The Economist December 1st 2007 - Online Public Access Catalog

Indian fuel pricesToo hot to touchNov 29th 2007 | DELHIFrom The Economist print editionThe vexing question of subsidiesAS DUSK falls, kerosene stoves ignite in the poorer kitchens of Delhi. Sengeni, who lives on an alley wedged between the Nizamuddin railway tracksand a tributary known as ganda nallah (or dirty ditch), is looking forward to a dish of rice. He is entitled to a quota of 11 litres of cheap keroseneevery fortnight, which he buys for about nine rupees (23 cents) a litre, compared with a free-market rate of about 25 rupees. The price hasn'tchanged for months, he says, despite the surge in oil prices.In India, as in many countries, the government dares not allow the rising price of crude to be felt in the common man's pockets. Only a third of the48 developing countries studied in an IMF review let the market set fuel prices. The governments of Yemen and Indonesia, for example, spent moreholding down the price of fuel than they spent on health and education combined. Attempts to raise energy prices—as in Yemen in 2005, Nigeria in2000 or Indonesia in 1998—have a sorry record of prompting riots and revolutions. China's decision to raise prices by 10% in November has alsocaused tempers to rise.India's government subsidises kerosene and liquefied petroleum gas (LPG) directly. It keeps other fuels, such as diesel, artificially cheap by thesimple expedient of stopping state oil companies from raising their prices. These firms keep themselves afloat with “oil bonds”, which thegovernment guarantees but does not enter on its books. In October, for example, the government announced it would issue bonds worth 235 billionrupees this fiscal year, which will compensate oil-market companies for about 43% of their losses. All told, India's fuel subsidies might cost as muchas $17.5 billion this year, according to Lombard Street Research, a British firm of economists. That amounts to as much as 2% of the country's GDP.Cheap kerosene fires the poor man's stove in India's cities and lights his home in the country's villages. More prosperous city folk cook instead withmore refined gases. Thus a kerosene subsidy can at least claim to be progressive as well as expensive. This is more than can be said for India'scheap LPG. According to Bharat Ramaswami of the Indian Statistical Institute, the richer half of India's urban population captures about threequartersof this subsidy. Unfortunately, about half of India's subsidised kerosene never makes it to household stoves, he says. It is diverted to theblack market, where it is either sold at a higher price or used to adulterate diesel, which sells for about 30 rupees per litre.This then poses an acute dilemma for the government. The subsidies are costly. Yet more expensive kerosene would hurt the poor (not to mentionthe government's own electoral prospects). And if it kept kerosene cheap while letting diesel rise in price, it would only increase the scope forarbitrage between the two.Not all fuel in India is subsidised. By the Nizamuddin rail tracks, a gaggle of children warm themselves on a chilly night by burning scraps of wood.One thick-skinned show-off waves his foot in the flames for a foolhardy second. India's fragile government, on the other hand, is in no mood to playwith fire.Copyright © 2007 The Economist Newspaper and The Economist Group. All rights reserved.