case of oil subsidies: are we stealing from future generations?

CASE OF OIL SUBSIDIES:ARE WE STEALING FROM FUTURE

GENERATIONS?

By: Akhil PrabhakarNikhil Varshney

Shailesh PatelSwapnil Pal

*Please view in slideshow

Understanding the case…

Cash assistance

Upstream and

downstream

Government subsidy

Retail prices

Desired Market prices

Total Subsidies

LPG=Rs 410.50

Kerosene=Rs 14.79

Retail prices Desired Market

prices

LPG=Rs 874.44Kerosene=Rs 45.60

Who pays the difference?

Pay the differenc

e

Government Upstream and downstream companies

Fiscal subsidy

Cash assistance

Public money - Tax Revenues

Under-recoveries

Shareholder money

A. Intention of subsidies

Where the primary targets are the Poor and Low Income Households

Making energy affordable

BUT Beneficiaries are not just the poor…

76% of which goes to urban areas & 40% of which is enjoyed by the wealthiest 6.75% of the population

LPG subsidy is DOUBLE the Kerosene subsidy

Kerosene is mostly used by rural areas for lighting and cooking purpose

Substantial portion of subsidies go to well off households

A. Beneficiaries of subsidies

&

Leakages - Multiple connections- Ghost beneficiaries- Duplication

40% of the PDS kerosene when mixed with other fuel is used for non-PDS and non-household purposes

Intended: Poor Households(smaller share)

Un-intended:Well off households

(larger share)

B. Impact on oil companies

Under recoveries

Subsidy – Under recoveries

Less Investible Funds

Less E&P activities & production

More imports

Increasing Fiscal deficit

Inflation

Higher interest rates

Dull Business Activities for

OMCs & NOCs

Impact of External factors-

Depreciation of rupee

Delay in payment of

cash compensatio

n --> Unnecessary borrowings

Higher Interest rates

More import dependency

As a result, less domestic production and less private participation is evident!

ReformsBroad Framework • First step is to properly specify timeline for Subsidy Reform • Consumer should be given time to absorb the effect of price rise• Different approaches must be followed for different fuel• Regular revision of prices to keep subsidy at affordable level.

Price volatility

Fiscal volatility

2013 2014 2015 2016 2017Eliminate diesel under recovery

Elimination of LPG subsidy

40000 50000 60000 70000 80000

400500

600700

800

Per capita Income

LPG

Pri

ce

Reforms

• Should be restricted to “BPL” only. • Proper targeting of beneficiary. • Inflation to be dealt with cash transfer.

Mid Term

Long Term

• Cap on subsidized cylinder. • Number of cylinder must be rationalized

• Subsidized cylinder would help rural areas to switch to clean energy

LPG

Kerosene

Diesel• Elimination of under recovery.• Adverse effect of depreciation over increase in

price of Rs. 0.5/month.

• We need to devise proper subsidising categories where we subsidize fuel for the poor but remove the subsidy from urban households.

• Shift from fossil energy sources to renewable sources of energy will require a huge amount of time & capital.

• Thus, in short and medium term we need to bear the burden of oil subsidies and at the same time initiate proposed reforms for good fiscal health.

• In longer term, we must look to develop subsidising mechanisms for cleaner and sustainable energy sources to make cleaner energy affordable to poor.

For or against subsidy? We cannot choose in absolute black or absolute white. The answer lies somewhere in grey.

Low income household

E & P activities of oil companies

Tota

l Im

pact

Direct impact

Indirect impact

For Against

References

• Kelkar committee report on “Fiscal consolidation”

• IMF working paper on oil subsidy.

• India citizen guide

• Rangarajan committee report 2006

• Parikh committee report 2010

THANK YOU