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Uncanny idea of fuel subsidies in India Bookmark and Share  
 
  Author Name : K Ramesh Babu Posted on : July-5-2010 Total Hits: 1618
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At the time of Independence India had a balance of payments in its favour. Yes this was because of the war economy and exports of India over estimated imports. However, the situation slowly changed where it has to import capital goods and other inputs to speed up economic development.

 

Needless to say, fuel usage in India was expanding as the urban development prioritized against the rural development. Fast growing cities consumed more energy in particular energy resources. Urban mobility fastened and to the full extent depended on fossil fuels.

 

Whereas the green revolution prompted the uses of diesel pump sets and other energy resources in combination with fossil fuels. Both urban and rural expansion together created a situation where at one point of time country’s one third of import money spent on fuel imports!

 

Now it is said that the imports will increase to 85% in next two years.

 

Why fuel imports is an issue in India as not in elsewhere? Other emerging markets including fuel hungry economies like China, South Africa and other developing countries entirely depend on Gulf and other Petroleum producing countries to meet their demand. Whenever, there is a hike in fuel prices it affects these economies seriously and hinders their future growth possibilities.

 

The major reason for opposition of fuel price is reduction in subsidy. For an average citizen fuel subsidy is offset against loss of daily minimum intake of food. Because of most of the food items and their prices entirely depends on transportation. In India fuel prices directly connected with food prices since wide transportation of food items from one place another is a common prevalence. Hence, once there is a price hike it will affect across the economy.

 

However, India had a subsidy system to set off the damages made whenever there is a price hike (in particular post 1970 Oil-Shock years) at international level. Meanwhile, India is consistently increasing its domestic oil production. Today, nearly 40 per cent of the fuel consumption is from the domestic off-shore and on shore fields. Therefore, the dependency on imports is not at full scale.

 

The argument in favour more subsidies rather than less government control on prices are demanded by the public is based on the logic that domestic production is less expensive compared to imports. The cost difference of fuel among neighboring countries which import more fuel than India is wider, because of tax component. After the recent price hike and delimitation public voice across the magazines echoed that tax component should brought down since it holding around 50% of the price of fuels.

 

The real price for petrol or diesel is around Rs 20.00 but it goes up to Rs 60.00 per liter after expenditures, commission to retailers and taxation both by central and state governments.

 

The issue of subsidy came to forefront during the liberalization era under the congress government in early 1990’s while the arguments on fuel subsidy make exchequer lean put forwarded. Growth with liberalization was predominantly changed the scenario since the fuel power igniting the growth momentum.

 

Corresponding increase in international prices affected the fuel economics of India. Subsequent government since 1990’s had no alternatives to go out of the situation. There are no concrete proposals to compensate the loss of revenue by reducing the tax component. While subsidies should be kept at the current position or to be hiked in case of fuel (international crude prices) price hike.

 

Since, an economy which grows at near double digit growth needs more imputes rather than stumbling blocks. Finding more alternatives to fuel consumption like using Jatropha and Ethonal even at rural areas would ease the price situation and consumption pattern. It will also reduce subsidy level, consequently. Moreover, farmers would benefit by two counts, one is growing sugarcane will become more profitable and additional income from less irrigated or dry land farming related to Jatropha farming.

 

However, during the last five years there are no concrete actions towards such options and still least attempts being made either by the central as well as state governments.

 

Loss of revenue due to tax reduction of fuels could be met with alternative means either simply re writing VAT taxation or increasing Excise and Sales taxes through indirect taxes or income tax slabs could be altered to adjust the loss.

 

Government should come out with possible alternatives rather than adamantly keeping the prices high which in long term impacts negatively the growth momentum.

 

 

 

 

 

 

 

 
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