Fuel price decontrol helps India put up brave face at G20 summit

Written by KG Narendranath | Toronto | Updated: Jun 28 2010, 05:44am hrs
The plan for phasing out fossil fuel subsidies was back on the agenda of the G20 meeting here on Sunday, with the US and other developed countries insisting on its inclusion.

Having taken the steps for de-regulation of prices of petroleum products just ahead of the meet, India did have the moral strength to respond to the demand for a debate on the issue. Advanced economies still account for large part of these subsidies despite recent policy action by some of them, especially the US, to reduce these payouts, that encourages wasteful consumption of fossil fuels.

However, while embracing the idea of curbing the extravagant consumption of these fuels with high greenhouse gas emissions, India would still resist taking binding commitments for any definite plan of action to eliminate them, top government officials told FE.

The G20 groupings medium-term plan formulated in Pittsburgh last September was to phase out subsidies that make fossil fuels cheaper to buy and produce.

India wants the scope of the G20's remit in this regard in line with its plan for achieving double digit GDP growth and sustaining it for a the a few years at least. Indias planned capacity addition in the power sector would continue to be coal-based, a fuel whose prices are not fully market-determined.

Even during the Pittsburgh summit, India had opposed inclusion of a rad map to eliminate subsidies, even as it appreciated that these subsidies have resulted in wasteful consumption of these fuels. The wording of the G-20 communique was subsequently tempered down with the phrase phase out and rationalize, and allowing to provide targeted support for the poorest.

The US was in the forefront of the campaign to end these market-distorting subsidies, and has seemingly sought to set an example by repealing several tax preferences for these fuels in the fiscal 2011 budget and vowing to include their phase-out package in the proposed new energy law. World's fossil subsidies are variously estimated at between $250 billion and $500 billion, but there are more authenticated figures suggesting that developed countries themselves spent over $100 billion on subsidising these fuels last year.

In a recent signed article, Treasury Secretary Timothy Geithner and Obama's top economic adviser, Larry Summers, claimed that the US has made good on its pledge to lay out how it intends to phase out subsidies, and urged the G-20 countries to demonstrate their commitment to this critical objective by detailing how and when they plan to eliminate policies that encourage the over-consumption of fossil fuels."

The likely measure that the G-20 could take in this context is to make a statement of intent to phase out these subsidies and opting for voluntary and member-specific measures, sources said. Prior to the recent hikes in oil product prices by India, the official estimate of the subsidy burden was that if the average price of Indian basket of crude remains at $70, oil marketing companies under-recoveries on the sale of petrol, diesel, domestic LPG and PDS kerosene for the current fiscal would be around over Rs 48,353 crore.

As a large oil importer, India's energy security as well the strength of its fiscal position is highly vulnerable to sudden spikes in global oil prices. This was amply demonstrated in the highest ever petroleum and fertilizer subsidy bills in 2008-09, a year which saw oil prices skyrocketing to an all-time high of $145 a barrel. Costlier crude can trigger price spiral of many other globally traded commodities including urea, which India imports a lot, and subsidises the prices to the farmer.