Poking the beast

Policy shift cannot wait for very long.

Successive governments are aware that subsidies are a beast whose whiskers are best not fiddled with. The government’s prompt rebuttal to the recommendations of the Vijay Kelkar Committee to reduce subsidies and increase LPG prices, as well as put subsidy reduction targets in place, comes as no surprise. It cannot be denied that energy subsidies have played a crucial role in keeping prices of petrol and petroleum products within reach of the poorer sections of society. Subsidies have helped contain inflation to an extent, though government estimates of headline inflation come peppered with huge doses of unreality.

Fossil fuel subsidies have been used world over to balance economic and political imperatives against consumer interests. But heavy subsidisation in countries like India, Mexico, Indonesia and China has only triggered further demand for oil in the world market and further price increases. Zero subsidy nations like the US and the UK continue to pay more for oil, and have simultaneously argued that scrapping subsidy has helped ease demand for oil and improve their energy conservation programmes. But the fact remains that a substantial section of the Indian population, including farmers and the BPL category, still rely on subsidies to manage their day-to-day oil and fuel requirements. But largescale official mismanagement and public pilferage abound. So, while opposing the Kelkar recommendations, the government is forced to ignore the elephant in the room – rising subsidy expenditure. Fuel and fertilizer subsidy expenditure could touch 2.6 per
cent of GDP in 2012-13 versus the budgeted target of 1.9 per cent.

While it is wise on the government’s part to keep consumer interest in mind, a long-term picture of the nation’s fiscal priorities needs to take centrestage. Meddling with subsidies would be regressive considering that more “painful decisions” on fuel prices have not been ruled out. Natural gas and crude oil production contracted 13.5 per cent and 0.6 per cent in August. Oil barrel prices fell to $92 over the weekend, though this may not be visible by way of lower prices on the ground. The government is well aware that pruning the subsidy element may help it stagger oil import and distribution losses, but not the growing dependence on oil which necessitates systemic changes in upstream operations and downstream supply chains. That is where a policy shift is imperative.