Oil Is Well, or Is It?

The IEA annual report puts world oil subsidy at $312 billion for 2009; India is listed as the fourth biggest subsidiser with $21bn spent to cushion fuel users.

The IEA annual report puts world oil subsidy at $312 billion for 2009; India is listed as the fourth biggest subsidiser with $21bn spent to cushion fuel users.

As India emerges, eyebrows across the world are knitting up on the sovereign republic’s domestic policies. New Delhi’s fuel subsidies, especially, are a G-20 issue. And the International Energy Agency (IEA) has stiffened its stance against retail pricing that it considers distortive of the world energy market. If governments pay part of the bill to refill your car and shield you from rising global oil prices, you have no incentive to cut consumption or switch to green alternatives—and this keeps demand surging, oil prices rising, and public finances creaking.

The IEA’s latest annual report puts the world oil subsidy total at $312 billion for 2009, with India listed as the fourth biggest subsidiser with $21 billion spent by the state to cushion fuel users. Iran tops the list, with $66 billion, followed by Saudi Arabia’s $35 billion and Russia’s $32 billion. ‘For importing countries, subsidies often impose a significant fiscal burden on state budgets,’ warns the report, ‘while for producers they quicken the depletion of resources and thereby reduce their export earnings in the long term.’

In June, India stopped subsidising petrol, used mostly by the better-off, though it was only a tenth of the entire fuel subsidy bill. Diesel, LPG and kerosene that constitute the bulk still sell extra cheap, with the Centre expected to pick up a tab of Rs 59,000 crore this fiscal year, money which some argue is largely wasted, since the poor—the real targets—gain very little. Especially keen to see off the subsidy regime are investors waiting to buy shares of oil giants like ONGC and IOC, which have public offers lined up.

Yet, the issue is not so simple. For one, raising retail fuel prices will fuel inflation, raging already in India. Second, the poor need cheap fuel, a purpose subsidies do serve in their own imperfect way. “The most opportune time to target subsidies,” says Dr Kirit Parikh, chairman, Integrated Research and Action for Development, “would be when inflation has been moderated and the Unique Identification System (UID) is in place [this way, usage by the poor can be subsidised accurately].”

All said, given the big picture, an energy cushion still has compelling political logic for India.

About The Author

Shailendra Tyagi