Published on March 6, 2014
Continuing from last year, Energy Security… here comes The Challenge TEAM OIL BELLWETHERS Nishad Patil Ashish Pandita Siddharth Mishra Hardik Shah
The actual beneficiaries of oil subsidies in a true sense 16 lakh diesel cars sold last year 15% of nations’ diesel consumed by private car owners These facts show that subsidies are benefitting people who can afford to buy fuels at higher rate. Energy subsidies help rich on the expense of poor. Christine Lagarde LPG consumption 9% of Rural vs 62% of urban population
The Inconvenient Truth Crude oil products such as kerosene and LPG are some of the most misused products. Misused Products Kerosene, intended for public distribution system; is often mixed with petrol and sold at petrol prices to masses. Kerosene blending Rate of LPG for commercial and domestic uses are different; the later being cheap due to low taxes and more subsidies. But, the gas agencies often sell cylinders meant for domestic use to ones using it commercially. LPG black market
Some Facts!!! • Oil sector subsidies have become a new sacred cow to be milked freely to generate large amounts of black money to the extent of USD8 to USD10 billion per year. • According to IMF, bottom 40% of income distribution receives only 15-20% of fuel subsidies. • Fuel traders or agents are often directly or indirectly linked to the political establishments and they are minting huge profits by diverting cheap fuel; when country is loosing valuable foreign exchange in order to import crude oil.
Subsidy Impact on the Upstream Oil Companies • • Initially upstream companies have to bare the cost of subsidies. Government gives ex-facto cash assistance. Subsidies HIGH RISK •Take Loans •Invest •Take Loans •Invest Subsidies •Profits Even after the cash assistance from the government approximately 40% of the burden is borne by the company.
Subsidy Impact on net import Ever Increasing Demand + Lack of Domestic Sources Nullifies the effect of subsidies. Crude Import Adverse Effect on the Economy Prices of other commodities increases Rupee depreciates against U.S. Dollar. Increasing import bill and falling rupee value takes India’s position as an importer to the higher level.
Subsidy Reform Petrol: Already liberalized But final control of prices depends on politics, electoral cycles as major OMCs have large govt. intervention Gradual disinvestment from govt. should be implemented. Allowing the mixing of Ethanol in petrol up to 10% will reduce the crude import by a huge margin and that will strengthen Rupee and will help in petrol price reduction and control. (India is in the top 3 sugar producers and most of sugar factories are producing Ethanol from slug.) Blending Biodiesel with Diesel can also be hoped. Every vehicle manufacturer gives the specifications for Biodiesel blending.
Amending the Fuel Pricing Policy Subsidy Reform • LPG & prices are Diesel In India fuelKerosenedecided by Trade Parity Restricting the Supply • from IPP(Import Parity Pricing(TPP). 80% of which comes15% India’s Diesel Consumption - High Income 20% from XPP(Export Parity Pricing). from Economically Advanced Class. Pricing) andFamilies (monthly income above ₹50,000 ) • Abolishing Diesel Subsidies will • Prevent Black Marketing of Result in Inflation India is net importer of crude oil but is a net exporter of Cylinders • Selective Subsidy Concept refined petroleum products due excessive refining • Avoid selling similar products at – Private Diesel for Higher Prices vastly different prices to prevent capacity. – Payment through Credit Cards diversion losses (Kerosene and Diesel, Domestic LPG and only. Commercial LPG) If the percentage of XPP in TPP is increased fuel prices will – Data Collected from RTO • comeGas Connections Piped down considerably and under-recoveries can be Offices. – Submit & prevented. Surrender Cylinders – Prohibit Supply of Subsidized Fuel to Govt. Officers.
Public Subsidy Reform Awareness Campaign • Reducingsubsidies, Social safety nets • Instead of the corruption…the greatest challenge! Indirect ways: transfer programs seeking to prevent the poor or those vulnerable – are to shocksBPL surveys tofrom falling below a certain poverty level. Accurate and poverty ensure proper targets and the extent of the work needed to be done. Pilot projects to understand full fledged implementation. supplementary Fee waivers and feeding exemptions for Conditional In-kind Smart cardprograms and system: Market driven kerosene prices and available at subsidized health care, Cash transfers cash transfers transfers food stamps, rates only to smart card holders. (Linking the subsidies to UID) schooling and vouchers, and utilities coupons Alternate Energy Sources Social safety nets Solid Waste Management Village Level Biogas Plants. Hybrid Cars and Bikes • Development of a program on the lines of The US Low Income Home Energy Assistance Program (for low income households)
Against or For? Considering the number of BPLs in our country sudden and entirely abolishing subsidies is not fair. Subsidy on Diesel should be selective. For LPG no subsidy to high income families. Kerosene: Subsidies have to be maintained as it is still basic fuel for poor India, but measures should be taken to prevent it’s diversion and misuse.
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