The Indian tale of oil subsidy

Here are some facts about India's oil consumption:

The Situation*:

• India is the sixth largest consumer of oil in the world, using 2.6 million barrels per day, or 3 per cent of global demand
• India imports more than 70 per cent of its oil and charges retail consumers of petrol and diesel less than half global market prices
• At current crude oil prices, India's total fuel subsidy this year will be around 17.5 billion dollars, or 2 per cent of gross domestic product

The Numbers: If we see the numbers from 2002, petrol prices have risen by 86.8% where as diesel rose by 116.6%. However crude rose from 20$ a barrel to a whopping 140$ which is a 600% increase. So where is all the excess coming from? Ans: Government subsidies. It amounts to about 77000 crores of subsidies which are partially redeemed by Govt and the rest as losses on the books of public sector oil companies.

The Consequence: Inflation and rocketing fuel prices are almost directly as a result of this. The prices have not been passed on to the consumer. Instead, on the facet of serving the public or call it the fear of loosing the "Seat", the government has decided to bear the burden along with public sector companies like ONGC, HPCL.

From an economic perspective, passing on the costs to the consumer could result in higher costs of travel and hence greater inflation. However, such a prolonged burden on the government has sent the oil prices sky high and resulted in inflation. Such low cost of oil products also deters efforts to develop alternative sources of energy.

The Irony: Picture this situation - A guy comes in his 100CC moped, shells out 56 bucks per liter and curses the government for exorbitant oil prices. A Merc rolls by shells out the same 56 bucks per liter and the only thing on his mind is the scratch he got on his car because of a "stupid" motor-bike. Why should someone who can afford the luxury of a Mercedes Benz or any car for that instance be subsidized? Why should a guy who goes around with a fuel economy of 70KMPL be paying the same as a guy who goes at 5KMPL? What logical sense does that make?

The Solution: Given a subsidized price, the government is not offering a reason for anyone to avoid personal transport and switch to mass transit. No subsidy should be offered to those who use cars. Company cabs can be an exception. Luxury segment bikes also may not need a subsidy. Ex. 150 CC and below could be entitled to a subsidy. Unless the government takes some serious steps towards this, inequality will and so will inflation.

The Formality: Disclaimer: I am solely responsible for any of the opinions expressed.
* Source: globeinvestor.com