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Issue 1. Volume 1. February 2014

http://www.iisd.org/gsi/

A biannual survey of energy subsidy policies

INDIA ENERGY SUBSIDY REVIEW

• Infiscalyear(FY)2012-2013,theIndianGovernmentspentINR962billion(1.75percentofIndianGDP)compensatingOilMarketingCompaniesforretailunder-recoveries accrued in this period. The Ministry of Petroleum and Natural Gas estimatesthattotalunder-recoveriescouldreachINR1.81trillioninFY2013-2014,ayear-on-yearincreaseof12percentfromFY2012-2013.

• SinceJanuary2013thegovernmenthas pursued a policy of incrementally increasingtheretailpriceofdiesel,withthestatedaimofeliminatingunder-recoveriesbymid-2014.Dieselpricesrose11percentbetweenJanuaryandNovember2013.

• Following the introduction of an initial cap on the consumption of subsidized LPGperhousehold,thegovernmenthas subsequently increased the quota twice.Inmid-2013thegovernmentbeganto implement a program of electronic payments for LPG subsidies in selected

districts,howeverthiswasdiscontinuedinearly 2014 following legal challenges and extensive implementation problems.

• The reduction in PDS kerosene consumptionhascontinuedin2013asthe government has retained its policy of progressively restricting supply.

• InJune2013,thegovernmentannouncedits intention to revise the domestic gas pricingformulae,withthepotentialtosignificantlyaffectinputpricesinkeysectors and potentially increase related subsidy outlays.

• Despite increases in subsidized diesel pricing and limits on subsidized LPG consumption,currencydepreciationandpersistently strong international oil prices ledtohigherunder-recoveriesperunitforall subsidized fuels in the second half of 2013.Asaresult,totalunder-recoveriesinFY2013-14arelikelytoequalorexceedthosein2012-13.

Highlights

Contents

Introduction

Part One: Recent trends in fossil-fuel pricing policy

Part Two: Guest analysisThe impacts of diesel price increases on India’s trucking industry by Jyoti Parikh and Gayatri Khedkar

Balancingstate,utilityandsocialneedsinagricultural electricity supplyby Ashwini K. Swain & Udai S. Mehta

The Last WordSubsidies for petroleum products in India: Why and for whom?Kirit Parikh and Jyoti Parikh

Bibliography

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India Energy Subsidy Reviewis published by The International Institute for Sustainable DevelopmentInternationalEnvironmentHouse2,ChemindeBalexert,5thFloor1219,Chatelaine,Geneva,Switzerland

Tel +4122917-8748Fax [email protected]

ExecutiveDirector-InternationalInstituteforSustainableDevelopment-Europe Mark Halle

Programme Leader– Subsidies and Sustainable Energy Peter Wooders

EditorDamonVis-Dunbar AuthorsKieranClarke,ShrutiSharmaandDamonVis-Dunbar

Design: The House London Ltd. Web: www.thehouselondon.com

Acknowledgments Special thanks to Kaushik Ranjan Bandyopadhyay for his valuable input. Any errors are the responsibility of the authors.

India’sfuelsubsidiesareasignificantfiscalburden,costingonaverage1.4percentofGDPsinceFY2008(seeFigure1).InFY2012—2013,13.7percentofIndia’sbudgetexpenditure1 was allocated to fuel subsidy payments. Currentfuelpricingpoliciesencouragewaste,undermineenergyefficiencyandincreasedomesticgreenhousegasemissions.Theyarealsosociallyregressive,benefitinghigherincomegroupsdisproportionately.Forthesereasons,India’s fuel pricing policy merits attention.

ThisisthefirsteditionoftheIndia Energy Subsidy Review,anewbiannualpublicationoftheInternationalInstituteforSustainableDevelopment’s(IISD)GlobalSubsidiesInitiative(GSI).PartOneofeacheditionoutlineseconomicandpolicydevelopmentsaffectingIndia’ssubsidizedkeyfuelmarkets(diesel,liquefiedpetroleumgas,keroseneandnaturalgas),andanalysesthedynamicsofeachmarket.

PartTwofeaturesanalysisbyguestauthorsonissuesrelatedtoenergypricingpolicy.Inthisedition,twoarticlesexamine the impact of energy subsidy reforms on India’s transport and agriculture sectors respectively. This edition ofthereviewconcludeswithacommentarybyDrKiritParikhandJyotiParikh,distinguishedpractitionersinthefield.

Table 1: Sed ut perspiciatis unde

Introduction

3

Figure 1 Total fuel subsidy expenditure vs. fuel subsidy expenditure as a % of GDP, FYs 2008-09—2011 through 2013—2014

GDP is at Market Prices

Source:GDPfor2008to2013atMarketPricesfrom(PlanningCommission,2013a);TotalSubsidyfrom(MinistryofPetroleum,2013a)2.

Issue 1. Volume 1. February 2014

(a) Summary of recent policy developments

FuelsubsidypolicyinIndiahasundergonesignificantchangeoverthelastyear.

Diesel markets: The Government of India has pursued a policy of incremental monthly price increases since January2013,withthestatedaimofdecontrollingdieselpricesbymid-2014(Jaiswal,2013).Sofar,thegovernmenthaslargelymetitscommitmenttoincreasedieselpricesbyINR0.5permonth,withpricesrising12.63percentfromINR47.65toINR53.67(USD0.76toUSD0.85)3betweenJanuaryandDecember20134 (PPAC,2013).

LPGmarkets:InSeptember2012,thegovernmentintroducedacapontheconsumptionofsubsidizedLPGcylinders,allowinghouseholdswithanLPGconnectiontopurchaseamaximumofsixcylindersperannumatsubsidizedrates.ThisquotawasthenincreasedtonineinJanuary2013,andrecentlyfurtherincreasedto12perhouseholdinJanuary2014.InMay2013thegovernmentbegantoimplementaprogramofelectronicpayments(DirectBenefitTransfer(orDBT))forLPGsubsidiesinselecteddistricts,howeverthiswas discontinued in January 2014 following legal challenges and extensive implementation problems. Beyond amendmentstodealerfees,therehasbeennochangeinthepricingofsubsidizedLPGaspartoftherecentpackage of reforms.

Kerosene markets: The reduction in PDS kerosene consumption has continued in the past year as the government has retained its policy of progressively restricting supply. Prior to the collapse of the DBT program forLPG,thegovernmenthadproposedtheintroductionofelectronicpaymentsforkerosenesubsidies,howeverthiswasnotadoptedfollowingconcernsraisedbyseveralstategovernments(whichareresponsibleforkerosenedistributionwithinthePublicDistributionSystem).AsinLPGmarkets,therehasbeennochangein the pricing of subsidized kerosene as part of the recent package of reforms.

Naturalgasmarkets:InJune2013thegovernmentchangedthedomesticdownstreamgaspricingformulaforfiveyears,whichmayleadtoadoublingofgaspricesfromApril2014.Thenewformulaistheweightedaverageofimportedgaspricesandpricesatthreeinternationalgastradingpoints:HenryHub(NorthAmerica),NationalBalancingPoint(UnitedKingdom)andtheJapanesewellheadprice.Thispricereformhasbeenthesubjectofextensivedomesticcontroversy,withseveralpublicactorsallegingthatitwillgeneratesubstantialwindfallprofitsforIndia’smainprivately-ownednaturalgasproducer,RelianceIndustriesLtd,andpotentially increase total energy subsidy costs.

(b) Overview of current fuel subsidy expenditure

WithinternationalcrudepricesdenominatedinUSdollars,thecombinationofhigheroilpricesandaweakerrupeeincreasestherupee-denominatedgapbetweenmarket-basedcostpricesandcontrolledretailprices.Asaresult,under-recoveriesperlitrehaveremainedpersistentlyhigh,evenasIndianretailfuelpriceshaverisen(fordiesel,seeFigure8and7)andsubsidydistributionhasbeenrestricted(inthecaseofLPG).Forexample,despitepriceappreciationofcloseto10percentbetweenAprilandSeptember2013(seeFigure8),dieselunder-recoveriesperlitreincreased126percent5.Thistrendhas,however,reversedasthevalueofthe rupee stabilized.

Nonetheless,under-recoveriesforthethreesubsidizedfuelshavefallenformuchof2013comparedto2012(seeFigure3,4).InFY2012—2013,theIndianGovernmentspentINR1000billion(USD16billionwhichis1.75percentofGDP)compensatingoilmarketingcompanies(OMCs)forretailunder-recoveriesaccruedinthisperiod(seeFigure5).ForFY2013—2014,currentbudgetestimatesforCentralGovernmentexpenditureonsubsidy-relatedcompensationtoOMCsisINR650billion(USD10.4billion)(MinistryofFinance,2013);Thegovernmenthas,however,alreadyprovidedINR80billion(USD12.8billion)inthefirstquarterofFY2013—2014topartiallycompensateOMCsforunder-recoveries(Hindu,2013a).Totalunder-recoveriesondiesel,LPGandkeroseneamountedtoINR609billion(USD9.74)(PPAC,2014)forthefirsthalfofFY2013—2014,comparedwithINR855billion(USD13.68billion)inFY2012—2013(PIB,2013a).

Part One: Recent trends in fossil-fuel pricing policy

Issue 1. Volume 1. February 2014 5

Figure 2: Indian basket crude – INR price, 2013

Figure 3: Under-recovery by fuel FY 2012-13 and 2013-14

Source:PriceofCrudeOilBasket(PPAC,2013);ExchangeRate(BankofEngland)

Source:(PressInformationBureau,2014)

Under Recovery in INR Billion Jan -‐ March Apr -‐ Jun Jul -‐ Sep

Year 2012 2013 2012 2013 2012 2013

Diesel 244.6 182.46 290.42 105.54 236.69 46

PDS Kerosene 72.87 75.19 72.74 65.07 70.57 70

Domestic LPG 94.81 104.1 114.95 85.18 70.49 115.36

Total 412.28 361.75 478.11 255.79 377.75 231.33

Figure 4: Under-recovery, total and by fuel, 2012—13 and 2013—14

Figure 5: Under-recovery burden sharing (INR billion), 2009-10 – 2012-13

Source:(PressInformationBureau,2014)

Source:(MinistryofPetroleum&NaturalGas,2012)(Reuters,2013)

BOX1:CrudeoilremainsIndia’slargestimport,providing80percentofdomesticconsumption(DNA,2013).AsinternationaloilpriceshaverisenandtheUSdollarvalueoftherupeehasfallen,thecostofoilimportshasincreasedsignificantly(seeFigure2).Demandforimportedoilisrelativelyprice-inelasticintheshort-to-medium-term,sothedepreciationoftherupeeisunlikelytocauseadeclineindomesticdemand;rather,theamountspentonoilimportsislikelytocontinuetorise.

Inrecentyears,India’scurrentaccountdeficit(CAD)hasexpandedrapidly,increasingbyanominalfactorinexcessoftensince2007(fromUS$8billiontoUS$90billioninFY2012-2013)(Kumar,2013).Thishasraisedconcernsaboutthere-emergenceofthemacroeconomicimbalance(thestructuralemergenceofsimultaneousbudgetandcurrentaccountdeficits)thatprecipitatedIndia’s1991economiccrisis.AsindicatedinFigure6,oilimportshavecontributedasignificantandgrowingproportionofIndia’stotalCAD.Morerecently,thereissomeoptimismsurroundingIndia’sCAD,asgrowingexportsanddecliningimportsnarroweditto1.1percentoftheGDPinthethirdquarterofFY2013-2014(BusinessStandard,2014).Indianpolicy-makersstressthatfuelsubsidyreform is driven in part by a desire to temper the demand for crude oil imports.


Figure 6: Long-term composition of Indian CAD

Figure 7: Diesel prices vs. Monthly Consumption, 2013

(c) Diesel (HSD)

InJanuary2013,theGovernmentofIndiacommittedtomonthlyincreasesinthesubsidizedpriceofdiesel(PressTrustofIndia,2013).Asaresultofthiscommitment,thepriceofdieselinNewDelhiroseapproximately13percentbetweenJanuaryandDecember2013(PIB,2013).InJanuary,thegovernmentalsoendedsubsidiestobulkconsumersofdiesel(nationaldefence,heavyindustry,transportcorporations,powergenerators,etc.).

Thesereformsreducedtheunder-recoveryperlitreofdieselsoldbetweenFebruaryandMay2013(seeFigure8).However,theappreciationininternationalcrudepricesandahistoricallyweakrupeeledtoaquadruplingofdieselunder-recoveriesperlitrebetweenMayandSeptember,evenasretailpricesincreased.Under-recoveriesperlitreareexpectedtostabilizefollowingtheirpeakinSeptember2013asthevalueoftherupeestrengthens(Reuters,2014).India’sOMCsreportedtotalunder-recoveriesondieselinthefirsthalfofFY2013-14ofINR282.6billion(USD4.52billion)(PressInformationBureau,2014).

Source:(Fattouh,Sen,&Sen,2013,p.8)

Source:(PPAC,2013)

Figure 8: Total monthly under-recovery for diesel vs. monthly under-recovery/litre

Source:(PPAC,2013)

AsshowninFigure7,Indianconsumptionofdieselfellconsiderablyinthesecondhalfof2013.Thisispartlyaconsequenceofseasonalfactors,butalsotheresultofhigherprices,bothforbulkandregularconsumers.Bulkorderswereparticularlyaffected—withbulkdieselsalesfallingby41percentbetweenJanuaryandJune2013asaresultofdecontrolledpricesforindustrialconsumers(Jacob,2013).

BOX2:InOctober2013,India’sExpertGrouponPricingMethodologyofDiesel,LPGandPDSKerosene,chairedbyKiritParikh,releaseditsreportonproposedchangestopricingmethodologyforrefinedproducts.ReflectingtradedynamicsinIndianfuelmarkets,currentrefinerygatedieselpricesaredeterminedonthebasisoftradeparitypricing(80percentconstitutedbyanimportparitypriceand20percentbyanexportparityprice),whilekeroseneandLPGrefinerygatepricesare based on import parity pricing.

Thegovernmenthadproposedusingexportparitypricing(EPP)asthebenchmarkonwhichtobaserefinerygateprices,especiallyasIndiahasinrecentyearsbecomeagrowingexporterofrefinedproducts(chieflythroughRelianceIndustries’Jamnagarrefinery,thelargestrefineryintheworld).Perhapsmoreimportantly,asexportparitypricesarelowerthanimportparity,usingtheformerwouldresultinlowerretailunder-recoveriesforOMCs,andreducecashcompensationrequirementsforthegovernment.TheexpertgrouprejectedtheideaofEPP,arguingthat,fordiesel,itwouldnotreduceunder-recoveries(whichareincreasinglydeterminedbycurrencyandcrudepricedynamics)andthatitwouldbeaninappropriatebenchmarkforLPGandkerosenesincedemandforthoseproductsismetbydomesticOMCsupply,itselfdependentonimportsofcrude oil.

(c) LPG

InSeptember2012thegovernmentintroducedacapontheconsumptionofsubsidizedcylinders,allowinghouseholds with an LPG connection to purchase a maximum of six cylinders per annum at subsidized rates. Followingpoliticalopposition,inJanuary2013thisquotawasthenincreasedtonineperhousehold.InMay2013thegovernmentbegantoimplementaprogramofelectronicpayments(DirectBenefitTransfer(DBT))for LPG subsidies in selected districts. Following legal challenges to the program’s design and extensive implementationproblems,theschemewasdiscontinuedinlateJanuary2014.Inaddition,thegovernmentannounced an increase in the per household quota from nine to 12 per annum with effect from April 2014.


Figure 9: LPG Monthly Consumption, 2013

Source:(PPAC,2013)

Source:(PPAC,2013)

Figure 10: Total monthly under-recovery for LPG vs. monthly under-recovery per cylinder

LPGdemandhasgrownstronglyyear-on-year(seeFigure11)partlyasthenumberofLPGconnectedhouseholdshasrisen(substantiallyattheexpenseofkeroseneconsumption),makingthesubsidyonthisfuelanincreasinglyexpensivebudgetaryitemforthegovernment.Nevertheless,betweenJanuaryandJune2013,totalIndianLPGconsumptionfell8percent(seeFigure9),mostlikelyasaresultofnewlimitsonyearlyconsumptionofsubsidizedLPG cylinders6.Inthesecondhalfoftheyeartotalconsumptionreboundedstrongly.LPGunder-recoveriespercylinderfell45percentbetweenJanuaryandJune2013(seeFigure10).Inasimilarpatterntothatseenindieselmarkets,asaresultofstrengtheninginternationaloilpricesandaweakrupee,under-recoveriespercylinderincreasedbetweenJuneandSeptemberfromINR335toINR470(USD5.36toUSD7.52).

Kerosene (SKO)

Kerosene is used primarily as a source of lighting for rural households. The subsidy on kerosene is targeted and deliveredthroughrationcardsoperatingwithinthePublicDistributionSystem(PDS)forpoorhouseholdswithoutaLPGconnection.SubsidizedPDSkerosenepricesinIndiaarecurrentlyamongthelowestintheworld.However,withtherapidexpansionofLPGconnectivityinIndia,totalconsumptionofkeroseneisinyear-on-yeardecline(seeFigure11).Aswithotherfuels,deterioratingtermsoftradehaveledtoanincreaseinkeroseneunder-recoveriesperlitreinthesecondhalfof2013(Figure12).Nonetheless,fallingkeroseneconsumptionhasledtoadeclineintotalunder-recoveriesfromPDSkerosene,andalsoasaproportionoftotalunder-recoveriesforallsubsidisedfuels.

There have been several attempts to computerize PDS databases in order to control subsidy leakage and deter dieseladulteration,whichhasbecomeasignificantissueasdieselpriceshaverisen(thepricedifferencebetweendieselandkerosenehasincreasedfive-foldsince2002;seeFigure13).CashtransferslikethoseimplementedundertheDBThavebeenrecommendedfordistributingkerosenesubsidies;suchaschemehasalreadybeenpilotedinAlwar district in Rajasthan.

Figure 11: Kerosene vs. LPG Consumption, 2009-10 – 2012-13

Figure 12: Quarterly under-recovery for kerosene (total and per litre)

Source:(PPAC,2013)

Source:(PPAC,2013)


Figure 13: Kerosene-diesel price differential

(d) Natural Gas

InlateJune2013,theGovernmentofIndiaannouncedasignificantrevisiontotheformulausedtodetermineprices for domestically produced natural gas. Analysts have suggested the new formula could lead to a doublingofgasprices,toUSD8.40/mmBtu,whenintroducedatthebeginningofFY2014-2015(1April,2014).India’sretailgaspriceshavenotchangedsince2007,whenabenchmarkdealwassealedwithRelianceIndustriesthateffectivelycappeddomesticdownstreampricesatUSD4.20/mmBtu.ThenewpricingformulawillonlyapplytocontractssignedafterApril2014andwillbeineffectforfiveyears.RelianceIndustrieswillbenefitfromthenewpricingformulaunderabankguaranteeschemetoensureproductiontargetsaremet.Reliancehasbeenunder-producinggasfromtheKGD6blockandtherehasbeenspeculationthatitdidsotomakewindfallprofitsafterApril2014(IBNLive,2013).

Theformulaisbasedontherecommendationsofthe2013RangarajanCommittee,whichsuggestedthatpricesbedeterminedbyaweightednetbackaverageofIndia-boundLNGcontractpricesandhubspotpricesintheUS,theUKandJapan.Forbothcomponentsofthisformula,referencepriceswillbederivedfrom12-monthrollingaveragesineachofthemarketsconsidered,andIndianpriceswillberevisedeveryquarterbased on changes in these underlying prices. Applying this revised formula at today’s gas prices lead to a priceofUSD7/mmBtu,lessthantheUSD8.20/mmBtuinitiallypredictedandsignificantlylessthantheUSD15-16/mmBtucurrentlychargedunderinternationalLNGcontracts.

Theshiftinpolicysignifiedbythischangeingaspricedeterminationreflectsthegovernment’sdesiretoencourage investment in domestic natural gas production. Investment has stagnated under current pricing arrangements,andanincreasewouldshoreupweakeningtradebalances.(SeeBox1above,onIndia’sCADissues.)Indiacurrentlymeetsabout25percentofitsgasneedsoninternationalmarkets,payingsignificantlyhigher LNG contract prices for this proportion of its supply. Higher gas prices will also increase the GovernmentofIndia’sroyaltyrevenuesfromdomesticgasproducers.Significantlyincreasedpricesunderthenewschemewillinevitablyimposeadditionalcostpressuresonlargegasusers(inpowergeneration,fertilizerproduction,petrochemicalsetc.)andtheircustomers.Thegovernmentisconsideringtheimplementationofpricesubsidiesforstrategicallyimportantgasconsumers,especiallyinpowerandfertilizerproduction.

ConsumptionofnaturalgasinIndiahasbeenrelativelystableduring2013.Itwillbeinterestingtoexaminetheresponse of consumption and upstream gas investment to higher prices after April 2014.

(e) Recommendations

Basedontheaboveanalysis,thefollowingrecommendationsaremadeforeachfueltype:

Diesel

• Thegovernmentshouldcontinuetoraisedieselretailpricesmonthly,withtheaimofachievingpriceliberalization by the end of 2014.

• This should be done by automatically applying a consistent and transparent pricing formula to retail prices eachmonth,ideallybytheOMCsastheyretailtheproduct.

• Diesel pricing formulae could include reference to changing international oil prices and rupee currency dynamics(orbyreferencetochangesinunder-recoveryperunitoffuelovertime).Intimesofweakeningtermsoftradeandhigherunder-recoveriesperunit,monthlypriceadjustmentsshouldbecommensuratelylarger.

LPG

• The government should help increase access to LPG connections for poor rural consumers by improving financialinclusionandbygraduallyreducingtheyearlyquotaofsubsidizedLPGcylindersperconnection.

• Considerprovidingone-timegrantsforthepurchaseofexistingLPG-efficientcookingequipmentinordertotemperstronggrowthinLPGdemand,controlunder-recoveriesandreducehouseholdenergycosts.

• WorkwiththeprivatesectorandgasPublicSectorUndertakingstoexpandpipednaturalgasinfrastructure in key urban centres.

PDS Kerosene

• FollowingtherecommendationsoftherecentExpertGrouponthePricingofPetroleumProducts,PDSkerosene prices should be tied to growth in agricultural GDP. While agricultural incomes have increased byover60percentsince2002-2003(Parikh,2013),nominalkerosenepriceshavenotchangedsignificantly,meaningexpenditureonkerosenehasfallenasaproportionofruralhouseholdincome,whiletotalkeroseneunder-recoverieshaveexpanded.

• Confirmestimatedcostsavingsfrompilotedcashtransferssystemsforkerosenesubsidies,andprioritizetheexpansionofsuchdisbursementsystems,onthemodelofatargetedDBT.

• LPG-for-keroseneprogramsshouldbeprioritizedandexpanded,especiallyinruralregions,followingthe example of Delhi NCR as well as countries like Indonesia. The design of these programs should consider the limited ability to pay for the initial costs of LPG connections and cylinders of many poor rural households,offeringone-timesubsidiestoeasethetransitionfromkerosenetoLPG.

Natural Gas

• Monitorthesocialandeconomicimpactofhighernaturalgasprices(especiallythroughhigherpowerandfertilizerprices)anddesigntargetedcompensationmechanismswherenecessary.

1India’sbudgetexpenditurein2011-12wasINR13,043.65billion(USD208.69billion)(MinistryofFinance,2013)andFossilFuelSubsidyExpenditurewasINR1519.84billion(USD24.31billion)(includingfiscalsubsidyandcompensationgiventoOMCsbytheGovernment).(MinistryofPetroleum,2013a,pp.62,64)

2TotalexpenditureonfossilfuelsubsidyiscalculatedasthesumoffiscalsubsidyonLPGandPDSkerosene(thoselistedontheunionbudgetofthenationalgovernment)andunderrecoveriesondiesel,LPGandPDSkerosene.DataforthesefigureshasbeensourcedfromPPAC(MinistryofPetroleum,2013a)

3ExchangeRatefromwww.xe.comon26January2014,INR1=USD0.016usedthroughthisentireedition

4PriceofDiesel(INRperlitre)inDelhi

5Under-recoveryondieselinSep2013wasINR14.5per(USD0.23)litreofdieselandinApril2013wasINR6.42(USD0.1)perlitreofdiesel.(PressInformationBureau,2014)

6TheGovernmenthadintroducedacapofsixsubsidisedcylindersperyearbutrevisedittoninecylindersfromApril2013(EconomicTimes,2013)

Notes


Part Two: Guest analysis

The impacts of diesel price increases on India’s trucking industry JyotiParikhandGayatriKhedkar,IntegratedResearchforActionandDevelopment

Dieselconstitutes38percentofIndia’spetroleumconsumption,65percentofitusedintransportation(Anand,2012).Whileareductionindieselunder-recoverieswillhavesignificantfiscalandeconomicbenefitsfortheeconomyasawhole,risingdieselpriceswillhurtindustryanddiesel-intensivesectors.

ThisbriefsummarizesthefindingsofarecentstudybyIntegratedResearchandActionforDevelopmentthatexplores the relative vulnerability of truck operators and the trucking industry to increases in diesel prices and elaborates on policy measures to improve the trucking industry’s resilience to higher fuel prices. Two important questions addressed were:

1. What factors make the trucking industry vulnerable to diesel price increases?2. What measures would reduce the vulnerability of the trucking industry to diesel price increases?

Thestudyincludedconsultationswiththeoperatorsofsmall,mediumandlargetruckingoperations,aswellasmembersoftheAll-IndiaMotorTransportCongress,aleadingIndiantransportassociation.

Factors responsible for high diesel consumption and wastage

Poor quality roads: National highways constitute only 2 per cent of the total road network but carry 40 per cent of the traffic.Deloitte(2012)estimatedthatlessthan10percentofIndia’stotalroadnetworkisofgoodquality.Manylargestretchesofnationalhighwayshaveonlytwolanes,reducingtheircapacitytohandlelargetrafficloads,andIndia’spoor road quality results in higher fuel consumption.

Waiting time at tollgates:Waitingattollgatesandcheckpostsaccountsforalmost50percentofdelaysonalongtripandwastesfuelworthbetweenINR100andINR150billion(USD1.6toUSD2.4billion).Tollsandsalestaxaccountforapproximately15percentoftripexpenses(TCIL,2012).

Overloading:Overloadingispossibleonlyintheopen-bodytrucksnormallyusedbysmalloperators.Theyoftenclaimthatlowfreightratesforcethemtooverloadtheirvehiclesinordertomaintainprofitmargins.Theyalsoclaimthattheprofitgainedthroughoverloadingmorethancompensatesfortheadditionalmaintenancerequiredonthetruck.However,thisviewmaybeshort-sighted,giventhelong-termwearonthetrucks.Pressuretooverloadtruckscanbeattributedtotheinabilitytochangefreightrates,lowfuelefficiency,andon-roaddelaysthatpushupcostsandlowerprofitmargins.

The effect of recent price increases on truckers

Truckoperatorsfindasharphikeeasiertopassontocustomers(HinduBusinessLine,2013a).Freightratesarenormally revised only once every two or three years but many operators said that their rates had not changed since 2009. The main reasons cited for not being able to pass on the costs of higher fuel prices were:

• Stiffcompetition,resultinginpricewarsandunder-pricingpractices.• Weakbargainingcapacityandinformationasymmetries,whichgivebrokerstheupperhandinnegotiations.• Theabsenceoflong-termcontractswithfirmsthatallowratestoreflectchangesinfuelcosts.Mostcontractsare

oralandinformal.Wherecontractsarerevisedregularly,theyinvolveacompetitivebiddingprocesseachtime.Truckoperatorshavenoguaranteesthattheywillgetthenextcontractwiththesamefirm,andmustunderpricein order to win bids.

Measures that would make truck operators more resilient to higher diesel prices

Reduce waiting time at toll gates

TCILandtheIndianInstituteofManagement,Kolkata(IIM-C)(2012)foundthattolldelaysareamajorimpedimenttoefficienttruckingoperations.Althoughthecostsofdelaysarenotsignificantforindividualtrips(INR122.79/hourorUSD1.9/hour),thestudyestimatesthatthetotalannualcostofdelaytotheIndianeconomyisaboutINR270billionperyear(USD4.32billion).ThestudyestimatesthatthetotalcostofadditionalfuelconsumptionduetodelaysandreducedspeedsisaboutINR600billionperyear(USD9.6billion).

A study by the Working Group on Roads for the National Transport Development Policy Committee for the Ministry ofRoadTransportandHighways(GovernmentofIndia,2012)identifiedthefollowingstrategiestoimprovetheefficiencyoftollbooths:

• Broadcastreal-timetrafficinformation.• Introduce electronic toll collection on all major highways and expressways. • Initiate public transportation information systems in major cities. • Introduceadaptivetrafficsignals,congestionchargesandparkingguidance.• Installweigh-in-motiontechnologyforgoods-carriagevehiclesonroads.• Consider reducing toll rates after recovery of capital cost for publicly funded projects or after the expiry of

concession periods for private investment projects.

Set up computerized exchange networks to link clients and trucker operators

There are information asymmetries in the trucking industry. Small operators lack information on consignments and depend on brokers as intermediaries. Information technology can bridge this gap in supply and demand and reduce the role of brokers in obtaining business and deciding freight rates. One such intervention is the Transport Exchange ofIndia,aprivateinitiativethatactsasanelectronicintermediarybetweenshippersandtransporterswhoregisterwiththeexchange(Sriraman,Venkatesh,Karne,&Mohite,2006)TheTransportExchangemaintainsreal-timedataontruckersandcustomersonlineandco-ordinatesthematanominalcharge.Registrationisbytelephone.

Improve fuel efficiency

Thelowfuelefficiencyofmosttrucks(3–4km/litre)increasesthetotalcostpertrip.TheTCIL-IIM-C(2012)notesthat,ifmileageofvehicleswereoptimal,savingstotheeconomywouldbeapproximatelyINR240billion(USD3.84billion)peryear.Thisisnot,however,asimplematter.Fuelefficiencyislowforvariousreasons,includingpoor-qualityroads,delaysattollgatesandlackoftrainingfordriversonproperusageandmaintenanceoftrucks.Lackoftechnologyandmanufacturingstandardsarealsoproblems.Forexample,truckmanufacturingcompaniesonlymakethechassisofthevehicle.Thebodyisbuiltbyunorganizedroad-sidevendors,makingitdifficulttoimposequality controls and standardization.

Encourage long-term provisions that allow for freight rate adjustments as fuel prices change

The contracts of most small operators of bulk haulage trucks do not provide for revision of freight rates if fuel costs rise. Larger companies normally have clauses in their contracts with large truck operators that provide for rate adjustmentslinkedtofuelpriceincreases.Togivesmalleroperatorsaccesstosuchprovisions,thegovernmentshouldmakeitmandatorytoincorporatefuel-costconsiderationsintocontractsthatextendtomorethansixmonths.

Introduce training for truck operators and revise financing conditions

Littletrainingisrequiredtoenterthetruckingbusinessandtruckpurchasescaneasilybefinancedthroughnon-bankingfinancialinstitutionslikeShriramTransportFinanceLimited(thecurrentleadersintruckfinancing)andTataCapital.Nationalizedbanksalsolendtosmalloperators(onetofivevehicles)onaprioritybasis.Theresultisthattrucksgetfinancedwhetherornottheycangenerateenoughrevenue,decouplingrisksfromreturnsforfinancialinstitutions.Thereisanurgentneedtoassignprerequisiteslikeaminimumassetbasetoaccessfinancingandminimumeducationandtraininginordertoenterthetruckingbusiness.Thereshouldalsobeguidelinesforfinancersto assess the revenue generation and loan repayment capacity of truck operators. These guidelines would help reduce the rate of interest for existing players and act as an effective entry barrier for new entrants.

Fix minimum freight rates

Thetransportationindustryisverycompetitive,sounder-pricingiscommon.Apopularsolutionthatemergedduringconsultationswithtruckoperators,aswellaswithresearchersattheAsianInstituteforTransportDevelopment,CIRTandtruckoperators’unions,isfixedminimumfreightrates.

Thegovernmentcouldregulateminimumfreightrates,fixedonper-tonneandper-kmbases.Freightratesaremostlyafunctionofdemand,giventheexcesssupplyoftrucks,sofixingminimumratescouldfurtherreducedemandduringperiodsofrecession.Becauseofthediversityofgoodscarried,fixingoneratemightbedifficultand


ineffective,whilefixingseparateratesforvariousclassesofgoodscouldbecumbersome.Similarly,thequalityofroadsvariesbetweenstatesandbetweenhillyareasandplains,sosettingaminimumper-kilometreratecouldhaveanegativeimpactontruckerswithnationalpermits.Iffixedrateswerehigherthanmarketprices,bothsupplyandidle time would increase. Despitetheseissues,truckoperatorshavearguedthatissuingguidelinesforfixingfreightrateswouldlikelyreducetheirvulnerabilitytoincreasingdieselpricesandhelpmaintainprofitmargins.

Set uniform diesel prices across states

Truckdriversoperatingonlongroutesaredirectedtofilltanksinthestatewheredieselischeapest.FortruckersfromDelhi,dieselischeaperintheadjoiningstateofHaryana,somosttruckersfillwithdieselthereatthebeginningof the trip. This requires a higher requirement for working capital at the beginning of the trip. If the diesel price is uniformacrossstates,truckdriverscanfillwithdieselanywherealongtheirroute.Forexample,atruckoperatingontheDelhi–MumbairoutecanfilluponceinDelhifortheoutwardjourneyandagainatMumbai,afterreceivingfreightchargesinthere,forthereturn.Insuchcases,therequirementofworkingcapitalforonetripissignificantlyreducedand truck operators can operate more than one truck with the same working capital.

Thisisadifficultoption,given,India’sfederalstructureandcouldleadtonewmarketdistortions.Whileoil-marketingcompanieshaveauniformbasepricefordieselinallstates,statetaxesondieseldifferandareanimportantrevenuestreamforstategovernments.Centralgovernmentcanonlyadvise—notcompel—statestoraiseorlowertheir taxes.

Recommendations

Thereareurgentfiscalandenvironmentalreasonstophaseoutthesubsidyondieselfuel.Thestudyconcludesthatthe vulnerability of the trucking industry to diesel prices arises from the inherent structural and regulatory issues of theindustry,whichmustberectified.Withfuelcostsataround56percentoftotaloperatingcosts(TCIL,2012)truckoperators are vulnerable to increased diesel prices. Togivetruckoperatorsimmediaterelieffromrisingdieselprices,thestudyrecommends:

• Reduce waiting time at tollgates. • Incorporateflexibilityintolong-termcontractstoadjusttochangesinfuelcosts.• Fix minimum freight rates.

Recommendationsforlong-termstructuralchangesinthetruckingindustryinclude:

• Set up computerized exchange networks for matching loads to trucks. • Improvethefuelefficiencyofthetrucks.• Introducetrainingfortruckoperatorsandexaminetruckfinancing.

Balancing state, utility and social needs in agricultural electricity supplyAshwiniK.Swain&UdaiS.Mehta,ConsumerUnity&TrustSociety

SubsidizedpowerfortheagriculturalsectorisakeyfeatureoftheIndianelectricitysystem.Sincethelate1960s,inordertogarnerthesupportoffarmers,state-levelpoliticalpartieshaveendorsedandprovidedagriculturalelectricitysupplyatahighlysubsidizedrate,sometimesfreeandmostlyunmetered.Thesesubsidies,largelyanexerciseinpoliticalpatronage,aremarketedasdevelopmentalpoliciestoensurefoodsecurityandimproverurallivelihood.Nevertheless,theyhavetheirrootsinlegitimatedevelopmentalconcernsgoingbacktoIndia’sGreenRevolutionofthe1960sand1970s(Swain,2006).

Thehigh-intensity,high-productivityfarmingpracticesintroducedduringtheGreenRevolutionwerehighlydependentontheavailabilityofadditionalinputs,particularlyirrigationwaterandchemicalfertilizer.Stategovernments saw a need to provide farmers with subsidized agricultural inputs. The agricultural electricity connectionsandconsumptionhavenowballooned,andthecoststostateutilitieshavebecomeunsustainable(Swain,2006).

Theavailabilityofcheapelectricitypromotesover-useofelectricityandwaterinIndianagriculture(PlanningCommission,2006;BadianiandJessoe,2011),andcontributestoIndia’sgroundwaterandelectricitycrises.Whileagricultureconsumesaboutone-fourthofIndia’selectricity,itsrevenuecontributionisaslowassevenpercent,leavingstateutilitiesinfinancialdistress(PFC,2013).Thoughpartoftherevenuegapiscoveredthroughcross-subsidizationfromindustrialandcommercialconsumers,theremaininggapisasignificantburdenonstatefinances. Currentsubsidizedelectricitypoliciesencourageoveruseofwater,leadingtosoildegradation,soilnutrientimbalanceandgroundwaterdepletion,allofwhichhaveaffectedagriculturalyieldandincome.Duetohighdemandandlowpayingcapacityofthesector,theutilitiesinevitablyprioritizehighreturnconsumersovertheagriculturalsector.Farmersmusttoleratepoorqualityelectricalservice—limitedhoursofsupply,inadequatevoltageandfrequentbreakdowns—whichhasindirectcostsincludingunavailabilityofwaterwhenitisneededforirrigation,theneedforinvestmentinbackuparrangements,andfrequentpumpburnouts.

Subsidizedelectricitytofarmersismoderatelyregressive,inthatthebenefitsaccruemoretowealthierfarmersthantheirsmallercounterparts.(SantandDixit,1996;WorldBank,2001;HowesandMurgai,2003).

Despitethesedrawbacks,subsidizedelectricityhasenhancedfoodsecurityandthelivelihoodsoftheruralpoorinIndiasincethe1970s.Planstoreformagriculturalelectricitypricingshouldclearlyreflectthis,andrecognizethattheverypoorestinIndiansocietyalsobenefitfromthecurrentarrangement.

Reforming agricultural electricity subsidies: Getting the prices right

Giventheimportanceoftheruralpoorasapoliticalconstituencyinmanystates,reformingelectricitypricingandsupplyhasbeenextremelydifficultforstategovernmentsforseveraldecades.Neverthelesstherehavebeenanumberofrecentattemptsatsubsidyreformatthestatelevel,concentratingrelativelynarrowlyonmarket-basedpricingofelectricityandcostrecoveryforutilities.Herearetworecentexamplesofthisprocess,includingsomeofthe unintended consequences of reform:

Rationing the agricultural electricity supply in Gujarat

Ruralloadsegregationreducestheagriculturalloadandimprovesruralelectricitysupply,byconnectingnon-agricultural and agricultural consumers by to separate feeds. About eight states have initiated rural load segregation schemes. Only in Gujarat has it been applied throughout the state and described as a success.

Theschemeresultedintwosignificantimprovements:

• Non-agriculturalconsumersreceived24hoursofelectricalsupplyfordomesticuseandforschools,hospitals,market places and village industries.

• Farmersreceivedlimitedhoursofhigh-qualityelectricitysupply.

Theschemehasbenefitedtheutilitiesbyreducinglosses,thefts,andagriculturalconsumption.Ithasimprovedpeakloadmanagementandrevenuerealizationinproportiontoconsumption.Thenetfinancialgains,however,donotprovidethereturnrequiredonthelargeinvestmentsmadeinthescheme(WorldBank,2013).Thestatehas,however,benefitedfromreducedsubsidyburden.Therationingofelectricitysupplyhascappedtheextractionofgroundwaterandcontributedtogroundwaterconservation(SwainandCharnoz,2012).

Althoughfarmersappreciatetheimprovementsinelectricityquality,theyarenotunreservedlyhappywiththescheme,particularlytherationedsupply.FarmersintheareasofcentralandsouthernGujaratwherewaterisabundant,whousedtooperatetheirpumpsfor18-20hoursadayandsellwatertosmallandmarginalfarmers,havelostincome.However,waterbuyersarehardesthitasthegroundwatermarketshaveshrunkandwaterprices


haveincreasedby40-60percent.Accesstoirrigationforsmallandmarginalfarmershasdeclined,pushingmanyoutofirrigatedfarmingandareasonablelivelihood.(SwainandCharnoz,2012).

Metering agricultural electricity in West Bengal

The removal of meters from agricultural connections was arguably the biggest blunder in the process of institutionalizing agricultural electricity subsidies. Reinstallation of meters to measure actual consumption is a prerequisiteforreform.Whilefewstateshavemovedinthisdirection,WestBengalhasbeensuccessfulinmeteringagricultural connections.

WhileagriculturalelectricitysubsidiesareaninsignificantpartofthestatebudgetandofthestatefiscaldeficitinWestBengal,thesehavebeenwellcoveredthroughcross-subsidization.Nevertheless,utilitieshaveblamedsubsidiesfortheirdeterioratingfinances.Inresponse,thestatehasinitiatedmandatorymeteringofagriculturalelectricityconnections.Beginningin2007,thestatebegantoinstallGSMcellular-basedmetersthatrecordconsumption by time of day. This enables the utility to charge the farmers on the basis of actual load and time of consumption.Thegoalsaretobettermanagetheagriculturalload,reducetheagriculturalsubsidy,improverevenuerealizationandphaseoutcross-subsidizationfromindustrialconsumers(SwainandCharnoz,2012).

A major outcome of the metering reforms in West Bengal has been a new incentive structure within the groundwater market.Thenewarrangementrequiresthepumpownerstopayonlyfortheamountofelectricityconsumed,sotheyarenolongerforcedtosellwater.Thewaterbuyershavelostbargainingpower,sothepumpownersincreasedwaterpricebybetween30and50percentafterthereforms,eventhoughannualelectricitybillshaveactuallydeclined.Thishashelpedthewealthierfarmersbyreducingtheirelectricitybillsandincreasingtheirprofitfromsellingwater(Mukherjietal.,2010).Atthesametime,thewaterbuyershavetofaceproblemslikeadvancepaymentandunavailabilityofwateratdesiredtimes,whichreducestheequityofaccesstowater.

Theimplicationsforutilitieshavebeenmixed:Whiletheutilitiesgainthroughreducedpeakloadandloss,theyfaceashort-termreductioninrevenue(Mukherjietal.,2009).Inthelongrun,theremightbesignificanttransformationinthegroundwatermarket,markedbyanincreaseinpumpownership,asthecostofelectricitycomesdown.Whilethereformsmayimproveefficiency,therewillbeshort-termnegativeimpactsonequityofirrigationwateraccess,andnosignificantimpactonelectricityandwaterconservation.

A broader approach to reform: balancing state, utility and social needs

Subsidizedelectricityforagriculturalusershasbeenseenasanissueofeconomicinefficienciesaffectingfarmers,utilitiesandstategovernments.Consequently,theproposedsolutionshavefocusedonrevisingthepriceorimprovingpumpingefficiency.However,agriculturalelectricitypricingisamulti-dimensionalissueandislinkedwithgroundwaterscarcity,ruralpovertyandfoodinsecurity.AsseeninGujaratandWestBengal—twoapparentreformsuccessstories—anarrowapproachcanhavedamagingimpactsonthepoorestandmostvulnerable.Whilerationingandmeteringofagriculturalelectricitysupplyprovidevitaleconomicgains,thesemeasurescomewithacostforwaterbuyers—poorerfarmerswhocannotaffordtoownirrigationpumps.

Thiscallsforanembeddedapproachtoagriculturalelectricitypricingreformsthatconsidersthesocial,economic,political and environmental dimensions simultaneously. The major reform objectives in India are to improve resource (waterandenergy)useefficiencyandimprovecostrealizationwithintheagriculturesector.Raisingelectricitypriceshasnotworkedwellasastand-alonepolicytoachieveefficienciesinenergyproductionandusewhilemaintainingfoodsecurityandlivelihoods.Whatmayworkisacombinationofelectricitytariffrebalancing,betterwatermanagement,andimprovedagriculturalpracticesandpolicy.Inthissection,wemakeanumberofsuggestionstowards a broader approach to the problem.

Improving irrigation management

While irrigation programs have been high on India’s development agenda and have received sustained public funding,onlyone-thirdofIndia’sirrigatedlandshaveaccesstosurfacewater.Theremainingtwo-thirdsmustextractgroundwaterforirrigation,loweringwatertablesandrelyingheavilyonelectricityforpumping.

Expansion of surface irrigation systems emerges as an important part of the solution and a prerequisite to taming agriculturalelectricityandgroundwaterconsumption.Withgoodmonsoonrainfall,watersourceslikeHimalayanglaciersandawidenetworkofrivers,Indiahasahugeuntappedwaterpotential.Indiamustrevitalizetheexistingnetworkofcanalstoreducedependenceongroundwater,andthusonelectricity.

Ontheotherhand,over-extractionofgroundwaterandalackofinitiativestorechargethewatertablehavecausedfastandcontinuousdepletionofwatertables.Asthewatertablegoesdown,morepowerfulpumpsthatdrawmoreelectricityareneeded.Sustainedgroundwatertablerechargecanhavesignificantimpactonagriculturalelectricityconsumption.WhileIndiareceivesagoodamountofrainfallthatcanrechargethesetables,muchofitiswastedordischarged to the sea. There is a need to promote innovative schemes to recharge them. While the farmers can do much,individuallyandasacommunity,throughwaterharvestingandstorage,thestatesneedtopromoteawarenessand encourage such initiatives.

Watermanagementisamulti-levelactivitythatinvolvesvariousstakeholders.Developmentofsurfaceirrigationhastobetakenupbythestategovernments,waterharvestingisacommunityorlocalactivity,whileincreasingefficiencythrough modern technologies is a farm level initiative. At each level the state must play the role of facilitator and policy framework provider.

Modifying agricultural practices

Farmerscanusewaterandelectricitymoreefficientlybyadoptingsomeeasyandinexpensivepracticesatfarmlevel.Landlevellingisatraditionalpracticethatreducestheneedforwater,reducesthetimeneededforseeding,increasesyieldandreducesweeds.Similarly,mulchingenhancesthemoistureretentioncapacityofland,reducestheneedforwater,reduceserosion,providesnutrients,suppressesweedsandincreasesfertility.Farmersshouldusecropresidues,bothfieldandprocessresidues,asmulch,insteadofburningthemandfurtherreducingsoilmoisture.Whethertoavoidtheextralabourorfromalackofawarenessoftheirbenefits,farmersseldomadopttheseinexpensiveandefficientpractices.ThestatemaytakeinitiativestoreintroducethesepracticesinIndianagriculturethrough an incentive structure.

Cropdiversificationisanothercost-effectivewaytoimproveagriculturalresourceefficiency.Indianfarmerstendtogrowspecificcropsandadoptnewvarietiesonlyreluctantly.However,shiftingfromdominanceofasinglecroporvarietytoarotationcanberesource-efficient.Ithelpstoimprovesoilhealth,balancesoilnutritionandmaintainadynamicequilibriumintheagro-ecosystem.Farmerscanalsosavewaterandelectricitybyfarminglesswater-intensivecropsorchoosinglesswater-intensivevariantsofthesamecrop.ThoughIndiahasdevelopedlesswater-intensivevariantsofwheatandrice,adoptionofthesevarietiesislow.Thestatecanfacilitateadoptionwithpilotdemonstrations,awarenesscampaigns,distributionofseedsandincentives,whilesupportingfurtherresearchonnew crop varieties.

Realigning wider agricultural policy

Governmentscanalsofacilitatecropandvarietydiversificationbyrealigningfoodprocurementpolicy.India’sagricultural product procurement policy has been biased toward water intensive crops by ensuring a higher minimumsupportprice,whichmeansabetterandmoresecuremarketprice.Farmershavelittleincentivetoplantlesswater-andelectricity-intensivecropswithsimilarreturns.Resource-efficientplantingcanbepromotedthroughprice incentives.

Fertilizer subsidies also increase water and electricity consumption. Farmers believe that higher levels of chemical fertilizerswillgeneratebetteryields.Fertilizersubsidiesencouragefarmerstousethemmore,resultinginhigherdemand for irrigation water. States may facilitate a transition from chemical fertilizers to organic manure by shifting the subsidy incentive.

Agriculturalelectricitypricingreformscouldbeuseful,butonlyaftertamingwaterdemandthroughthemeasuresdiscussedabove.Oncethewaterandelectricitydemandhavedeclined,highertariffswouldbeaffordabletofarmers,whichinturnwouldfostersocialacceptance.Atthesametime,electricitysubsidiesneedtoberedesignedwithafocusonconservation.Forinstance,offeringstrongerpriceincentives(lowtariffs)tolow-consumingfarmersandlowerpriceincentives(hightariffs)tohigh-consumingfarmerscouldbeeffective.Weneedtodevisetoolsfortargetedtransferofsubsidiestoneedyfarmers,includingmeteringtheelectricitysuppliedtofarmers.


The Last Word

Subsidies for petroleum products in India: Why and for whom?KiritParikhandJyotiParikh,IntegratedResearchandActionforDevelopment

Consumerpricesofthreecriticalpetroleumproducts—diesel,LPGandkerosene—arecurrentlysetbygovernment.Theseproductsconstitute50percentofthepetroleumproductsconsumedinIndiaandtheirpricesdonotfullyreflectthecostofsupplyingthem.Thisresultsinlossesforpublicsectoroilmarketingcompanies(OMCs).(Sincethegovernmentdoesnotreimburseprivate-sectorOMCs,theydonotselltheseproducts).TheOMC’slosses,called“under-recoveries,”arecoveredjointlybythegovernment,OMCsandthepublicsectorupstreamcompanies,Oiland Natural Gas Corporation and Oil India Limited.

FuelsubsidieshaveanimpactonthegrowthofinflationandGrossDomesticProduct(GDP).AstudycarriedoutbyIRADe(Parikh,Parikh,Ghosh,Panda,&Kaur,2012)hasshownthatwhensubsidiesincrease,sodoesthefiscaldeficit.Thisinturnincreasesthemoneysupply,causinghigherinflation.TheReserveBankofIndiathenraisesinterestrates,resultinginlowerinvestmentandlowerGCPgrowth.Whileeliminatingsubsidiesimposesshorttermpain,itresultsinconsiderablegainsovertime. Subsidy policies are not necessarily pro-poor policies

Fuelsubsidiesareostensiblydistributedtoprotectpoorconsumers.Dieselsubsidies,forexample,areintendedtokeeptransportcostsincheck,andkeepessentialitems,suchasfood,affordable.However,astudybyIRADe(Parikh,Parikh,Ghosh,Panda,&Kaur,2012)showedthatraisingthepriceofdieselby10percentwouldincreaseconsumption expenditure by around 0.6 per cent for the poorest 10 per cent of the people in rural and urban areas. Incontrast,a4percentincreaseintheWholesalePriceIndexduetoinflationresultingfromafiscaldeficitwouldputa much larger burden on the poor consumers.

Today,27percentofdieselisconsumedbydiesel-poweredvehicles(Parikh,2013)manyofwhicharesportutilityvehicles(SUVs)ownedbyrelativelyaffluentpeople.ThedifferencebetweenpetrolanddieselpricesimplicitlyprovidesalargesubsidytoSUVowners,whichwasestimated(Parikh,2012)atonetimetobeashighasINR50,000(USD800)peryear.

InFY2012—2013,ofthetotalsubsidyforpetroleumproductsofINR1,610billion(USD25.76billion),INR396billion(USD6.3billionor25percent)wasforLPG.Thepoorest20percentofhouseholdsreceived1percentofthissubsidyonLPGinruralareasand8percentinurbanareas.SubsidizedLPGcanbejustifiedonthegroundsofthenecessityofcleancookingfuelsforpoorhouseholdswhowouldotherwisecookwithdirtybio-fuelslikewood,agriculturalwasteanddung,whichcauseindoorairpollutionsleadingtorespiratorydiseasesandeyeinfections.Indoorairpollutioncausesanestimatedhalfamillionprematuredeathseveryyear.However,bygrantingtheLPGsubsidyequallytoallhouseholds,thepolicyalsosupportsthepurchaseofLPGbywealthierhouseholdswhocouldafford to pay market prices.

ThesubsidytokerosenewasINR294billion(USD4.7)inFY2012—2013.Thekerosenesubsidyforpoorhouseholdswithoutaccesstoelectricitywasjustifiedforlightingneeds.However,itisestimated(NationalCouncilofAppliedEconomicResearch,2005)that30to40percentofsubsidizedkeroseneisdivertedtoblackmarket,mainlytoadulteratediesel(ItisironicthatIndiainvestedINR200billionorUSD3.2toupgraderefineriestoproducecleanerdiesel,whichisthenadulterated!)

Progress is being made, but more needs to be done

The government is concerned about subsidies on petroleum products and has taken measures to contain it. In late 2009itsetupanexpertgrouptorecommend“aviableandsustainablesystemofpricingpetroleumproducts.”In

February2010thegrouprecommendedthatpetrolanddieselpricesshouldbemarket-basedatboththerefinerygate and at the retail level. It also recommended that the subsidy on LPG and kerosene be reduced until a system (basedonauniqueidentificationcard)todeliverthesubsidytothepoorisimplemented(MinistryofPetroleumandNaturalGas,2010).PetrolpriceswerederegulatedinJuly2010.Asaresult,thepriceofpetrolhasincreasedfromINR44.72/litre(USD0.71/litre)inJanuary2010inDelhitoaroundINR75/litre(USD1.2/litre)today.Thepriceofdieselhasbeenraisedperiodically:byINR5/litre(USD0.08/litre)inJune2010,INR4/litre(USD0.06/litre)inAugust2012,andtherehavebeen11monthlyincreasesofINR0.45/litre(USD0.007/litre)sinceJanuary2013.However,depreciationoftheIndianrupeeandtheincreaseinworldcrudeprices,hasslowedthefallindieselunder-recoveries.TheywereINR9/litre(USD0.14/litre)inlate2013,comparedtoapproximatelyINR13/litre(USD0.2/litre)in January 2010.

Thepriceofkerosene,whichwasINR9/litre(USD0.14/litre)beforetheParikhCommitteereportof2010,isnowINR14.96/litre(USD0.23/litre).ThesubsidyisINR38/litre(USD0.6).However,theamountofsubsidizedkerosenehascomedownasthenationalgovernmentreducesitsrationstostates.Itwas7.4milliontonnesin2012-13,comparedto9.1milliontonnesin2009-10.

ThepriceofLPGinDelhi,whichwasINR350/14.2kgcylinder(USD5.6/cylinder)inJanuary2010,increasedtoINR450/cylinder(USD7.2/cylinder)inNovember2013.ThesubsidyisstillINR500/cylinder(USD8/cylinder).PakistanchargesconsumerstheequivalentofINR996/cylinder(USD15.9/cylinder)andSriLankaIndianINR1274/cylinder(USD20.38/cylinder).Alimitofsixcylindersperhouseholdperyearwasproposedbutinresponsetopoliticalpressureitwasraisedtoninecylinders.Whilethishasnotsignificantlyreducedhouseholdconsumption,ithasreduced diversion of subsidized LPG to other uses.

Despiteallthesemeasures,iftheworldcrudepriceremainsatUSD110/barrel,under-recoveriesin2013-14willbearoundINR1,400billion(USD22.4billion)andaroundINR1,600billion(USD25.6billion)in2014-15.

Subsidies,apartfromlargemacro-economicimpacts,discourageenergyconservationandinnovationinrenewableenergy,whichcanhelpreducedemandandpollution.WhiletheIndiahastakenmanystepstocontrolsubsidies;ithasstillsomedistancetogo.Itneedstoletdieselpricesbemarket-determined,andprovideatargetedcashsubsidy to poor consumers of kerosene and LPG.


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About IISDTheInternationalInstituteforSustainableDevelopment(IISD)contributestosustainabledevelopment by advancing policy recommendations on international trade and investment,economicpolicy,climatechangeandenergy,andmanagementofnaturalandsocialcapital,aswellastheenablingroleofcommunicationtechnologiesintheseareas. We report on international negotiations and disseminate knowledge gained throughcollaborativeprojects,resultinginmorerigorousresearch,capacitybuildingindevelopingcountries,betternetworksspanningtheNorthandtheSouth,andbetterglobalconnectionsamongresearchers,practitioners,citizensandpolicy-makers.

IISD’svisionisbetterlivingforall—sustainably;itsmissionistochampioninnovation,enabling societies to live sustainably. IISD is registered as a charitable organization inCanadaandhas501(c)(3)statusintheUnitedStates.IISDreceivescoreoperatingsupportfromtheGovernmentofCanada,providedthroughtheCanadianInternationalDevelopmentAgency(CIDA),theInternationalDevelopmentResearchCentre(IDRC),andfromtheProvinceofManitoba.TheInstitutereceivesprojectfundingfromnumerousgovernmentsinsideandoutsideCanada,UnitedNationsagencies,foundations and the private sector.

About GSIGSIisaninitiativeoftheInternationalInstituteforSustainableDevelopment(IISD).GSIputsaspotlightonsubsidies—transfersofpublicmoneytoprivateinterests—and how they impact efforts to put the world economy on a path toward sustainable development. In cooperation with a growing international network of research and mediapartners,GSIseekstolaybarejustwhatgoodorharmpublicsubsidiesaredoing;toencouragepublicdebateandawarenessoftheoptionsthatareavailableforreform;andtoprovidepolicy-makerswiththetoolstheyneedtosecuresustainableoutcomes for our societies and our planet.

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