Case of Oil Subsidies

Are we stealing from future generations?

Being in an era of rapid technological advancement, where people are persistently trying to improve
their quality of life, there occur many junctions where only one choice can be pursued at the cost of
giving up another. And the world today has made one such choice to use very scarce fuel resources
to satisfy needs of the present generations; giving little importance to their cautious utilization and
our future generation.
Although the fluctuations in hour-to-hour currency exchange rate in the international market have a
huge impact on import price of crude oil, yet it does not affect governments of most developing
countries to import it. Because they want to make it easier to their people to use it so that it can
facilitate the process of economic development. This has been made possible by the provision of
large amounts of fiscal subsidies as well as cash assistance given to oil producing and marketing
corporations (OMCs) .
In India, petroleum is one of the most subsidized sectors. The flawed pricing mechanism has adverse
impacts on the OMCs. There has been steady growth in under-recoveries the difference between
cost price of petrol and regulated price at which it is sold, after accounting for subsidy provided by
the government. The total size of the under-recoveries in 2011 was INR 78,190 crore - a mammoth
1.07% of our GDP! Declining government revenues has caused the government to reduce subsidies
and cash transfers, thereby increasing the losses faced by OMCs.
The government is faced with an outstanding subsidy bill of Rs 800,000 crore to OMCs over the next
5 years. About half of the price paid by consumers per unit of petrol goes to the government in the
form of taxes. Instead of giving subsidy if government Decrease the tax rates that are imposed on the
petroleum product will be more favourable for the citizens of India.
But a more appropriate questions would be are fuel subsidies helping the citizens of India at large?
To answer that question, let we consider the following aspect of the impact of fuel subsidies.
1) It has resulted in mounting fiscal deficit. The subsidies and government share of under-
recoveries has been denting the treasury. It will be sensible to continue providing such
subsidies only if revenues generated by the oil industry in the form of tax surpasses this
amount.
2) The total amount of subsidies provided to the oil industry is much more than that spent by
the government on the social sector to improve health and education. What must be
considered here is the opportunity cost of improving living conditions of the people.
3) While more than a quarter of Indian population lives below the poverty line with no access
to fuel or electricity, a massive amount of money is spent to appease the needs of a
relatively small section of the society that own automobiles and use electricity to a large
extent.
4) There is a growing threat of reduced interest in investment in renewable energy sources.
Subsidized fuels can increase consumption that has immense detrimental impact on the
environment.



The decisions related to pricing and subsidies of the oil industry have close political ties.
Any effort to reform prices of petroleum products has been met with opposition that has
deterred government from taking strong and consistent measures on price reform.
The only way ahead is a four-pronged approach.
1) Abolition of government price control & Change in price mechanism to allow domestic
prices to be in synchronise with that of the international markets.
2) By adopting different countries Best policies to support Poor Households like Indonesian
government used the cash Transfer assistance program, fuel subsidy reduction
compensation Program & Mexicos oportunidades program: - conditional cash Transfers
(ccTs) require recipient families to commit to certain activities, generally related to
childrens health care and education and many more.
3) Systematic dismantling of government subsidy programs.
4) The way in which subsidies are eliminated can also ease the transition to market prices and
build public support for reform.
It would make more public funds available for development of renewable energy resources. It will
make OMCs more competitive, efficient and enhance their investment in technology
advancement and that will ultimately lead to long last use of petroleum. Over all, the entire
economy is put on a path of steady energy-driven progress steered towards the right direction.
At the current consumption rate of petroleum in India, it will last for 20 years. What will be the
panorama of our future generation? The same sight which was in 18-19
th
century, Everything
Stationary!!