In India, the government subsidizes petroleum products by requiring the companies who sell them – referred to as ‘oil-marketing companies' – to do so at a fixed price. If the companies are private, they receive no compensation and must absorb any losses. If they are government-owned, they are given government bonds in return: financial instruments that guarantee a fixed payment at a future time period, and can be immediately traded for their future value on financial markets. Giving out government bonds is essentially the same as printing new money. Government-owned oil-marketing companies are also compensated with some of the profits earned by government-owned upstream oil companies. Even state oil companies, however, lose large amounts of potential revenue and the entire sector blames the arrangement for continued under-investment and financial difficulties. Between fiscal years 2004–2009, the subsidies resulted in under-recoveries of US$ 67 billion. It is difficult to estimate the total government expenditure because the creation of bonds is not recorded as spending in the national budget.
In 2008, as crude oil prices continued to increase, and the financial situation of oil companies worsened, a second high-level committee was organized under the chairmanship of Shri B. K. Chaturvedi, a former member of the Planning Commission, the government body that draws up India's Five Year economic plans. Unlike the Rangarajan committee's report, the Chaturvedi report did not recommend the liberalization of prices in direct and unambiguous terms, but its recommendation that product prices be based on "export parity", as opposed to trade parity, amounted to the same thing. They suggested very strongly that there should be no subsidies on kerosene and liquified petroleum gas (LPG), and that the poor could be more effectively helped through a smart card or coupon system. In December 2008, dramatically lower oil prices offered an ideal opportunity for reform, but the government did not act on these recommendations because of populist political pressure from opposition parties and some allies. The window of opportunity soon closed: prices climbed to over US$ 70 per barrel, once again affecting the bottom lines of the oil-marketing companies.
Read the full article in the Global Subsidies Initiative website.