ONLYONE SOLUTION

RAHUL KUMAR

HIMESH PATEL

SUCHIT SHARMA SHUBHAM PACHAURI

LIQUIFIED PETROLEUM GAS• In FY 2008, Only 8-9% of the rural population

consume LPG as a primary fuel for cooking Vs 62% in Urban areas.[NSSO 2010]

• LPG, is subsidized to meet the fuel requirements of the poor but it seems

• 76% of LPG subsidy goes to urban areas and nearly 40% of the LPG subsidy is enjoyed by the wealthiest 6.75% of the population.[Chawla et al.,2005]

• Even in urban areas, subsidy is inefficient and regressive.

PDS KEROSENE• It is used primarily for lighting purposes .[NSSO

2010]

• Only 1.3% of rural households used it for cooking VS 8% of urban households.[NSSO 2010]

• In FY 2008, 39% of Rural households used KEROSENE as primary fuel for lighting VS 5.1% of Urban. [NSSO 2010]

• It is an inefficient and more expensive source of lighting compared to electricity and causes indoor air pollution.

Fire-wood and

Dung Cake85%

LPG9%

PDS Kerosene1%

Coal1% Others

4%

Fire-wood and

Dung Cake21%

LPG62%

PDS Kerose

ne8%

Coal2%

Others7%

PDS Kerosene39%

Elec-tricity60%

Others1%

PDS Kerosene

5%

Electricity94%

Others1%

OIL & GAS SUBSIDY FOR THE POOR. Oh Really?

Rural VS Urban

Rural VS Urban

We’re running out of OIL.!!

DIESEL• No explicit fiscal subsidy is provided to Diesel,

but the final prices of the product at the petrol pumps operated by Oil Marketing Companies(OMCs) are controlled by the Government.

• The under-recovery on diesel as of January16,2012, stood at 2.95/litre.₹

• Almost 60% of diesel consumed in India was in the transport sector of which 54% was consumed in Road transport sector.[GoI 2010a]

• The consumption of subsidized Diesel by private vehicle has increased substantially which is fuelled by the price difference between petrol and diesel

Transport59%

Plantation20%

Power Genera-

tion7%

Industry5%

Misc Services9%

Below Poverty

Line25%

Above Poverty

Line75%

Variation Of Income

Subsidies for the POOR:

• The top income quintile received 6 times more subsidy benefits than the bottom quintile.

• For Diesel and LPG, 65% and 70% respectively of subsidy benefits accrue to the top two quintiles

• Approximately 1/4th of India’s 1.2 billion people live BPL and energy access and its affordability plays an important role for this segment of the population.

• The above said population spends a larger share of their income on energy needs so changes in fuel prizes affect them much more than the rich.

Use Of Diesel

Under Recovery

Fiscal Subsidy

Depot PriceCost Price

Subsidies and Upstream Oil companies

Cost Price

Depot Price

Under Recovery

Domestic LPG & P D S KEROSENE

DieselUnder-recovery

• The subsidy provided on the three petroleum products covers only a part of the difference between the cost price and selling price, there by resulting in under-recoveries for the OMCs.

• Under-recoveries are calculated as the difference between the cost price and the regulated price at which petroleum products are finally sold by the OMCs to the retailers after accounting for the subsidy paid by the Government as shown in the figure.

A large part of this under-recoveries is compensated for by additional cash assistance from National Oil Companies (NOCs). The remaining portion remains uncompensated to the OMCs. • The total size of under-recoveries on Petrol, Diesel, PDS Kerosene and LPG in FY 11 was ₹

78,190 crore [PPSE2011a] , which is a significant 1.07% of GDP. [RBI,2011a]

• The graph shows how total under-recoveries to OMCs and specific under-recoveries on Petrol, Diesel, PDS Kerosene and LPG have varied over the last six years [2005-11].

• In 2010–2011, the burden borne by upstream and downstream companies was 30,297 crore ₹and 6,893 crore respectively.₹

• This not only adversely affects the cash flow and profitability of oil companies but also hinders the upstream sector from investing in improving and expanding their exploration and production operations.

1. India was the fourth largest consumer of oil and petroleum products after the United States, China, and Japan in 2011.

3. The majority of imports continue to come from the Middle East, where Indian companies have little direct access to investment.

4. India had 5.5 billion barrels of proved oil reserves at the end of 2012. About 53 percent of reserves are from onshore resources, while 47 percent are offshore reserves. Most reserves are found in the western part of India, particularly western offshore, Gujarat, and Rajasthan. The Assam-Arakan basin in the northeast part of the country is also an important oil-producing region and contains more than 10 percent of the country's reserves.

1. India is also the fourth largest importer of oil and petroleum products.

2. India has increased its oil imports from about 40 percent of demand in 1990 to more than 70 percent of demand by 2011.

3. Saudi Arabia is India's largest supplier, at about 19 percent of oil imports; in total, approximately 64 percent of India's imported oil came from Middle East countries in 2012.

4. The second biggest source of imports is Africa (17 percent), with the majority of that oil coming from Nigeria.

Saudi Arabia

30%

Iraq21%Kuwait

16%

UAE14%

Iran10%

Other Middle East 10%

India Crude Oil Production Indian Crude Oil Imports

Offshore56%

Gujarat16%

Rajasthan14%

Assam/Nagaland

12%

Andhra Pradesh1%

Others1%

1. Despite being a net importer of crude oil, India has become a net exporter of petroleum products by investing in refineries designed for export, particularly in Gujarat. Essar Oil and RIL export naphtha, motor gasoline, and distillate fuel oil to the international market, particularly to Singapore, the United Arab Emirates, and Indonesia.

Singapore16%

UAE15%

Indonesia11%

Bahmas10%

Taiwan8%

Japan 7%

South Korea7%

United States

6%

Other20%

Motor fuel, kerosene jet fuel and naphtha EXPORTS

Impact of oil subsidies on imports:

Oil and Gas Subsidies

Misuse Of Subsidies by rich

people

Increase in Import which increases

the debt and thus decrease the GDP

of the country

1. Under-recovery• A great burden of under-recovery is to be borne by

upstream oil companies which as a net effect pushes these companies towards financial crisis, thus decreasing the exploration and production activities and thus increasing the total amount of import of oil and gas which in turn pushes the country toward debt and adverse impact on the economy.

Under-recovery due to subsidy

Decrease in exploration and

production activities

Increase In imports of oil

and gas

Adverse Impact on the economy as the debt on

the country increases.

As a result GDP decreases

2. MisUSE

• Large subsidies on valuable oil and gas products promotes misuse which in turn increases the import.

Reformation

Although many fuel subsidies help the rich more than the poor, we should not loose sight of the fact that some

poor households depend on subsidies to make energy

affordable. For these people expenditure of energy takes up a larger portion of their budget

than it does for the wealthy.

The political aspect of energy subsidies cannot be ignored. The reason why energy subsidies are still prevailing in India in the first place is vote bank which cannot be overlooked. Whenever the issue of removing or reforming fuel subsidies are raised or any such recommendation proposed by any committee, the government seems to

be reluctant on this issue and is afraid of taking strong decisions.The different kind of views are grouped under as follows:

Capitalist: This viewset of people believe in growth, development and profits but not of sharing them.

They know only to take

Communist: This mindset of people believe that no matter how much a person works hard but money would be distributed equally. They

know only to give.

Democratic: This presents a balance between growth and distribution of resources. These people maintain a give and take relationship.

• 1. Those that provides assistance to poor households.• 2. Those that help the broader community to understand

and support reform.

But subsidy reform can be designed and implemented in a way that minimizes the negative impacts on poor households. A suite of policies have been used by countries around the world to ease

the transition away from fuel subsidies. The policies can be grouped into two categories:

Team-SAMARTHYAM

Reform Strategy

Introduction of policies to support poor households

Reducing energy subsidies would free of the Government funds for other purposes. By allocating these funds to programs that directly target the poor, the government

would redirect money from fuel subsidies to those in need. There are basically two ways:

Cash transfers

This policy of transferring the money directly to the beneficiary account has been implemented successfully internationally. This approach was adopted in Indonesia during 2005-08 under the

name of BLT program which was accompanied by short term measure referred to as the Fuel Subsidy

Reduction Compensation Program. These programs provided targeted support for the

affected groups by increasing social spending in the areas of education, health and rural

infrastructure.

Conditional cash transfers (CCTs)

This can be observed in other countries also like Jordan, supported subsidy reform in 2008 by

increasing the minimum wage and providing a salary increase to low paid government employees.

The alternative approach to above is to link cash payments to behaviours that assist community development. In India various

cash transfers schemes have been implemented to support education and health. At the central level programs like

Dhanalakshami scheme [2008], Janani Suraksha Yojana[2005] and Balika Samridhi Yojana[1997] have been introduced.

Communication campaign:

Gradual Phase-

out

Monitoring and

Adjustment

Communication campaign

Reform should be preceded by a Public Information Campaign (PIC) highlighting the motivation for reform. The campaign should highlight that: Fuel subsidies are fiscally

costly. Benefits are regressive and

accrue mostly to higher income groups.

Subsidies crowd out higher priority public spending [e.g. On education, Health, Social protection and public infrastructure].

For example in 2005 the Indonesian government implemented a public relations campaign alongside cash transfers and social spending as a means for building support for Reform.

Gradual

Phase-out

A gradual phase-out of subsidies can give recipients time to adjust. The longer a subsidy has been in place, the more difficult it will be to remove and the longer the likely timeframe required for reform. Subsidies have a tendency to become perceived as entitlements and any attempt to reduce them can be politically hazardous.

In December 2010, the Bolivian government made sudden and dramatic increases to the price of subsidized fuel raising prices by over 80% with few supporting measures to ease the transition. The result was a major public backlash and a rapid reinstatement of subsidies by the government.

Monitoring and

Adjustment Monitoring and adjusting

reform on an on going basis is necessary to assess whether measures have been effective, check whether there have been unintended negative consequences, and adapt policies over the time.

Temporary assistance policies also require careful monitoring in order to ensure that the assistance is reaching the target groups and that support does not continue that it becomes entrenched.

Team SAMARTHYAM - Strategy for reformation of Subsidies

Team Samarthyam - FOR OR AGAINST Oil Subsidies

• The Integrated Energy Policy which was approved by Cabinet in 2009 provided that fuels that are tradable(i.e. imported or exported) would be priced in line with global prices. The current regime of energy subsidies in India is a heavy burden on the government’s resources and has had only limited success in reaching the intended beneficiaries.

PDS Kerosene- 40% of the fuel being diverted toward non-PDS usage.

LPG- a major part of the subsidies accrue to the richer households, which can afford to pay market prices for the fuel

Energy subsidies also have significant ecological ramifications due to overuse of petroleum products and over-exploitation of groundwater resources caused by inefficient consumption of free electricity are genuine and urgent concerns.

Subsidies also put a lot of pressure on national oil companies and power sector utilities, which face heavy financial burdens under the current system.

But however, at the same time subsidy reform has to be addressed carefully. Because subsidy reforms or changes in fuel prices affect the poorest section of the population most. Target groups which are to receive subsidy benefits need to be identified accurately and appropriate measures to

compensate for the loss of welfare from rising fuel prices should be designed carefully. A prerequisite to reform is the presence of a high degree of awareness among the people regarding the plethora

of issues surrounding energy subsidies, including an understanding of their overall costs and benefits.

Thus team SAMARTHYAM supports reformation of oil and gas subsidies using measures as described.