CAIRN-ACE II

UNDERDOGGS GREAT LAKES INSTITUTE OF MANAGEMENT, GURGAON.

1. Subsidies-Beneficiaries
HSD- Retail consumers like Car owners, as almost every car has a diesel

variant and sell at a premium due to low cost of fuel, i.e, HSD. Also, recently subsidy was removed from bulk consumers and not retail consumers of HSD which created a distorted dual price regime. Diesel is cheaper than Furnace Oil, so instead of using Furnace Oil, many plants use Diesel instead. (HSD is a superior fuel than FO and a negative price gap with FO not only puts FO at a disadvantage but also encourages more use of diesel and exploitation of subsidies).
LPG- Middle-Higher class population, Commercial eateries and established

hotels, private car owners who use it instead of Auto-LPG(costlier)

Kerosene- Adulterers. (HSD volume sold is adjusted with Kerosene, price

gap being close to Rs. 35/Litre, as of April 2013)

1.Subsidies- Intended Beneficiaries

HSD -

Poor people like farmers,

State Transport- which caters to the poorest people, Railways- which often provide a means of transportations

to disadvantaged sections Armed forces and commercial establishments. LPG - Households Kerosene Poor rural population.

1. Benefits from Subsidies

Research by the International Monetary Fund (IMF) shows that fuel subsidies are both inefficient and inequitable As per report the study found that the top 20% of households capture six times more in benefits from fuel subsidies than the poorest 20%.

In the past fuel subsidies were touching 2% of Indias gross domestic product According to (TERI), 76 % of the LPG subsidy goes to urban areas and nearly 40 % of the LPG subsidy is enjoyed by the wealthiest 6.75 % of the population

It shows that Indias fuel subsidies are both fiscally costly and socially regressive.

Clearly benefits are not reaching the intended targets for oil subsidy

2.Impact on Upstream Companies

1. These huge losses due to the under recoveries shared by the upstream companies adversely affects the cash flow and profitability. 2. It also hinders the upstream sector from investing in improvement and expansion of their exploration and production operations.
3. Currently to deal with the twin deficits, current account and fiscal, there is a direct need to reduce dependence on oil imports, currently at 80 per cent to increase domestic oil production 4. Therefore upstream companies have to be financially sound so that they can invest in domestic

exploration and production, and acquisition of such assets in other countries.

OMCs are facing continuous erosion in their bottom line. If the trend is not arrested, the situation may reach a point of no return. The possibility of their turning sick is not ruled out, much like SEBs.

2.Impact on Upstream Companies

1. To drive home the point that Subsidies and the burden of them on upstream companies is detrimental to the development of the country as a whole, we can use this chart. 2. In 13 years of time only 6% increase is reported in moderate to well explored area. 3. 5% increase in area which is poorly explored and can use more effort on upstream companies part. 4. A staggering 56% area is unexplored or exploration effort has only begun.

So under-recoveries can be considered a major culprit behind the sentiment that we do not have enough explored oil & gas resources in our country.

3. Reforming Energy Subsidies - Recommendations

1. Govt. could decide a threshold level of crude prices (say $100/bbl), below which all OMCs will

be free to operate on their own terms

2. Targeted subsidy extension is the need of the hour. Govt could give subsidies directly to specific consumers such as Railways, State Transport Corp, Army etc; Smart cards issued to eligible customers and private transporters to claim subsidy 3. Private fuel retailers should be paid diesel subsidy at par with their public sector competition to create a level playing field. Govt could decide on the total subsidy to be given to Pvt and PSU OMCs at the time of the budget. Once subsidy is fixed, all OMCs given autonomy to set their own prices 4. Cash Transfers for PDS Kerosene and domestic LPG linking cash transfers to inflation rates, increasing financial inclusion ( individual bank a/c ).

3. Reforming Energy Subsidies - Recommendations

5.

While some of these measures can be considered short-term fixes, we should have a clear long-term roadmap to eliminate the need of LPG and kerosene. This can be done by focusing more towards renewable energy like solar energy to light homes in the rural areas instead of Kerosene. 1 MW plant can be built with an outlay of Rs. 7.5-8 crores. OMCs are under-recovering Rs. 286 crores per day as of 16th June 2013. So spending 8 crores on a plant which can easily serve at least 5 villages cannot be considered far-fetched. Similarly, LPG can be replaced by providing and if necessary mandating Piped gas connections. Piped natural gas is a better, cheaper and convenient alternative but there are various lobbies in play against this development. One of them is the cylinder distributors lobby. Thus, politics comes into play.

6.

7.

Direct cash transfer scheme needs better accountability and for that it needs better infrastructure, so that we do not create another monster in order to slay one.
So all in all we need to empower the poor and stop pampering privileged classes of our population.

5.

4. Subsidy - Conclusion
It is evident that subsidy mostly does not reach its intended beneficiaries but we cannot

ignore the needs of the poor people and direct cash transfers has promise.

For decades we have held the belief that giving direct money to the poor is bad and they

will spend on bad activities. Now that subsidies have created hoarders and black marketers all around, we need to put our faith in the people who actually need the money and trust that of 10 households getting the money at least 3 or 4 will put the money to good use from the outset and then later on with their progress as a yardstick other households will also straighten up. This happened in Kenya, why cannot it happen in India.(source: http://econ.st/1d8Ea39) be met, like solar plant, biomass plant, etc.

As we go on transferring the money, we also create other avenues for their energy needs to

For getting in the renewable energy into the fold we can provide incentives like tax holidays,

tax rebates to the company or individual who is setting up the plant.

the overall upliftment of the area.

Government can pump in cash into these projects directly and create a multiplier effect for