A Citizens' Guide to Energy Subsidies in India
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A CITIZENS’ GUIDE TO ENERGY SUBSIDIES IN INDIA Produced by The energy and resources InsTITuTe and The InTernaTIonal InsTITuTe for susTaInable develoPmenT’s global subsIdIes InITIaTIve. www.iisd.org | www.teriin.org A CITIZENS’ GUIDE TO ENERGY SUBSIDIES IN INDIA © 2012 The International Institute for sustainable development Published by the International Institute for sustainable development. The International Institute for sustainable development (IIsd) contributes to sustainable development by advancing policy recommendations on international trade and investment, economic policy, climate change and energy, and management of natural and social capital, as well as the enabling role of communication technologies in these areas. We report on international negotiations and disseminate knowledge gained through collaborative projects, resulting in more rigorous research, capacity building in developing countries, better networks spanning the north and the south, and better global connections among researchers, practitioners, citizens and policy-makers. IIsd’s vision is better living for all—sustainably; its mission is to champion innovation, enabling societies to live sustainably. IIsd is registered as a charitable organization in canada and has 501(c)(3) status in the united states. IIsd receives core operating support from the government of canada, provided through the canadian International development agency (cIda), the International development research centre (Idrc), and from the Province of manitoba. The Institute receives project funding from numerous governments inside and outside canada, united nations agencies, foundations and the private sector. Head office: 161 Portage avenue east, 6th floor, Winnipeg, manitoba, canada r3b 0y4 Tel: +1 (204) 958-7700 | fax: +1 (204) 958-7710 | Web site: www.iisd.org international institute for sustainable development global subsidies initiative International environment house 2, 9 chemin de balexert, 1219 châtelaine, geneva, switzerland Tel: +41 22 917-8373 | fax: +41 22 917-8054 | Web site: www.iisd.org/gsi a citizens’ guide to energy subsidies In India march 2012 Isbn 978-1-894784-49-8 A CITIZENS’ GUIDE TO ENERGY SUBSIDIES IN INDIA Table of Contents Introduction ............................................................................................................................2 1. A Brief Overview of India’s Energy Subsidies .........................................................................4 1.1 What Is an Energy Subsidy? ............................................................................................................4 1.2 Why Subsidize Energy? ...................................................................................................................6 1.3 Energy Subsidies in India: A snapshot ...........................................................................................6 1.3.1 Petroleum Products .................................................................................................................................6 1.3.2 Electricity .................................................................................................................................................13 2. Are Energy Subsidies Good for Indian Citizens? ....................................................................16 2.1 What Is the Impact of Energy Subsidies on the Economy? ........................................................16 2.1.1 Impact on Government Finances ..........................................................................................................16 2.1.2 Diversion and Misuse .............................................................................................................................18 2.1.3 Impact on Public Sector Oil Companies ...............................................................................................20 2.1.4 Impact on Private Oil Companies ..........................................................................................................21 2.2 Do Poor People Benefit? ................................................................................................................21 2.2.1 LPG ...........................................................................................................................................................21 2.2.2 High Speed Diesel ..................................................................................................................................22 2.2.3 Kerosene .................................................................................................................................................23 2.2.4 Electricity Subsidies ...............................................................................................................................24 2.3 What About the Environment and Health? .................................................................................24 2.4 Who Would be the Winners and Losers from Energy Subsidy Reform? ...................................25 2.5 What Plans to Reform Subsidies Have Been Announced by the Government? .......................26 3. What Do We Know About Reform of Energy Subsidies? ........................................................30 3.1 Policies to Support Poor Households ............................................................................................31 3.2 Good Processes to Support Reform: Lessons from international experience ...........................33 3.2.1 Communication ......................................................................................................................................33 3.2.2 Gradual Phase-out .................................................................................................................................34 3.2.3 Monitoring and Adjustment .................................................................................................................34 3.3 Conclusion ........................................................................................................................................35 4. Endnotes ...........................................................................................................................36 5. References .........................................................................................................................37 Acknowledgements ...............................................................................................................40 1 A CITIZENS’ GUIDE TO ENERGY SUBSIDIES IN INDIA introduction subsidies are one of the most powerful policy tools in the hands of the government. In India, as elsewhere, they have been used for decades to achieve a range of economic, social and environmental objectives. Indeed, one of the most important and challenging responsibilities of a government is allocating financial resources to achieve public good. There are a number of criteria by which a subsidy policy may be assessed. Is it serving a public, rather than a private interest? Is it achieving its intended objective efficiently? does it have any negative, unintended consequences, such as corruption or environmental degradation? only when citizens are in possession of this information can they make an informed decision on whether their government is spending money wisely. The focus of this guide is energy subsidies in India. In addition to forming a large part of government expenditure in India, subsidies for energy have a tremendous impact on the lives of citizens. at the most immediate level, these subsidies affect how much people pay for energy. but digging deeper reveals that they have a profound effect on the environments in which people live and the economies in which they earn their living. 2 A BRIEF OVERVIEW OF INDIA’S ENERGY SUBSIDIES SECTION ONE | A BRIEF OVERVIEW OF INDIA’S ENERGY SUBSIDIES 1. A Brief overview of india’s energy subsidies India has historically subsidized energy with the objective of protecting its consumers from international price volatility and providing energy access for its citizens, especially the poor. however, energy subsidies place a heavy burden on government budgets, while often failing to reach their targeted beneficiaries. The petroleum sector is one of the most heavily subsidized energy sources in India. The pricing of petroleum products has changed over time, alternating between free market and regulated regimes. until 2010, the central government controlled the prices of petrol, diesel, kerosene 1 and liquefied petroleum gas (lPg) 2. In June 2010, the Indian government deregulated the price of petrol. however, prices for diesel, 3 Pds kerosene and domestic lPg continue to be regulated. even in the case of petrol, omcs can only change prices every fortnight, and only after seeking approval from the government. In contrast to fuel subsidies, electricity subsidies in India are disbursed by the state governments, at considerable cost to state budgets. 1.1 what is an energy subsidy? a number of definitions of subsidies exist. one internationally agreed definition has been adopted by the World Trade organization (WTo), which identifies four main types of subsidy: 4 (a) direct transfer of funds (e.g., grants, loans, and equity infusion), potential direct transfers of funds or liabilities (e.g., loan guarantees); (b) government revenue that is otherwise due is foregone or not collected (e.g., fiscal incentives such as tax credits); (c) Provision of goods or services other than general infrastructure,