sustainable levels, the timing of which is uncertain though, the expert opined.

Bio-fuel Effect

On the other hand, the "old world" where stocks were the main influence behind palm oil prices has vanished, Dr Fry asserted, adding the arrival of bio-fuels has reduced the role of stocks; and since early 2008, they have determined only the premium of crude palm oil over petroleum prices. Suggesting that current prices of crude palm oil (CPO) are somewhat too high considering stock levels and soya bean oil prices, stock movements and the extent of discount crude palm oil suffers over other oils, the speaker said if Brent crude were to remain stable at a shade less than $80 a barrel over the next six months, CPO will take a gradual dip to below 2,600 Malaysian ringgit (MYR) a tonne over the period.

7. CRITICAL REVIEW

Many academicians, Newspapers and other sources have quoted Kirit Parekh report as old wine in the new bottle, since this is not the first attempt by an expert committee to deregulate the prices of petrol. In 2002, after renouncing the Administered Price Mechanism (APM), the prices of petrol began to be determined completely on the basis of market forces of demand and supply. However, due to highly volatile and erratic International crude oil prices, this market oriented policy had to be given up in 2004 to insulate the economy from these exogenous shocks.

In the recent past, myriad other committees viz. Vijay Kelkar committee in 1995, Rangarajan committee in 2005 and Chaturvedi committee in 2008 have given similar recommendations which went unaccepted. However, such recommendations need to be viewed with a pinch of salt.

First of all, in a country like ours where political motivations overshadow economic rationality most of the times, we need to be pragmatic when it comes to policy recommendations, mindful of the political feasibility of such suggestions.

It is highly improbable that the government would shift the entire burden of fluctuations in crude oil prices on to the consumers.

"The government will ensure that the least burden is passed on to the poor and the common man... while also ensuring that the financial health of (PSU fuel retailers) is protected" - (Business Standard, March 18). This tactful and populist comment by Minister of State for Petroleum and Natural Gas, Mr. Jitin Prasada, amid protests by the opposition and even by UPA members, virtually sums up the political milieu of our country.

Shortcomings in the suggested policy

The critiques of the report are against it due to the following reasons:

The bottom two-thirds of this country's population does not have access to or the capacity to pay for even PDS kerosene. And even if one assumes that the top one third does not consume any PDS kerosene, the per capita allotment of PDS kerosene to the bottom two-thirds of the population is a little over one litre a month. But even this abject subsistence level of allotment is not spared.

Contrary to the tenor of the report, there are no net subsidies in the petroleum sector. The total tax collected from the petroleum sector by the central and state governments is a multiple of the combined fiscal subsidies and under recoveries. So any price liberalization must also address the issue of oil sector taxation which the expert committee fails to do.

It ignores that the taxes should reflect the purchasing power parity of the Indian rupee.

Petroleum products have emerged as the India's largest export in recent years, but what has been exporting is not added value but the subsidies to the refineries funded by the Indian taxpayers.

The report talks of taxing pre-NELP concessions and taxes on the windfall profits of ONGC. Then why not also tax oil product exporters who made windfall profits by the exporting the subsidies they received from Indian taxpayers? The Parikh's committee actually rewards such refiners.

Very less BPL families use LPG and the report talks of limiting LPG subsidies to BPL households.

The report talks of compensating higher diesel prices for the agriculture sector through higher support prices. What about the small and marginal farmers who have no surplus to sell? Has the Parikh committee not heard of farmers' suicides even in Punjab- the granary of the country?

The report talks of electrification of the BPL households when the truth is that about half the country's population has no electricity.

The recommendations are too aggressive to be implemented in the current form, given inflation concerns, implementation issues and political considerations.

The Kirit Parikh report suggests seeking ONGC's opinion on revenue sharing and it is not clear to what extent will ONGC be willing to share the under recoveries. There is also no clarity on how does the government plan to finance the under recoveries although earlier it has be resorting to oil bonds which have been largely illiquid for the OMCs.

Practicability of the selective allocations to poorer families through smart cards linked with UID project also needs to be evaluated by the government keeping in view the infrastructure requirement for the same.

The report doesn't talk much about environmental aspects of the policy implementation.

Positive features of Report

The proponents of the report are supporting it due to the following reasons:

During the last six years, there have been under-recoveries of Rs 3-lakh crores by PSU oil marketing companies while Reliance and Essar closed their petrol stations due to lack of subsidy and government support.

This money could have been used to build thousands of schools or hundreds of hospitals to serve the poor better. But in the name of helping the poor, politicians belonging to all parties want the government to control petroleum prices.

The report suggests that PDS kerosene be distributed through smart card or the coupon system to prevent its diversion.

Kerosene causes considerable indoor pollution. For both these reasons, we need to rapidly wean away the kerosene using householder to LPG or natural gas, and then discontinue subsidised kerosene supply

In our pricing policy, we have to be significantly more inclined towards minimising net increases in oil consumption, than say the USA or Canada or Australia, in particular because of our relatively weaker resource endowments, the certainty of higher future growth in consumption, and the greater opportunity we have (being in an earlier stage of development) to put in place more energy efficient technological choices.

PRICE HIKE MAY NOT INCREASE PRICE: Example of European Countries

The hike may not necessarily crimp growth, at least going by the experience of Europe. Several European countries, including the UK and Germany, have adopted a high fuel price policy which has actually resulted in curbing its unproductive usage. In fact, the UK and Germany now consume 12-15% less oil compared to what they were burning over four decades ago in the 1970s. In Europe, petrol today costs the equivalent of a little over Rs 85 per litre while diesel range between Rs 66 and Rs 87 a litre-substantially higher than the pump prices in India. The higher fuel prices are mainly due to higher taxes imposed on fuels. Nearly 65% of the petrol price in Europe represents taxes as against 48.5% in India. Similarly, taxes on diesel amount to around 55% in Europe as against 24.6% in India.

Different Viewpoints

1) Mr. R S Sharma, ONGC Chairman - Happy with the report.

2) Investment bank and broking firm Morgan Stanley-if the entire price hikes are implemented, the direct impact on inflation would be 1.26 per cent (current inflation is 7.3 per cent). "We believe these policies would be positive if implemented, but in the short term, we expect at least the auto fuel price increases to take place. This should increase direct inflation by 0.23 per cent, taking the breakeven price to $69/bbl.

3) Mr. D R Dogra, Managing Director & CEO, CARE Ltd.-"The impact on the oil and gas industry, if any of the recommendations by the committee is implemented, will be extremely positive"

4) Essar Oil Chief S Thangapandian was positive about the report and said that idle assets of the company can be activated and employment opportunities will be created.

5) Centre for Science and Environment (CSE): "The panel's formula is not effective enough to check deadly dieselisation of the car segment that threatens to make our air more toxic, as clean diesel fuels and technologies are still not available in our country."

6) Equity Analyst, A K Prabhakar: If implemented, the proposals would benefit 

GAIL the most, as it has not been included in the new proposed graded 

subsidy sharing mechanism. The proposed formula (post abolition of auto-fuel 

subsidy) would be applicable only to players that were given nominated 

blocks by the government (ONGC, OIL) and would thus not, logically, include 

GAIL.

Comments by the Public

"Government should take away all the indirect taxes levied on the petrol/diesel. There is an infrastructure cess and local sales tax levied on petrol & diesel - so it is costing more. Can the govt withdraw all these levies and then sell the petrol/diesel at the International price?"

"....It is common man's money being given to them (OMC's and other PSU's) in one way or the other...in fact it is good way to distribute wealth...the rich pay more tax, which is used for subsiding fuel for everyone."

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