case of oil subsidies: are we stealing from future generations?
DESCRIPTION
Analyzing oil subsidies in Indian contextTRANSCRIPT
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