Government and Business Case Study

Subsidised Oil Price in India—Can it be sustained?

OR

Abstract:
The Indian government started to subsidise petroleum products from the year 1975, after seeing the impact of the first oil shock in 1973. The whole idea of subsidising the oil price was to shield the domestic customers from international price fluctuations. The main targeted section was the poorer section of India, who could not afford to buy petroleum products at steep international prices. Initially, the Indian government strictly regulated the prices of various kinds of petroleum products. After dismantling the administered pricing mechanism (APM) in a phased manner during the period 1998-2002, price regulation for many petroleum products was abolished. However, petrol and diesel continued to be subsidised indirectly, simply by stopping oil marketing companies from raising prices. Kerosene and Liquefied Petroleum Gas (LPG) were kept out of the reform process on the ground of being highly used cooking fuel and their prices were directly subsidised by the government. Kerosene and LPG were available at much lower prices in India than international prices. Kerosene was sold at the lowest price in India in the whole world. During the period April 2001 to March 2005, the price of LPG increased by 23%, whereas the international price rose by 150% during the same period. However, the oil subsidisation policy faced a lot of criticism from a section of the analysts and economists. The distorted pricing mechanism was blamed for increasing the fiscal deficit of the country as well as putting the financial condition of oil marketing companies at stake. Moreover, the subsidy often could not serve its true purpose.The facility of subsidised LPG and kerosene was enjoyed mainly by the middle-class and rich consumers instead of the targeted urban and rural poor Indians. Due to these problems, the feasibility of subsidised oil pricing was questioned many times.

Pedagogical Objectives:

• To understand the subsidy mechanism implemented in India for specified petroleum products.
• To analyse the impact of the policy on oil marketing companies as well as on the overall economy.
• To highlight the feasibility of the oil subsidy policy.

Keywords :  Subsidies, Petroleum, Administered pricing mechanism, Cross-subsidisation, Oil marketing companies, Up-stream oil companies, Public refineries, Oil bonds, Crude oil, Under-recoveries, Lopsided pricing, Budget deficit, Inflation, Domestic petroleum, Unsustainable