India submits plan on energy subsidy cuts to G-20

India submits plan on energy subsidy cuts to G-20

New Delhi: India last month submitted to the Group of 20 (G-20) a detailed plan to phase out inefficient energy subsidies, said two people with direct knowledge of the matter.

India’s commitments, as detailed in its final plan, will be reiterated when Prime Minister Manmohan Singh meets leaders of other member-states of G-20 in Canada in June.

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“We have had two meetings (on the issue) and are expected to meet again," a senior official in the petroleum ministry said on condition of anonymity, explaining that some details are being calibrated.

“G-20 is asking the Indian government to make sure that this phasing out happens," Nobuo Tanaka, executive director, International Energy Agency, told Mint in March. “I think this government clearly understands the necessity."

India’s G-20 commitments are not based on the standard definitions that are to be used by all member-states. According to one government official, each member-state has been given the leeway to define energy subsidy.

The member-states’ plan to phase out inefficient subsidies, which encourage wasteful consumption, are designed to dovetail the economic and social challenges of the state, the official said.

Still, in India’s case, such a move could be politically costly, as any increase in fuel prices owing to the lifting of subsidies would generate heated opposition, putting the government on the defensive and jeopardizing other programmes, including economic reform.

The country’s commitment to G-20 is also likely to provide the framework for a discussion within the government on rationalizing petroleum subsidies. The exercise to rationalize petroleum subsidies will result in a link between domestic retail prices of petroleum products and international crude prices (Mint, 5 May). A direct link between domestic retail prices and international crude prices will reduce subsidies and ease the pressure on public sector oil marketing companies, which currently price retail petroleum products below their cost.

An empowered group of ministers of the United Progressive Alliance government is expected to meet soon to discuss rationalizing petroleum subsidies. “I am very much convinced that this government is trying to utilize one market mechanism to send the energy efficiency messages," Tanaka had said in March.

Even before domestic policy on the petroleum subsidy is finalized, India had to detail its current energy subsidies and the plan to phase them out to G-20 as Singh had made a commitment to do so at a summit in Pittsburgh, US, last September.

At Pittsburgh, G-20 leaders promised to come up with a plan that would rationalize and phase out inefficient energy subsidies over the medium term. The Pittsburgh commitment, however, allowed countries to provide subsidized energy to the poor.

According to senior Indian government officials, membership of G-20 has given the country a “seat at the high table". The grouping comprises the most important developed countries and emerging markets, which among them account for at least 80% of the world’s gross domestic product.

“G-20 commitments are not binding," said Rajiv Kumar, director and chief executive of the Indian Council for Research on International Economic Relations. “Sometimes these commitments carry more weight than formal agreements."

According to Kumar, India’s commitment to G-20 on rationalizing energy subsidies has come in the wake of a strong case that has been built up by the Union government within India on the need to rationalize energy subsidies.

The petroleum ministry had earlier floated a proposal based on the recommendations of a panel led by former Planning Commission member Kirit Parikh. However, nothing came out of it. The committee had suggested freeing petrol and diesel prices and an increase in retail prices of kerosene and liquefied petroleum gas by Rs6 per litre and Rs100 per cylinder, respectively.

Indian Oil Corp. Ltd, Bharat Petroleum Corp. Ltd and Hindustan Petroleum Corp. Ltd are expected to end the current fiscal year with total under-recoveries of around Rs90,150 crore. They lost Rs46,051 crore in the last fiscal year.