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INDIA: End to Fuel Subsidies Brings Damaging Diversions

Analysis by Ranjit Devraj

NEW DELHI, Aug 9 2010 (IPS) - While India’s opposition parties are agitating against moves by the pro-reform government of Prime Minister Manmohan Singh to remove subsidies on petrol and other fuels, experts say the country has laboured too long under price distortions that have not benefited poorer people — or the environment.

On Jun. 25 the government bit the bullet and totally deregulated petrol prices, resulting in a 6.7 percent jump in the price of the prime automotive fuel. The price of diesel was raised by five percent — though deregulation was deferred to a future date on the consideration that it drives tractors and irrigation pumps in the price-sensitive rural sector.

The government showed determination by reducing subsidies on liquefied petroleum gas (LPG) or cooking gas and kerosene, the fuel used for cooking in millions of Indian homes.

In reaction, opposition parties, including the right-wing Bharatiya Janata Party (BJP) and the communist parties of the Left Front, mounted a crippling nationwide general strike on Jul. 5, but the government has remained unbending.

”It is an unpalatable decision but the people will understand why we have had to take this decision,” said Manish Tewari, spokesman for the ruling Congress party.

The country’s state-run petroleum companies have also served notice that they cannot go on absorbing the cost of the subsidies — currently estimated at 17 billion dollars annually — given the vagaries of international prices on a largely imported commodity.


India is also keen to fall in line with global trends to shift its economy to a low-carbon trajectory, as advocated by the latest World Economic and Social Survey and other studies, through the elimination of subsidies on fossil fuels.

”At a time when global warming is a concern no responsible government can be seen to be subsidising fossil fuels,” Anumita Roychowdhury, associate director at the Centre for Science and Environment (CSE) told IPS.

According to estimates by the International Monetary Fund, global consumer subsidies on petroleum products had galloped from 60 billion dollars in 2003 to 520 billion dollars by 2007.

In India, however, more than the environmental concerns, gross anomalies had crept into the pricing of petrol, diesel, LPG and kerosene, resulting in larger-scale diversion of these petroleum products into unintended uses by profiteers.

One example is the diversion of about 40 percent of kerosene, subsidised to help poorer households, into adulterating diesel. Apart from losses to the exchequer, the practice has been shown to reduce the life of diesel engines and increase atmospheric pollution through improper combustion.

Similarly, subsidised LPG was found to be regularly diverted into the running of automotive petrol engines. The fact that LPG is chemically similar to petrol and that only very slight modifications were need to be made to petrol engines greatly facilitated the diversion.

But nowhere was the mismatch between policy and practice more glaring than in the cross-subsidising of diesel with higher prices on petrol — based on the belief that petrol was used by the well-to-do to run their cars while diesel went mostly into the tractors and irrigation pumps run by farmers.

The result was a spurt in demand for diesel-driven luxury cars and sports utility vehicles (SUVs). According to Roychowdhury, an authority on automobile pollution, there has been a steady ”dieselisation” of India’s automobile fleet, threatening to foul the air over most of India’s cities.

”India does not have clean diesel fuels or the technologies that go with them. And then there is the serious problem of kerosene finding its way into diesel supplies as a major adulterant,” Roychowdhury said.

According to Roychowdhury some 30 percent of new cars sold in India’s automobile market run on diesel and that this figure, she says, is expected to reach 50 percent in the next two years.

”You are looking at a situation where people who maintain luxury cars or SUVs running on diesel are having their fuel cross-subsidised by people who run small petrol vehicles or motorcycles — or even on kerosene diverted from the kitchens of the poor,” she said.

”The price asymmetry has had the unintended consequence of creating an incentive for motorists to opt for diesel rather than gasoline cars,” agrees Kaushik Ranjan Bandhyopadhyay, senior fellow at the New Delhi-based Asian Institute of Transport Development.

Citing a report created for India’s 11th Five Year Plan, Bandhyopadhyay told IPS that 71 percent of India’s personal vehicles were petrol-driven two- wheelers, which provide cheap mobility for the ”aspiring classes, and the climbers.”

Bandhyopadhyay told IPS that the subsidy on LPG created even more glaring anomalies in that, instead of catering specifically to the worse-off or worst- off (below poverty line) section, it largely benefited ”the affluent urban middle-class.”

The illegal diversion of LPG cylinders designed for use in kitchens into automobiles not only ate away subsidies but was also a safety hazard, Bandhyopadhyay said.

”A number of evaluation studies and reports by government committees have shown that the policy of providing kerosene at subsidised prices to consumers regardless of their economic status resulted in wastage, leakage, adulteration and inefficiency,” Bandhyopadhyay said.

”More than 70 percent of the rural poor and more than 20 percent of the urban poor continue to be dependent on direct burning of fuel wood or biomass for cooking, defeating the purpose of encouraging the use of a cleaner cooking fuel, through subsidies, and failing to relieve ‘energy poverty’,” Bandhyopadhyay added.

 
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