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The Perils of Oil Subsidies: India’s Black Gold Hole

April 16, 2011

India would be the biggest beneficiary by far of fossil fuel subsidy removal.  Based on a metric called ‘under recoveries’ – an indicative measure of the rate of effective subsidisation, India’s public subsidy burden amounted to US $40,000 million in 2008-9.

Source: IEA

The International Energy Agency, the OECD’s energy think-tank in Paris, notes in a study of India’s oil subsidies ‘the huge impact of petroleum product pricing on the health of India’s national budget and on India’s macroeconomic stability as a whole’.  In particular, the effects of the oil price run-up in 2008 were devastating, and carried over into 2009.

India’s trade balance for petroleum products continues to deteriorate.

Data: Petroleum Planning & Analysis Cell

 New data for the 10 months of 2010-2011 suggests that the value of net petroleum product imports has further expanded signficantly.

To date, the Indian Government has dealt with the budgetary shortfall caused by subsidies through the issuance of off-balance sheet debt (‘oil bonds’).  Since the IEA paper was published, oil prices have rebounded aggressively, with obvious significance for the budget and Government deficit.  In response, last year the Indian Government announced a movement towards removal of price controls for petroleum products, and avoidance of oil bond issuance.  The Financial Times reports this announcement, though comes up well short on an estimate of the aggregate subsidy. 

The ramp-up in crude prices and product demand will likely leave an increased shortfall in the Government budgetary provisions.  The Energy and Resources Institute (TERI) are undertaking some detailed analysis.  It is questionable how much of the shortfall will be left to consumers.  The distribution of the required increase in cost coverage is to yet to be seen:  additional oil bonds, fiscal coverage, or passed on to consumers.  The prospect of a deficit blow-out looms if the Government picks up the tab.

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