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Shravya Reddy’s Blog

Protest Against Fuel Subsidies Cutback - Test of Leadership for Indian Government

Shravya Reddy

Posted July 8, 2010 in Curbing Pollution, Health and the Environment, Living Sustainably, Moving Beyond Oil, Solving Global Warming

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On July 5 large parts of India were affected by a “Bharat Bandh” – an All India Strike – called by opposition parties in India in response to the Indian government’s recent decision to end gasoline subsidies and reduce subsidies on diesel and kerosene.  Many businesses, retail establishments and schools were shut down in protest against the rise in fuel prices. The nation’s largest truck union with over 7000 members, the All India Motor Transport Congress, also joined the strike. Railway and air transport was suspended in several states, and trading activity in many stock markets was also disrupted. The strike also resulted in many persons being arrested for numerous incidents of violence.  

The strike has cost India several thousand Crores (several hundreds of millions in U.S. dollars), according to some estimates of the economic losses. The Confederation of Indian Industry (CII), a leading industry association, pegged the losses at over 3000 Crore Rupees, or $641 million USD. The Associated Chambers of Commerce and Industry in India (ASSOCHAM) had higher estimates of 10,000 Crore Rupees, or $2.1 billion USD.   

Fuel subsidies and their phase-outs are not unique to India. A report by the International Monetary Fund reveals that price subsidies are widely adopted among transitioning economies. In 2008, forty-six countries reported using these subsidies to protect citizens from soaring fuel prices; this assistance was equal to 1% of these countries’ Gross Domestic Products (GDP) on average. While governments would like to cut costs, citizens, understandably, don’t take price hikes lightly. India’s protests are the most recent backlash, but not the only one. In May 2008, Indonesia announced it would increase fuel prices by 28.7%, and the country was soon crippled by strikes. Pakistan and Nigeria also faced unrest after slashing their subsidies. 

While it is indisputable that the end of large government subsidies to the petroleum industry will cause an initial rise in fuel prices and consequently an overall rise in cost of living, experts like Chief Economic Advisor Kaushik Basu in India’s Finance Ministry believe that in six to nine months, these reforms could help stabilize prices.  Crucially, the reduction of fuel subsides will significantly help reduce India’s budget deficit, currently at 5.5% of GDP.  According to both the government and market observers like Moody’s, budget savings will be used for much-needed social development efforts, including primary education and job creation in rural areas. In addition to budget savings, subsidy cutbacks will eliminate a distribution system that is both wasteful and corrupt. India’s existing fuel subsidies only benefit those who receive the rationed fuel- often the wealthiest households. The United Nations Environment Program reports that over 40% of the benefits of the subsidies accrue to the richest 7% of the population. By some estimates, up to one-third of subsidized kerosene and LPG is diverted to the black market and effectively wasted. 

The protests against fuel price hikes are also, however, a reminder that in an extremely price-sensitive consumer base like India, the removal of consumption subsidies for fossil fuels cannot stand on its own. As is, subsidy elimination creates many losers and very few winners. Disturbingly, the poor and urban- often those living in slums- will be most hurt by rising fuel prices. This is because they disproportionately use subsidized dirty fuels like kerosene, and spend a larger percentage of their monthly budgets on essential items like cooking fuels.  Subsidy reform would be far most effective- and far less controversial- if it were paired with simultaneous increases in subsidies for low carbon fuels and renewable energy. For example, kerosene subsidy elimination could be paired with the investments in solar lanterns and home lighting systems already planned under India’s National Solar Mission. This sort of investment would not only dampen the blow to the poor, it would also yield substantial environmental and public health co-benefits. While kerosene and other dirty fuels generate billions of dollars in damages from emissions and indoor air pollution, clean energy will allow poor households to leap frog to a higher rung of the energy ladder. All indications are that India is indeed ramping up its investment in renewable energy and clean energy technology, and it must now target these funds progressively. 

Prime Minister Manmohan Singh’s government has shown real leadership in taking this step despite stiff opposition. Many observers in India have commended the government for having demonstrated foresight, clarity in long-term priorities, and a robust understanding of macroeconomic forces. While most nations around the world have committed themselves to ending fuel subsidies, actually implementing such policies in a democratic polity like India is a measure of the Indian government’s substance, and has lessons for other nations including the United States. Still, the recent strikes are a reminder that the move to make India’s economy more resilient against global fuel price volatility must not occur separately from India’s investments in the low-carbon technologies that will form the bedrock of future development. India has made the right decision, but must now follow through with the investments needed to protect its citizens, especially the most vulnerable, as well as its budget. 

 

(Thanks to Christopher Bennett, an NRDC Map fellow working with the India Initiative this summer, for co-authoring this blog post).

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Comments

SusanJul 10 2010 03:53 AM

Bravo! Shame on the rest of us!

karanpJul 11 2010 12:00 AM

Nice article - but it doesn't address the fact that in india, the largest component of fuel price is government tax. Also, the PSU oil companies are making record profits. The strike wanted the government to reduce taxes on the fuel - not increase subsidies.

Shravya ReddyJul 12 2010 04:45 PM

Thanks for your comment KaranP. To the best of our knowledge, and as reflected by the vast majority of news reports from India last week, including those we linked to in the blog (as well as http://news.bbc.co.uk/2/hi/world/south_asia/10505004.stm and http://www.reuters.com/article/idUSTRE66410620100705), the strike was called by opposition parties to protest the rise in price of fuel. The rise in price was itself directly caused by the rollback of subsidies, and thus the strike was essentially against the rollback of subsidies. One of the prescriptions suggested by some political parties was indeed to offset the price rise by reducing taxes on fuel on part of the federal government, but it was also clear that none of these parties was willing to offset the price rise by reducing fuel sales tax in their own state. Indeed, as indicated here in the last line of the report, some of those who called the strike did, in fact, appear to be demanding subsidies (http://www.telegraphindia.com/1100705/jsp/bengal/story_12646882.jsp).
Reducing taxes on fuel, whether at the centre or state level, would be fiscally imprudent in the current economic situation. A potentially long-term benefit of market-based price levels is that it may allow the government to eventually reduce taxes in the long run, after prices stabilize and the budget deficit is narrowed.

karanpJul 16 2010 08:05 AM

Thanks Shravya.

The point i was making was that the opposition parties called the strike to oppose the rising fuel prices while maintaining the high level of taxes. I don’t think it is possible to look at them as separate points. Also, I’m not sure if it’s possible to subsidize a product while simultaneously taxing it as highly as petrol or diesel is - isn’t a subsidy a form of financial support or assistance?

Separately, I’m not sure on why it would be fiscally imprudent to reduce taxes on fuel. This would be a fairly simple way of ensuring that the consumer pays the same amount for the fuel. This should have been of paramount importance given the recent levels of food inflation.

There is one argument - the potential loss for the exchequer. However, this argument does not take into account (i) rising profits in Oil PSU's and (ii) the large sums of money earned by the Indian government in the recent auction of 3G spectrum.

Having said that, i acknowledge that the most prudent option would have been to adopt the proverbial "middle path". Unfortunately, the government appears to have unilaterally has taken a decision which benefits a select few at the possible cost of many.

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