Earlier this month the government finally took a bold step to bring down
the subsidy bill. It announced increase in price of diesel and a cap on number
of subsidized LPG cylinders to just six per year (in some congress ruled states
it is since revised up to nine per year). The news enraged the Facebook using
Indian middle class. The twitterati went berserk with innovative tweets and the
country shut down for a day in protest. Well, almost. However, of all the
people upset by diesel price hike, people driving diesel SUVs were the worst
hit.
 |
| Please do not snatch our crutches |
According to the ministry of petroleum and natural gas, in the year
2010-11, the government gave a subsidy of USD 637 million on Public
Distribution System (PDS) Kerosene and domestic LPG (Liquefied petroleum gas).
On top of this the oil marketing companies made an under-recovery of USD 17.1
billion. The under-recoveries were paid for by the government cash assistance
to the tune of USD 8.995 billion (52%), by upstream NOCs (oil exploration
companies) for USD 6.647 billion (39%) and the oil marketing companies paid for
USD 1.512 billion (9%). Half of the money was paid for by the government in
cash assistance on top of the subsidy.
The cash assistance of USD 8.995 billion must have been financed by tax
money or borrowing. Now the interesting thing here is that India is running a
huge fiscal deficit. For the year 2011-12 it stood at 5.8%, way above the
budget target of 4.6%. The target for this year is 5.1%, which is unlikely to
be met, thanks largely reduced economic activity. Ideally the government should
look at reducing cost (like most corporations do) to bring the deficit down.
Doing away with the subsidy is one of the many steps the government can take.
Often there are emails and Facebook shares suggesting how Indians are
being crushed under expensive fuel prices while our neighbours enjoy fuel at
less than half of what we pay. The truth however is
Country
|
Petrol
|
Diesel
|
LPG
|
India
|
68.46
(Delhi)
|
46.95
(Delhi)
|
400/14.2
Kg (Delhi)
|
Pakistan
|
55.55
|
52.19
|
786/11.8 KG
|
Sri Lanka
|
59.72
|
48.4
|
881/12.5
Kg
|
Bangladesh
|
57.60
|
38.61
|
443/12.5 Kg
|
Germany
|
114
|
103.3
|
-
|
U.K
|
111.4
|
114.79
|
-
|
USA
|
51.87
|
51.87
|
-
|
India still has the lowest diesel and LPG prices in the region, while
the highest petrol prices are the highest. Petrol prices in India are 15 – 23%
higher compared to our neighbours, having said that we should also look at the
impact of subsidised prices on their economies. All three neighbouring
countries are running virtually on international aid money. The local currency
is weak. International donors like IMF (International Monetary Fund) and others
are putting pressure to reduce the subsidy burden in order to receive further
aid money. There have been recent hikes in fuel prices in order to placate the
donors. Pakistan has an erratic supply of fuel despite low prices and natural
gas which is abundant in Baluchistan is sold at a price of Rs. 53, while it is
sold at Rs. 38.35 in Delhi.
Subsidies might ease the burden on our pockets but in the longer run
will ruin the economy. India needs large scale reforms, which includes
elimination of subsidies. While it is fun to be treated as subsidy darlings, it
is in our long term interest as a country to pay the market prices and use the
resources judiciously.
All prices quoted in Rs are in Indian Rupee and converted as per prevailing rates of 4-10-12 (xe.com)
