Chapter I: INTRODUCTION TO SUBSIDIES IN INDIA
India has historically subsidized energy with the objective of protecting its consumers from
international price volatility and providing energy access for its citizens, especially the poor.
However, energy subsidies place a heavy burden on government budgets, while often failing
to reach their targeted beneficiaries.
The petroleum sector is one of the most heavily subsidized energy sources in India. The
pricing of petroleum products has changed over time, alternating between free market and
regulated regimes until 2010, the central government controlled the prices of petrol, diesel,
and kerosene and liquefied petroleum gas (LPG). In June 2010, the Indian government
deregulated the price of petrol. However, prices for diesel, PDS kerosene and domestic LPG
continue to be regulated. Even in the case of petrol, OMCs can only change prices every
fortnight, and only after seeking approval from the government. In contrast to fuel subsidies,
electricity subsidies in India are disbursed by the state governments, at considerable cost to
state budgets.
1.1 What is an energy subsidy?
A number of definitions of subsidies exist. One internationally agreed definition has been
adopted by the World Trade organization (WTO), which identifies four main types of
subsidy:
(a) Direct transfer of funds (e.g., grants, loans, and equity infusion), potential direct transfers
of funds or liabilities (e.g., loan guarantees);
(b) Government revenue that is otherwise due is foregone or not collected (e.g., fiscal
incentives such as tax credits);
(c) Provision of goods or services other than general infrastructure, or purchase of goods; and
(d) Income or price support.
The different forms that energy subsidies can take are shown in figure 1.
Figure 1: Types of Energy subsidies
As for subsidies on energy in particular, the International energy agency (IEA) has a widely
accepted definition (IEA, 1999):
“Any government action that concerns primarily the energy sector that lowers the cost of
energy production, raises the price received by energy producers or lowers the price paid by
energy consumers”
Subsidies for energy can be broadly classified as
? Producer subsidies: Producer subsidies are provided to companies to encourage
investment and increase output.
? Consumer subsidies: Consumer subsidies, as the name implies, support the
consumption of energy, by lowering prices at which energy products are sold.
1.2 Why subsidize energy?
Energy subsidies aim to improve energy access by making prices more affordable, shielding
domestic consumers from international price volatility, and supporting energy-intensive
industries. Although energy subsidies do have the potential to generate benefits in the short
term by addressing these goals, they have been criticized for leading to unintended adverse
consequences. These consequences and the challenges in addressing them are discussed in
detail in this report.
1.3 Energy subsidies in India: A snapshot
In India, subsidies are provided for petroleum products and electricity. These products are
retailed at prices that are often kept artificially low compared to market rates. While subsidies
on both electricity and petroleum products are provided in the form of lower prices for the
final product, the methods of subsidy delivery and the amount of the subsidy itself varies
widely across the different products.
1.3.1 Petroleum Products
Three petroleum products, namely PDS kerosene, domestic LPG and diesel are sold for less
than international market prices, with the government providing a fiscal subsidy on LPG and
kerosene.
The subsidy, however, covers only a part of the difference between the cost price (including
marketing costs) and the selling price of these three petroleum products, thereby resulting in
“under-recoveries” for the OMCs. Under-recoveries are calculated as the difference between
the cost price and the regulated price at which petroleum products are finally sold by the
OMCs to the retailers after accounting for the subsidy paid by the government.
Are Energy Subsidies Good For Indian Citizens?
Out of India’s 1.2 billion people, approximately one-fourth live below the poverty line.
Energy access and affordability play an important role in ensuring socioeconomic
development of this segment of the population. Since poor households typically spend a
larger share of their income on energy needs (NSSO, 2010), changes in fuel prices affect
them much more than the rich. It is therefore imperative for the government to take into
account the impact that any policy on energy subsidies can have on these citizens.
Subsidies have multiple effects on the government’s budget. The first and easiest to identify
is the impact on the fiscal balances of the country. The fiscal subsidy to the petroleum
companies in 2010–11 was 2,904 Crore (US$637 million). In addition to the fiscal subsidy,
the government also grants assistance to the OMCs in the form of cash and oil bonds to share
the under-recovery burden. In 2010–2011, this assistance amounted to Rs 41,000 Crore
(US$8,995 million) (MOPNG, 2011).
Table1- Subsidies during the period FY10, FY11, FY12
The details of subsidies as per the Government budget and their % to the National
GDP during last 3 years are given in table below.
Unit 2009-10 2010-11 2011-12
GDP Rs. Cr 64,57,352 76,74,148 89,12,178
Subsidies:
Fertilizer Rs. Cr 61,264 62,301 67,199
Food Rs. Cr 58,443 63,844 72,823
Petroleum Rs. Cr 14,951 38,371 68,481
Total Rs. Cr 1,34,658 1,64,516 2,08,503
Subsidies as % to GDP
Fertilizer % 0.95% 0.81% 0.75%
Food % 0.91% 0.83% 0.82%
Petroleum % 0.23% 0.50% 0.77%
Total % 2.09% 2.14% 2.34%
doc_790690466.docx
India has historically subsidized energy with the objective of protecting its consumers from
international price volatility and providing energy access for its citizens, especially the poor.
However, energy subsidies place a heavy burden on government budgets, while often failing
to reach their targeted beneficiaries.
The petroleum sector is one of the most heavily subsidized energy sources in India. The
pricing of petroleum products has changed over time, alternating between free market and
regulated regimes until 2010, the central government controlled the prices of petrol, diesel,
and kerosene and liquefied petroleum gas (LPG). In June 2010, the Indian government
deregulated the price of petrol. However, prices for diesel, PDS kerosene and domestic LPG
continue to be regulated. Even in the case of petrol, OMCs can only change prices every
fortnight, and only after seeking approval from the government. In contrast to fuel subsidies,
electricity subsidies in India are disbursed by the state governments, at considerable cost to
state budgets.
1.1 What is an energy subsidy?
A number of definitions of subsidies exist. One internationally agreed definition has been
adopted by the World Trade organization (WTO), which identifies four main types of
subsidy:
(a) Direct transfer of funds (e.g., grants, loans, and equity infusion), potential direct transfers
of funds or liabilities (e.g., loan guarantees);
(b) Government revenue that is otherwise due is foregone or not collected (e.g., fiscal
incentives such as tax credits);
(c) Provision of goods or services other than general infrastructure, or purchase of goods; and
(d) Income or price support.
The different forms that energy subsidies can take are shown in figure 1.
Figure 1: Types of Energy subsidies
As for subsidies on energy in particular, the International energy agency (IEA) has a widely
accepted definition (IEA, 1999):
“Any government action that concerns primarily the energy sector that lowers the cost of
energy production, raises the price received by energy producers or lowers the price paid by
energy consumers”
Subsidies for energy can be broadly classified as
? Producer subsidies: Producer subsidies are provided to companies to encourage
investment and increase output.
? Consumer subsidies: Consumer subsidies, as the name implies, support the
consumption of energy, by lowering prices at which energy products are sold.
1.2 Why subsidize energy?
Energy subsidies aim to improve energy access by making prices more affordable, shielding
domestic consumers from international price volatility, and supporting energy-intensive
industries. Although energy subsidies do have the potential to generate benefits in the short
term by addressing these goals, they have been criticized for leading to unintended adverse
consequences. These consequences and the challenges in addressing them are discussed in
detail in this report.
1.3 Energy subsidies in India: A snapshot
In India, subsidies are provided for petroleum products and electricity. These products are
retailed at prices that are often kept artificially low compared to market rates. While subsidies
on both electricity and petroleum products are provided in the form of lower prices for the
final product, the methods of subsidy delivery and the amount of the subsidy itself varies
widely across the different products.
1.3.1 Petroleum Products
Three petroleum products, namely PDS kerosene, domestic LPG and diesel are sold for less
than international market prices, with the government providing a fiscal subsidy on LPG and
kerosene.
The subsidy, however, covers only a part of the difference between the cost price (including
marketing costs) and the selling price of these three petroleum products, thereby resulting in
“under-recoveries” for the OMCs. Under-recoveries are calculated as the difference between
the cost price and the regulated price at which petroleum products are finally sold by the
OMCs to the retailers after accounting for the subsidy paid by the government.
Are Energy Subsidies Good For Indian Citizens?
Out of India’s 1.2 billion people, approximately one-fourth live below the poverty line.
Energy access and affordability play an important role in ensuring socioeconomic
development of this segment of the population. Since poor households typically spend a
larger share of their income on energy needs (NSSO, 2010), changes in fuel prices affect
them much more than the rich. It is therefore imperative for the government to take into
account the impact that any policy on energy subsidies can have on these citizens.
Subsidies have multiple effects on the government’s budget. The first and easiest to identify
is the impact on the fiscal balances of the country. The fiscal subsidy to the petroleum
companies in 2010–11 was 2,904 Crore (US$637 million). In addition to the fiscal subsidy,
the government also grants assistance to the OMCs in the form of cash and oil bonds to share
the under-recovery burden. In 2010–2011, this assistance amounted to Rs 41,000 Crore
(US$8,995 million) (MOPNG, 2011).
Table1- Subsidies during the period FY10, FY11, FY12
The details of subsidies as per the Government budget and their % to the National
GDP during last 3 years are given in table below.
Unit 2009-10 2010-11 2011-12
GDP Rs. Cr 64,57,352 76,74,148 89,12,178
Subsidies:
Fertilizer Rs. Cr 61,264 62,301 67,199
Food Rs. Cr 58,443 63,844 72,823
Petroleum Rs. Cr 14,951 38,371 68,481
Total Rs. Cr 1,34,658 1,64,516 2,08,503
Subsidies as % to GDP
Fertilizer % 0.95% 0.81% 0.75%
Food % 0.91% 0.83% 0.82%
Petroleum % 0.23% 0.50% 0.77%
Total % 2.09% 2.14% 2.34%
doc_790690466.docx