Home / Opinion / Changing the climate for fuel subsidies

Guess who are the biggest gas guzzlers on the planet. Their ranks include the most vociferous champions of limiting climate change and countries claiming they are too poor to do anything about the threat. A new report issued by the Organization for Economic Co-operation and Development (OECD), the OECD Inventory of Support Measures for Fossil Fuels (2015), estimates that 34 OECD countries and the BRICS group (Brazil, Russia, India, China and South Africa) annually subsidized fuel consumption and production to the tune of $160-200 billion from 2010 to 2014.

The inability to limit the use of hydrocarbons is a major reason for the ever-increasing rise in the amount of climate-altering greenhouse gas emissions globally. The pricing mechanism of these fuels in different countries—and subsidies are an important part of that—is key to the political economy of limiting climate change. The issue is likely to lead to heated debate and haggling at the Paris conference in November when efforts are renewed to agree on a global arrangement to limit climate change. India is likely to come under pressure on this score.

The OECD report highlights pricing reforms undertaken by different countries to reduce subsidies. Mexico’s floating excise tax that changes as international prices of petrol and diesel change has led to a reduction in subsidies from $18.5 billion in 2012 to $2.5 billion in 2014. To be sure, this measurement is broad—total consumer support—and also includes the great reduction in global oil prices. But seen from any vantage, this is a huge reduction in subsidies. India’s administrative measures to align local fuel prices with global oil prices have also attracted positive notice. But, compared with Mexico’s drastic decline in support of fuel prices, the Indian success is more limited: from $18 billion in consumer support in 2012, the figure fell to $10 billion in 2014.

The reason is obvious: while Mexico has gone in for a far-reaching fiscal reform, India has merely tinkered with its retail fuel-pricing policy. Executing a Mexico-style reform may be beyond the capabilities of any government in India. A number of factors hinder any sensible reform of fuel pricing in India. One, fuels—broadly petrol and diesel—are an important source of indirect taxes for governments in India. The dependence of state governments on these fuels is much higher as compared with the Union government. This is the only reason why these fuels have been kept out of the purview of the goods and services tax. Two, the taxation structure of petrol and diesel is a thicket of basic and additional customs and excise duties. For example, there are six types of excise and customs duties on petrol and diesel. When one adds the number of states and Union territories and differential taxation within some states (for example, Maharashtra), there are 37 different rates of sales tax/value-added tax on these products across India. In the end, hydrocarbon pricing is a virtual jungle of taxes. Three, differential pricing of these fuels—lower for diesel and higher for petrol—is a matter of placating some special interests in the name of others. In the case of diesel, for example, any move towards fully market-determined, free-floating prices will attract the ire of various transportation lobbies—truckers, for example—leading to a danger of inflationary spirals in urban areas. But governments use the excuse that diesel is too important for farmers to be priced fully by markets.

The basic contradiction lies elsewhere: because these fuels are a big source of revenue for governments, any reduction in their consumption will force them to redo their fiscal math and change spending priorities. In India, this is a politically difficult task. But then, that is the nature of all reforms.

The other excuse in not moving towards sustainable use of fuel is that it will affect industrial growth in India. This may be true, but only very partially. It is the combination of governments’ revenue and spending priorities and the influence of different fuel-consuming lobbies that come in the way of reducing fuel subsidies and not future economic growth. There can be little doubt that without transport networks, all economic activity will come to a halt. But India has invested very little in reforging its transportation networks towards more sustainable use of fuels. For example, expansion of its rail network and using inland waterways as a source of transport are low-priority areas.

India is certain to come under pressure on this count. If an unequal and iniquitous global arrangement is to be avoided, India needs to explore the tough reforms needed soon.

What makes fuel pricing reforms so tough in India? Tell us at

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