Petrol Subsidies in India

The Government of India will spend upwards of INR 1.32L Crores (approximately USD 26B) during the current Fiscal Year in terms of providing subsidies to the oil marketing firms in the country, to compensate for the increasing prices of crude oil.

The Indian Prime Minister, Dr Manmohan Singh, recently said that these subsidies are unsustainable, and if the international crude prices rise further, the government would not be able to provide additional subsidies.

For a developing country like India, it would not be possible to spend such huge amounts of money in supporting the three oil marketing companies. Such a huge amount can really help in improving the infrastructure of the country, which is crying for urgent investments.

So, I agree with the Prime Minister – the government should, in fact, cut the subsidies, forcing the oil marketing companies to rise the petrol prices in tune with the international prices. That would be free market operation, and is in consonance with the official government-announced policy on deregulation of petrol prices [the Indian Government still controls the prices of other fuels such as diesel, kerosene and gas].

One way of controlling the fast-rising demand for petrol is to rise the petrol prices, and if the oil marketing companies are independent to operate in this respect, they should not desist from doing so, irrespective of the political costs.

The poor people get affected by diesel, kerosene and gas prices, and not petrol prices. The middle class will be hit the most by increase in petrol prices, but I believe that they will take it and reduce their consumption to accommodate their monthly expense budgets. They have to realize that India depends on imported crude oil for more than 70% of its consumption and there is a price to pay in a world where demand for crude oil is not going to go down. Economic principles have to play a role in determining the price elasticity of demand, and petrol is no different in that respect.

Let us reduce the consumption and try to use shared transportation wherever feasible, rather than imposing a higher demand on imports. There is no other way out in the current situation. Even if oil prices drop in international markets, the oil marketing companies would not pass on the benefit of price reduction, as they would cite their needs to recuperate accrued losses over the past couple of years of high oil prices and the increased cost of import due to the Indian Rupee depreciating by more than 10% against the US Dollar in the past couple of months, leading to a much higher import bill for crude.

So, let us think carefully. Petrol prices will go up, and nothing can be accomplished by fighting the increase, we are in a free-market economy. We cannot have it both ways – free-market whenever it is convenient, otherwise it is socialism !

Of course, if one has a diesel car (disclosure: I have one), then the increase in diesel prices are going to be rather controlled by the government, providing a certain cushion. While this is good, let us not forget that the diesel prices have also gone up, though by a lesser percentage over the past 15 months. Since India is not producing the oil that we all need, it is going to be this way, let us realize the fact.

Government should propagate their oil policy clearly to the citizens so that everyone understands the need for actions that would be taken, and could have early warning to manage their respective budgets. Is there a choice, except for more availability of electric and solar cars, and more car models that would run on compressed natural gas ?

We all should think, instead of just blindly protesting or supporting political parties which take to the streets for every increase in petrol price.


Vijay Srinivasan
13th November 2011


6 thoughts on “Petrol Subsidies in India

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