OIL SUBSIDY : BURDEN OF WHOM???By- Hemant Kumar

WHERE WE STAND TODAY

Oil subsidy was calibrated to reach financially weaker part of society.

“Richest 20% of households in south Asian countries capture six times more in total fuel product subsidies (43%) than the poorest 20% of households (7%)”--IMF

Lack of physical access to affordable and reliable energy fuel.

A free bonanza for the upper crust. Clear indication of rising gap

between destitute and elite section of the society.

SLAM ON UPSTREAM COMPANIES : BACKBONE OF OIL INDUSTRY 3 chief upstream companies (GAIL,OIL & ONGC) in FY12-13 contributed around 37% of total

subsidy , with devaluation of rupee this will further spurt. enquiring a heavy decline in their profits, reduction by 8.8 per cent over the June 2012 quarter aggregate net profit plunged by 34.3% y-o-y. Unfolding Burden of subsidy by upstream companies as

% GDP of India(2011-12): (1) Post-tax subsidy=0.7030% (2) Pre-tax subsidy=0.4625%

Source : IMF Report 2011

Short clip: interview of Dir. Finance ONGC

WHAT'S GOING ON AND THE BIG PICTURE AHEAD: POTENTIAL IN OIL RESERVES

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Onshore oil wellsoffshore oil wellsTotal

•Escalating oil imports –a big burden.•76% import of consumption oil reported by Planning Commission, October 2011.•%ages are projected to rise to 80 per cent by 2016-17.•Rate of exploration of new reserves in India seems stagnant.• No significant stimulus for private participation.

Estimated oil reserves in India

Oil wells in India

PARADOX OF OIL SUBSIDY

Any subsidy can be justified if the gain in social welfare and environment improvement it brings exceeds the economic cost.• distorts market and discourage sprouting of substitutes.

•over 2011–2025, demand for crude oil is likely to increase by about 90%, for diesel by about 110% , and for petrol by about 165%.•Giving subsidy at same rate increasing under Recovery

Increasing damage to environment leading to catastrophe.

•IEA has estimated developing nations spend over US$400 billion a year on fuel subsidies.•In accordance with a report of CGA for the fiscal year 2013 if the remaining government’s share of around Rs450 billion in under recovery would have been paid fiscal deficit for the year would have surged to .14% higher.

WHAT ELSE OIL SUBSIDY REWARDING US : ENVIRONMENTAL IMPACT

Subsidy not only increase demand but also proportionally damages adjacent environment.

the removal of oil subsidies in Chile can lower sulphur dioxide (SO2), nitrogen dioxide (NOx) particulate and CO2 emission each by around 5% in the short term.

greenhouse-gas emissions remain high relative to GDP, mainly due to the continued subsidy to energy-intensive industry to the economy and low energy efficiency.

Nowadays cases of smuggling of petroleum products from India to countries in proximityIs seen Increasing fiscal deficit of countryAnd wastage of public funds.

Increasing fuel demand implies increasing weight of subsidies which is not allowing Govt. to extend large funds for renewable energy sources.

RESTRUCTURING OIL SUBSIDIES

Long term objective : • Reduce fossil fuel consumption and promote renewable

energy .• Free the fiscal budget from the subsidy burden.

Short term objective : • Protection of vulnerable and marginalised section from the ambit of poverty• Control draining of subsidy in the greedy hands.

OUR MODEL

• Identification of vehicles using barcode technique.• Categorisation of vehicles at authorised refuelling pumps.•Subsidy on public vehicles >private vehicles>personal vehicles.• Regressive subsidy rate above the full subsidy zone. • Multiple personal vehicles to avail less subsidy benefit. For example, If the first vehicle is given 100% subsidy benefit the other would receive <100% .

Uses Of HSD In India(2009-10)

Misc. Services(9%)Industry(5%)Power Genera-tion(7%) Source: MoSPI

2011

For transportation

• Gradual phasing out of subsidies to industries to pressurise them to look for cheaper alternative fuel.• Enunciate long term goals and advocate transparency.

Demand of crude oil is found to be a principle function of consumption , price and income of the people. The long run logarithmic demand function is :Ln Dcrudet =-9.09C-0.41Ln Pcrudet +1.00 Ln Yt

Differentiating with respect to price ,ceterus paribus we get (dp*p)/(dq*q) = ep =0.41<1 The demand is less elastic and therefore any change in price will not have a drastic impact on demand so a substantial part of oil subsidy can be diverted to priority sectors.

Given the limited availability of fuel reserves, judicial and prudent use of them is imperative to keep sufficient reserve of it for the future generation .FUTURE LIES IN OUR HAND!

THANK YOU!

REFERENCES http://www.oecd.org/env/45575666.pdf http://www.iisd.org/gsi/sites/default/files/ffs_india_czguide.pdf http://www.iegindia.org/workpap/wp319.pdf Oil ministry-Indian Petroleum and gas Statistics 20011-12 http://www.unep.org/pdf/pressreleases/reforming_energy_sub

sidies.pdf http://www.unep.ch/etb/publications/energySubsidies/Energys

ubreport.pdf http://www.thehindubusinessline.com/opinion/columns/c-p-ch

andrasekhar/the-great-fuel-subsidy-hoax/article3013252.ece Petroleum Price Analysis Cell : http://ppac.org.in/report and S

ubsidy/ MNRE- Report on “

Developmental Impact and Sustainable Governance aspects of Renewable Energy Projects”.