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The great oil subsidy riddle
In 2012-13, 80 per cent of income tax collection in India was used to pay for oil sector subsidies.

Still we are not serious in reducing oil sector subsidies and to redirect the savings to critical sectors like education, health, sanitation and water.  In 2012-13 oil sector subsidies amounted to Rs 161,000 crore while total income tax collected was Rs 206,100 crore. For politicians it is easy to force the three public sector oil marketing companies to dole out subsidies by tweaking oil product prices. But it takes enormous efforts and a super administrative structure to collect income tax from millions of tax payers. No nation can justify the allocation of 80 per cent of income tax revenues to support the oil sector subsidies.

By diverting subsidised oil products those connected with the distribution chain are generating black money amounting to over Rs 50,000 crore a year. Beneficiaries of this largesse are mostly politicians and their cohorts.


Committees, reports galore!

Umpteen studies of several expert committees have shown that while diesel and residential LPG subsidies benefit mostly the rich and the upper middle class, residential LPG and kerosene are diverted to generate black money. The government agreed to phase out subsidies at G-20 meeting in 2009 and again in 2012. But there has been little action.  

The latest saga in this great game is the publication of one more comprehensive oil sector subsidy study, titled “Pricing Methodology of Diesel, Domestic LPG and PDS Kerosene.” Its author Dr Kirit Parikh had submitted a similar report in 2010 with more or less the same key recommendations, which the UPA government duly ignored to implement.


With elections little scope for action…

Since the publication of the report was timed in the thick of elections to five state assemblies, like the previous reports it has also been sent to the cold storage.  A recent IMF study of India’s oil sector subsidy shows that it costs just 0.02 per cent of GDP to compensate completely for 40 per cent of the poorest if oil sector is fully liberalised. However, it will result in savings of 1.7 per cent of GDP by not subsidising the rich and the middle class who can afford to pay higher oil prices.

Leave it to the market…

Expert committees have suggested formula based on Import Parity Pricing (IPP), Export Parity Pricing (EPP) or a combination of IPP and EPP called Trade Parity pricing (TPP). These are arbitrary and do not reflect market realities. Since each petroleum product has a different supply/demand matrix, the best way to determine prices is to use the free market. Developed countries also faced similar problems. After experimenting with different formulae to assess refining and marketing profitabilities, they finally decided to depend on the free market.

In a free market economy the integrated refining and marketing operations drive product prices. The expert groups have totally ignored this important factor. A private company like Reliance has far more sophisticated refineries and can run inexpensive crude oils. As a result its product prices should be considerably less than TPP.  As a result of continuing the regime of subsidy, public sector oil companies have neither the incentive to improve their refining operations nor the funds needed to do this.

The latest Parikh Committee has recommended that diesel price be increased by Rs 5 per litre, LPG price by Rs 250 per cylinder, PDS kerosene by Rs 4 per litre, to cap diesel subsidy to Rs 6 per litre and limit LPG quota to six instead of the present eight. Despite being fully aware that the government is unlikely to increase prices, one wonders why the committee has made such recommendations though all sensible. Instead it should have recommended that the government should stop organising expert committees and start the process of liberalising the oil sector immediately.




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