Friday, June 6, 2008

India and other countries dole out huge subsidies as soaring oil price grips the world

Even after the steep price hike in petrol/diesel, recent studies suggest that the Indian Government is doling out huge oil subsidies which go upto 2-3% of GDP. While the government run oil companies like ONGC and Bharat Petroleum are facing huge losses, other private players like Reliance are eluding bankruptcy by shutting down petrol pumps.

Most of the countries, like India, are doing the same. The cost of subsidies in different countries may vary because there is a huge gap between soaring international prices and fixed domestic prices. Countries like Malaysia, Venezuela, China can afford to provide petroleum products like petrol/diesel cheaply to their people. Moreover, the annual cost of oil subsidies in Malaysia is likely to touch 7% of its GDP this year!!

Other countries like Germany, Britain, South Korea have been less tolerant and are maintaining global rates. The Indian Government can never take this route as they will be reluctant to do so on the onset of the General Elections.

Oil subsidies for the haves and the have-nots.

Subsidies have proved to be non adequate in protecting the interests of the lower strata of the society. They benefit rich people, those who own ACs and cars. Finally, Industrialists have to pay less for energy generation. A recent IMF study proves my point: the richest 20% households consume 42% of all fuel subsidies.

While the oil subsidies were introduced to help the poor people, they have had the opposite effect. Had the oil subsidies been used for better purposes like education, human resources and health, they would have a positive impact on the poor. Furthermore, this would reduce the demand for oil and hence, less demand would lead to reduced prices!!

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