Petroleum Subsidies

The secret is out: The end consumer does not get any oil subsidy

light-diesel-oil-250x250Vivek Kaul
Over the last few days, there has been a lot of talk in the media about the government considering petroleum subsidy reforms (You can read about it here and here). One of the most well kept secrets in India has been the fact that the end consumer does not get any subsidy on petroleum products. But what we have been told is exactly the opposite.
What we have been told over the years is that the oil marketing companies have been selling products like petrol, diesel, cooking gas and kerosene, at a loss (The price of petrol was deregulated on June 26, 2010, so that is no longer the case). To a large extent, the government compensates the oil marketing companies for this loss. Hence, these products are subsidised. Subsidies are bad and they need to be done away with. 

The truth is however a little more nuanced than that. Let’s take a look at the following table.

Table

In 2012-2013, the under-recovery of the oil marketing companies on selling oil products had stood at Rs 1,61,029 crore. Of this the government provided a cash assistance of Rs 1,00,000 crore. Rs 60,000 crore came in from upstream oil companies like ONGC and Oil India Ltd.
So far so good. But does this amount to a subsidy to the end consumer? As Surya P Sethi writes in an article titled “Analysing the Parikh Committee Report on Pricing of Petroleum Products“It is clear that Indian consumers are paying the highest price for lower quality petrol and more for lower quality diesel when compared to the US and Japan – the two most vociferous proponents of removing fuel subsidies. Also, Japan and the UK and, indeed, several other countries tax diesel at a lower rate.”
A major portion of the price that we pay on buying petrol and diesel essentially consists of taxes collected by both the central and the state governments. At the central government level a huge amount of tax on oil products is collected through excise duties. At the state level, the value added tax on petroleum products is the major contributor.
For the calculations here, we will ignore the various taxes collected by the state government on petroleum products. We will consider only taxes earned by the central government. This includes excise duty, customs duty, cess on crude oil, income tax, dividend and dividend distribution tax paid by oil companies, as well as profit from exploration, among other things.
If all this is taken into account for the year 2012-2013 the central government earned Rs 1,17,422 crore. In comparison it paid out Rs 1,00,000 crore in the form of cash assistance to oil marketing companies. That still meant a surplus of Rs 17,422 crore.In 2011-2012, it earned Rs 1,19,850 crore from petroleum products and companies. The cash assistance to oil marketing companies during that year stood at Rs 83,500 crore. That meant a surplus of Rs 36,350 crore.
The scenario looks similar during the first nine months of 2013-2014 as well. The cash assistance to oil marketing companies stood at Rs 35,772 crore. In comparison, the central government had earned Rs 83,619 crore, leading to a surplus of Rs 47,847 crore.
Hence, the end consumer does not get any subsidy on petroleum products as a whole, even though the oil marketing companies suffer huge under-recoveries in the sale of diesel, cooking gas and kerosene.
A criterion that the International Energy Agency uses for defining something as a subsidy is whether it “lowers the price paid by energy consumers.” As A Citizens’ Guide to Energy Security in India points out “consumer subsidies, as the name implies, support the consumption of energy, by lowering prices at which energy products are sold.” That is clearly not the case in India.
Given this, the government and the media should stop using the word subsidy when it comes to talking about petroleum products as a whole. Second, the surplus that the government generates through taxing petroleum products and companies, should actually be paid out as cash assistance to the oil marketing companies. Once, that is done the burden on the upstream oil companies like ONGC and Oil India Ltd, which finance a part of the under-recoveries, will come down.
This is very important given that India imports more than 80% of the oil that it consumes. With the pressure on ONGC to finance the under-recoveries coming down, it can spend more money on exploring for oil. This will go long way towards beefing up the energy security of India.
The trouble is that the surplus that the government makes by taxing petroleum companies and petroleum products goes towards bringing down the fiscal deficit. The fiscal deficit is the difference between what a government earns and what it spends.
In fact, once we consider the total amount of taxes earned by the state government the real situation comes to the fore. During the first nine months of 2013-2014, state governments earned Rs 1,01,493 crore from taxing petroleum products. The state governments are highly dependent on these taxes to finance their expenditure. If the price of petroleum products needs to be controlled, it is this dependence that needs to come down. And that is easier said than done.

Vivek Kaul is a writer. He can be reached at [email protected]

The article originally appeared on www.firstbiz.com on June 15, 2014

How Chidambaram has screwed the next govt even before it takes over

P-CHIDAMBARAM
Vivek Kaul
What we don’t achieve ourselves, we expect from others.
This is a statement I have oft used during family conversations in the context of the “unrealistic” expectations parents and grandparents have from their children and grandchildren.
But it is also true for the current Congress party led United Progressive Alliance (UPA) government. After spending much more than it earned for close to six years now, and managing to screw up the Indian economy left, right and centre, the Congress-led UPA government wants the government that takes over after the next Lok Sabha elections scheduled later this year, to cut down on the fiscal deficit.
The fiscal deficit target set for the financial year 2014-15 (i.e. the period between April 2014 and March 2015) is at 4.1 percent of the gross domestic product (GDP). Fiscal deficit is essentially the difference between what a government earns and what it spends expressed as a percentage of GDP.
The Congress led UPA government set a fiscal deficit target of Rs 1,33,287 crore or 2.5% of the GDP in the financial year 2008-09 (i.e. the period between April 2008 and March 2009). The actual number came in at Rs 3,36,992 crore or 6 percent of the GDP. And so started an era of fiscal profligacy.
The fiscal deficit target set for the financial year 2013-2014 (i.e. the period between April 2013 and March 2014) was set at Rs 5,42,499 crore or 4.8% of the GDP. But it is expected to come in at Rs 5,24,539 crore or 4.6% of the GDP.
This is primarily a result of accounting shenanigans as explained earlier and does not reflect the true state of the government accounts.
The fiscal deficit target set by the finance minister P Chidambaram for the next financial year is at Rs 5,28,631 crore or 4.1% of the GDP. Prima facie, the target is unachievable and there are several reasons for the same.
The petroleum subsidy allocated for 2014-15 stands at Rs 63,426.95 crore. In comparison, the petroleum subsidy for 2013-14 has come in at Rs 85,480 crore. This after, Rs 65,000 crore had been allocated towards it, at the beginning of the year.
Even a higher allocation of Rs 85,480 crore is not enough, given that the under-recoveries of the oil marketing companies for the first nine months of the year stand at Rs 1,00,632 crore during the first nine months of 2013-14 (April-December) on the sale of diesel, PDS Kerosene and cooking gas. The interesting bit here is that since 2009-10, the government has never been able to match the petroleum subsidy it allocated originally at the beginning of the year (as can be seen from the following table).
oil subsidies
Take the case of 2012-13, when Rs 43,580 crore was allocated towards petroleum subsidy at the beginning of the year. The actual bill came in at close to Rs 96,880 crore, which was more than double. Given this, it is highly unlikely that Rs 63,426.95 crore will turn out to be enough.
This means greater expenditure for the government, and hence, a higher fiscal deficit, unless of course it balances the expenditure by cutting down asset creating planned expenditure. That is not the best strategy to follow, especially in a scenario of low economic growth which currently prevails.
Interestingly, even after making a higher allocation, a portion of subsidy payments is typically postponed to the next year. Estimates suggest that this year close to Rs 1,23,000 crore of subsidies have been postponed to the next year. The next finance minister would have to meet this expenditure.
If this expenditure has to be made and assuming that everything else stays equal, the fiscal deficit of the government would shoot to Rs 6,51,631 crore (Rs 5,28,631 crore + Rs 1,23,000 crore) or 5.1% of the GDP, against the currently assumed 4.1% of the GDP.
The only way the next finance minister would be able to meet the fiscal deficit target of 4.1% of the GDP, would be by following Chidambaram’s strategy of postponing expenditure, which is not the best way to go about it.
Another interesting point is the allocation of Rs 1,15,000 crore made towards food subsidies. Prima facie this does not seem to be enough to meet the commitments of the Food Security Act.
The government estimates suggest that food security will cost Rs 1,24,723 crore per year. But that is just one estimate. Andy Mukherjee, a columnist with Reuters, puts the cost at around $25 billion. The Commission for Agricultural Costs and Prices(CACP) of the Ministry of Agriculture in a research paper titled National Food Security Bill – Challenges and Options puts the cost of the food security scheme over a three year period at Rs 6,82,163 crore. During the first year (which 2014-15 more or less is) the cost to the government has been estimated at Rs 2,41,263 crore.
Economist Surjit Bhalla in a column in The Indian Express put the cost of the scheme at Rs 3,14,000 crore or around 3 percent of the gross domestic product (GDP). Ashok Kotwal, Milind Murugkar and Bharat Ramaswami challenge Bhalla’s calculation in a column in The Financial Express and write “the food subsidy bill should…come to around 1.35% of GDP.”
Even at 1.35 percent of the GDP, the cost of the food security scheme comes in at close to Rs 1,73,000 crore (1.35 percent of Rs 12,839,952 crore that Chidambaram has assumed as the GDP for 2014-2015).
All these numbers are more than the allocation of Rs 1,15,000 crore made by Chidambaram towards food subsidies. This means that there will be trouble for the next government in balancing the budget.
Of course, the new government that takes over after the Lok Sabha elections will present a fresh budget, in which it can junk all the calculations of the current budget (or to put it correctly, the vote of account). But even if the next government does that the expenditure commitments that the Congress-led UPA government has created are so huge, that it will be completely screwed on the finance front, even before it takes over.
This article originally appeared on www.FirstBiz.com on February 17, 2014
Vivek Kaul tweets @kaul_vivek