ACE

Energy subsidies, energy requirements in India

Who, in your opinion, benet the most from the Oil

Subsidy? Are they the
intended targets for which subsidy were conceived in
the rst place?
Successive Governments have found themselves trapped in a maze as far as
petroleum pricing and subsidies are concerned as politics has taken over
sensible economics. We see folks all around us blaming the government for
increasing the fuel prices. However, seen from a long term perspective, the
government policy is quite reasonable. The government should gradually
remove all subsidies on fuel. Here are the reasons in support of this
argument.
Initially after independence the government offered subsidies so that
the Indian industry could use cheap energy sources and thrive. This was
meant to give an initial push to the Indian industry which was still in its
fledgling state. However, since then the subsidy has remained even though
the industry has grown and matured to a great extent.
The oil subsidy issue has now become a political game changer and the
government and the opposition keep pulling each other up every time there
is a price rise. The problem is that the government cannot keep subsidising
the oil bill of the country for very long especially with the rising
consumption, misuse (more diesel cars, inefficient vehicles and machinery)
and over dependence on fossil fuels. Ultimately the prices will increase
because fossil fuel supply is limited and then the oil subsidy bill will
become unbearable for any government.
The effect of significantly lower product retail prices than crude input
prices a large effective subsidy has been the increasing accumulation
of under-recoveries by OMCs. Under recoveries are a notional measure
representing the difference between the trade-parity cost of refined
product paid by OMCs and their realised sale price. In fact, the actual
refinery-gate prices paid by OMCs are not necessarily congruent with
formula-based trade-parity prices as formally calculated. Trade-parity

prices depend on a variety of factors such as contract prices and transport

costs, meaning under-recoveries cannot be isolated on the balance sheets
of OMCs. They are an indicative measure of the rate of effective
subsidisation.
Out of Indias 1.2 billion people, approximately one-fourth live below the
poverty line. Energy access and affordability play an important role in
ensuring socioeconomic development of this segment of the population.
Since poor households typically spend a larger share of their income on
energy needs (NSSO, 2010), changes in fuel prices affect them much more
than the rich. This calls for subsidies on these citizens.
The intended primary beneficiaries of subsidies are poor. Subsiding oil
consumers most of whom are middle class or rich makes no sense in a
poor country. The Arjun Sengupta Committee found that most people live
on less than Rs 20/day. But the implicit petrol subsidy for many carowners exceeds Rs 100/day. This offends both justice and economic sense.
The Government clearly wants to reduce its subsidy burden on
petroleum products. A step in this direction was in allowing oil companies
to decide on petrol prices, small increases in diesel prices till the underrecoveries are neutralised and capping the number of subsidised LPG
cylinder a consumer can get to nine. It has decided to adopt the direct
transfer of subsidies on kerosene and LPG. This is to ensure that the
subsidy goes to the beneficiary and also bring down the subsidy burden.
Those tracking the sector say these efforts are being made to reduce the
fiscal deficit.
Depreciating rupee has resulted in widening losses on fuel sales and oil
firms are currently losing Rs 9.29 per litre on diesel, Rs 33.54 a litre on
kerosene and Rs 412 per 14.2kg LPG cylinder.(08 Aug13)

( Not complete...............include case)

How does subsidy impact the upstream oil companies? Does it
affect Indias position as a net importer of oil?
The effect of significantly lower product prices than input prices a large
effective subsidy has been the increasing accumulation of underrecoveries by OMCs. By 2005, it was recognised that OMCs could not
function sustainably under the weight of building under-recoveries,
shrinking liquidity and significantly impaired corporate flexibility. In order
to lessen the burden of under-recoveries, the Central Government
developed the Equitable Burden Sharing Mechanism (EBSM). Under this

system, it was agreed that Indias upstream public oil companies (Oil and
Natural Gas Corporation (ONGC), GAIL, Oil India Limited (OIL)) would
shoulder one-third of the burden of under-recoveries. This total was to be
appropriated by the Central Government through suitable adjustment of
the cess surcharge borne by ONGC and OIL. Upstream oil companies,
namely Oil and Natural Gas Corporation (ONGC) Limited and Oil India
Limited (OIL), sell crude oil to downstream refineries at discounted rates,
and the downstream companies also bear a portion of the under-recovery
burden. For bulk of fuel losses in the AprilJune period ONGC will chip in
Rs 12,621.78 crore, OIL Rs 1,982.06 crore and GAIL Rs 700 crore to make
up. From upstream share, IOC would get Rs 8,151.77 crore, BPCL Rs
3,666.36 crore and HPCL Rs 3,485.71 crore.