Energy subsidies prove drain on Indian economy

Narendra Modi’s government in October ended government-controlled diesel subsidies in an effort to cut spending.

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Energy subsidies need to be addressed as a priority issue in India, according to the World Energy Council.

Fuel subsidies have proved a major cost to India and have resulted in the country creating an unsustainable fiscal deficit over the years because of its heavy dependent on oil imports. India’s fuel subsidies reached an estimated 1.4 trillion rupees (Dh83 billion) in the financial year to March 2014, according to Moody’s.

But India has been gradually reducing its expenditure on subsidies for consumers. Narendra Modi’s government in October ended government-controlled diesel subsidies in an effort to cut spending. This followed the previous government’s reduction of diesel subsidies. Petrol was deregulated in India two years ago. Subsidies on kerosene and propane are still in place.

“Energy subsidies, perceived to be a critical uncertainty in 2014, now have moved towards the need-for-action quadrant of the map,” the World Energy Council highlighted in a recent report. “The drop in uncertainty could be explained through the decision of the Modi government to continue with the diesel subsidy reforms initiated through the previous government. The cost of energy subsidies in India is planned to decrease to less than 0.5 per cent of Indian GDP by 2016. Hence there is a need for action to ensure that planned changes are being implemented accordingly.”

It says that India is one of the biggest energy consumers in the world, after China, the United States and Russia. India’s energy demand is rising an annual growth rate of 2.8 per cent, according to the organisation.

Reducing subsidies is considered politically sensitive because such moves are often unpopular with the masses, who are also voters.

But because oil prices have come down sharply anyway, consumers have not noticed a negative impact from the removal of the government subsidies on diesel yet, which has actually come down in price compared to before the price controls were removed.

Savings from fuel subsidies can be used in other ways, such as helping the poor in a more targeted manner and infrastructure spending, experts have noted.

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