India Moves to Deregulate Fuel Prices

In a move that signals a huge departure from standard practice, the Indian government announced plans to move closer to market-driven fuel prices.

The country will stop subsidizing gasoline, though diesel, kerosene and natural gas will continue to be subsidized, albeit at a slightly lower level.

The decision was made in response to India’s increasing budget deficit, set to hit 5.5% of the GDP later this year. It is a significant development for the country whose policymakers have long avoided touching government subsidies because the issue is a political hot potato.

According to estimates, India’s fuel subsidies cost the government as much as $17.5 billion annually.

An important point to note is that fuel subsidies don’t necessarily make gasoline cheap in India. According to a report last year, “India is not only one of the world’s largest subsidizers of fuels, it is also among the largest taxers.”

The Wall Street Journal gleefully reported that India stepping down the deregulation road was a step in the right direction:

“This is a salve for both oil refiners and New Delhi’s burdened treasury. India’s long-standing fuel-price caps have meant that when crude-oil prices rise, selling refined fuel products in this energy-hungry country can be a losing proposition…. The government compensates the state-owned oil marketing companies for some of their losses. It was on track to spend $17.7 billion on subsidies for such firms this year, but Friday’s move means the total will likely drop to $13.5 billion, Barclays Capital estimates.”

The New York Times speculated that the move was timed specifically before India’s participation in this weekend’s G2summit meeting:

“India and other big countries committed to eliminating energy subsidies at a Group of 20 meeting last year, but policy makers here have repeatedly put off the politically difficult change.”

India is not alone in its dependence on fuel subsidies. According to The Economist (subscription required):

“Only a third of the 48 developing countries studied in an IMF review let the market set fuel prices. The governments of Yemen and Indonesia, for example, spent more holding down the price of fuel than they spent on health and education combined.”

A 2007 U.N Study found that energy subsidies worldwide, which totaled about $300 billion, mainly benefit wealthier people. The report concluded that cancelling these subsidies might reduce greenhouse gas emissions by as much as 6 percent.