http://www.dailypioneer.com/columnists/oped/oil-bonanza-will-end-soon-what-then.html
Thursday, 18 August 2016 | Uttam Gupta | i
To stay the course of fiscal discipline, Modi will have to stop routing subsidy via low prices and start making direct transfers to beneficiaries that need them the most
In the first two years of its stint, the Modi Government has stuck to the fiscal consolidation road-map, achieving fiscal deficit target for both 2014-15 and 2015-16. It did so even while pumping huge funds into building roads, highways, irrigation, agriculture and railways and without compromising on its commitments to welfare programmes.
Two major driving forces merit attention: First, foreign direct investment reforms, improved ease of doing business, and fast-track approvals for stuck projects has accelerated GDP growth and resultant buoyancy in tax receipts. Second, rationalisation of subsidies, plugging leakages in the delivery mechanism in crucial segments such as LPG, food and kerosene, led to significant savings.
But there was an X factor too: In June 2014, when Team Modi took charge, the international price of crude oil was at its peak at over $110 per barrel. Since then, it has been on a downward trajectory, plummeting to $30 per barrel in January. The gas price has moved in tandem from a high of $14 per mBtu plus to a low of $6.5-7 per mBtu.
This resulted in a mammoth saving of $50 billion during 2015-16. Subsidy on petroleum products viz, LPG and kerosene was less than one third of `1,30,000 crore paid during 2013-14 (this included diesel being under price controls which were removed in October, 2014]. Likewise, reduction in the price of imported LNG offered huge saving in fertilisers subsidy. But, India could not tap it till December 31, 2015, due to a flawed long-term supply agreement with RasGas (Qatar) which had to be re-negotiated.
Clearly, a predominant slice of the credit for maintaining fiscal discipline goes to the oil (and gas) bonanza which not only enabled a massive reduction in subsidy but also helped the Government garner extra revenue from an increase in excise duty on petroleum products. But, this bonanza won't be available eternally.
Already, oil price has increased from $30 per barrel in January to to around $50 per barrel currently. Further increase is imminent in view of demand growth (especially from India) and supply reduction from non-OPEC countries. During 2017-18, the price is projected to be in the range of $75-80 per barrel. This will lead to surge in subsidies on petroleum products and fertilisers (price of gas and other raw materials used in their production move in steps with oil). Add to this the impact of Modi's plans to extend LPG subsidy to 50 million more poor in the next three years on top of the 30 million already added during 2015-16. India could plunge into the scenario that existed in 2013-14.
To cope up with this, the Modi Government will have to demonstrate an appetite for big bang reforms, shedding the ‘incremental' approach followed hitherto. It will have to dismantle the extant dispensation of routing subsidy via low prices of fertilizers, food, kerosene, irrigation, power, seeds. This results in subsidy being cornered by rich farmers, better-off/rich households and manufacturers of these inputs.
Modi should gear up for urea de-control and direct benefit transfer (DBT) of subsidy to poor farmers which has been pending for long. This should have been done 10 years back, as recommended by Expenditure Reforms Commission in 2000 and accepted by the NDA dispensation under Vajpayee.
As regards LPG subsidy, though it is already under DBT, majority of better-offs (including very rich) continue to get it. Under the ‘GiveUp’ campaign, only 10 million have given up which is not even five per cent of the total beneficiaries. Besides, subsidy is paid by oil PSUs who then, claim reimbursement from the state. The Government should take a policy decision to give subsidy only to the poor households and deal with them directly, bypassing PSUs.
Likewise, in kerosene, the gradualist approach (only pilot projects are being run in select districts) should give way to a major overhaul. There is no rationale for the present arrangement when much of the subsidised kerosene is siphoned off for adulteration of diesel.
Food subsidy is another area where transition to DBT is happening at tortoise speed (at present, pilots are running in three union territories). The Government should dismantle all extant controls in procurement, handling and distribution of food and make way for other agencies — private, cooperative, state etc — so that consumers get the benefit of competition, efficiency gains and lower cost.
This is a tall order indeed but deferring it will risk fiscal indiscipline, impede investment and jeopardise growth all the more when, the oil price monster starts unleashing its terror.
Thursday, 18 August 2016 | Uttam Gupta | i
To stay the course of fiscal discipline, Modi will have to stop routing subsidy via low prices and start making direct transfers to beneficiaries that need them the most
In the first two years of its stint, the Modi Government has stuck to the fiscal consolidation road-map, achieving fiscal deficit target for both 2014-15 and 2015-16. It did so even while pumping huge funds into building roads, highways, irrigation, agriculture and railways and without compromising on its commitments to welfare programmes.
Two major driving forces merit attention: First, foreign direct investment reforms, improved ease of doing business, and fast-track approvals for stuck projects has accelerated GDP growth and resultant buoyancy in tax receipts. Second, rationalisation of subsidies, plugging leakages in the delivery mechanism in crucial segments such as LPG, food and kerosene, led to significant savings.
But there was an X factor too: In June 2014, when Team Modi took charge, the international price of crude oil was at its peak at over $110 per barrel. Since then, it has been on a downward trajectory, plummeting to $30 per barrel in January. The gas price has moved in tandem from a high of $14 per mBtu plus to a low of $6.5-7 per mBtu.
This resulted in a mammoth saving of $50 billion during 2015-16. Subsidy on petroleum products viz, LPG and kerosene was less than one third of `1,30,000 crore paid during 2013-14 (this included diesel being under price controls which were removed in October, 2014]. Likewise, reduction in the price of imported LNG offered huge saving in fertilisers subsidy. But, India could not tap it till December 31, 2015, due to a flawed long-term supply agreement with RasGas (Qatar) which had to be re-negotiated.
Clearly, a predominant slice of the credit for maintaining fiscal discipline goes to the oil (and gas) bonanza which not only enabled a massive reduction in subsidy but also helped the Government garner extra revenue from an increase in excise duty on petroleum products. But, this bonanza won't be available eternally.
Already, oil price has increased from $30 per barrel in January to to around $50 per barrel currently. Further increase is imminent in view of demand growth (especially from India) and supply reduction from non-OPEC countries. During 2017-18, the price is projected to be in the range of $75-80 per barrel. This will lead to surge in subsidies on petroleum products and fertilisers (price of gas and other raw materials used in their production move in steps with oil). Add to this the impact of Modi's plans to extend LPG subsidy to 50 million more poor in the next three years on top of the 30 million already added during 2015-16. India could plunge into the scenario that existed in 2013-14.
To cope up with this, the Modi Government will have to demonstrate an appetite for big bang reforms, shedding the ‘incremental' approach followed hitherto. It will have to dismantle the extant dispensation of routing subsidy via low prices of fertilizers, food, kerosene, irrigation, power, seeds. This results in subsidy being cornered by rich farmers, better-off/rich households and manufacturers of these inputs.
Modi should gear up for urea de-control and direct benefit transfer (DBT) of subsidy to poor farmers which has been pending for long. This should have been done 10 years back, as recommended by Expenditure Reforms Commission in 2000 and accepted by the NDA dispensation under Vajpayee.
As regards LPG subsidy, though it is already under DBT, majority of better-offs (including very rich) continue to get it. Under the ‘GiveUp’ campaign, only 10 million have given up which is not even five per cent of the total beneficiaries. Besides, subsidy is paid by oil PSUs who then, claim reimbursement from the state. The Government should take a policy decision to give subsidy only to the poor households and deal with them directly, bypassing PSUs.
Likewise, in kerosene, the gradualist approach (only pilot projects are being run in select districts) should give way to a major overhaul. There is no rationale for the present arrangement when much of the subsidised kerosene is siphoned off for adulteration of diesel.
Food subsidy is another area where transition to DBT is happening at tortoise speed (at present, pilots are running in three union territories). The Government should dismantle all extant controls in procurement, handling and distribution of food and make way for other agencies — private, cooperative, state etc — so that consumers get the benefit of competition, efficiency gains and lower cost.
This is a tall order indeed but deferring it will risk fiscal indiscipline, impede investment and jeopardise growth all the more when, the oil price monster starts unleashing its terror.
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