For a country with an alarmingly high fiscal deficit, India can hardly afford oil subsidies. But sound economics is often trumped by populist politics in the world's largest democracy, especially with a general election around the corner. Take the government's latest decision to increase the cap on annual sales of subsidised cooking gas cylinders. At the end of January, the government raised the cheap LPG cylinder cap per consumer to 12 a year from nine, in turn pushing up the oil subsidy bill by a huge Rs 5,000 crore. "The increase in the number of cylinders has more to do with politics than economics," says former petroleum secretary R.S. Pandey. "Data suggests that 90 per cent of consumers do not use more than nine cylinders annually. Those who consume more do not belong to a class that needs subsidy."
The combined revenue losses of oil companies on diesel, kerosene and lpg touched a record Rs 161,029 crore in 2012/13
Subsidies have always been a sensitive political issue in India. The government first limited the number of
subsidised cylinders at six per consumer in September 2012, but was forced to first increase the number to nine and then 12 in just 17 months as it tried to balance the needs of populism and pragmatism. Prime Minister Manmohan Singh's justification for the initial cap of six cylinders says it all: "Almost half of our people, who need our help the most, actually use only six cylinders or less. We have ensured they are not affected."
The waffling on cooking gas subsidies is just one example of the government's failure to stay the course of reform more than two decades after it threw open its economic doors. An overall view of the oil sector shows that more than three years after the government announced plans to deregulate petrol and diesel prices, oil companies in Asia's third-largest economy are still saddled with a cripplingly-high subsidy burden. Official data show the combined revenue losses of oil companies on diesel, kerosene and domestic LPG at a record Rs 161,029 crore in 2012/13.
The government set up the Kirit Parikh Committee in August 2009 to suggest ways to evolve a viable and sustainable pricing policy for four controlled petroleum products - petrol, diesel, kerosene and domestic LPG. The committee's report submitted in February 2010 suggested linking petrol and
diesel to market rates and limiting subsidies on LPG and kerosene. In June that year, the government deregulated petrol prices and gave the nod to linking diesel prices with the market without specifying a timeline. But the changes did not kick in instantly. The government has increased retail prices over the past few years as it struggles with the transition, but its oil subsidy bill remains high because of rising global oil prices and the depreciation of the rupee. Oil companies lost Rs 2,200 crore on petrol in the first year of deregulation itself.
Oil subsidies are a sensitive issue and the government is trapped between politics and pragmatism on the issue
Subsidised diesel and kerosene prices are a big drain on government resources. Although the government has announced plans to deregulate diesel prices, companies are still weighed down with a revenue loss of Rs 7.39 per litre. In diesel, the government has allowed companies to pass on a monthly increase of Rs 0.50 a litre to consumers, but at this pace it will take at least 15 months for diesel prices to be on a par with the market. A few rounds of increases have not helped with kerosene prices either - oil firms are losing Rs 35.76 a litre while consumers pay Rs 14.96 per litre (in Delhi).
Subsidised cooking gas accounts for one-fourth of the revenue loss of oil companies. The gap between subsidised and non-subsidised domestic cylinders has almost doubled to Rs 656 after the government introduced the cap in 2012. Revenue losses on subsidised cooking gas cylinders of the three big oil marketing firms - Indian Oil, Bharat Petroleum and Hindustan Petroleum - rose from Rs 21,772 crore in 2010/11 to Rs 39,558 crore in 2012/13. The losses stood at Rs 30,604 crore in the first nine months of this financial year. Still, the cap has had one positive impact. K. Ravichandran, Senior Vice President & Co-Head, Corporate Ratings, ICRA, says the nine-cylinder cap "resulted in checking the diversion of domestic cooking fuel to the commercial sector".
Surprisingly, the government has scrapped its ambitious scheme of directly transferring the cash subsidy on LPG to 150 million consumers using the Aadhaar network. It attributed the decision to implementation problems not long after the petroleum ministry said the scheme had been a "stupendous success". Oil companies only hope the subsidies are scrapped altogether.
