Deregulate Kerosene Pricing in India

By Raymond E. Vickery, Jr — 

Source: Payalnic’s flickr photostream, used under a creative commons license.

Status: Partially DoneKerosene meant for Public Distribution System (PDS) remains price controlled and subsidized. Despite deregulating non-PDS kerosene during the first term, Prime Minister Modi’s government incrementally raised the control price of PDS kerosene.

High Difficulty: Politically Charged Move Requiring Legislation — Complete decontrol will be opposed since kerosene is still used widely by the rural and poor populations. Indian courts may also step in as they did earlier when PDS kerosene allocations were reduced.

This is the seventh installment in a new series of articles on the India Reforms Scorecard: 2019-2024 by the staff and experts at the Wadhwani Chair in U.S.-India Policy Studies. The series seeks to provide analysis on why reforms marked as “Incomplete” or “In Progress” have not been completed, and the impact such reforms can have on specific sectors or the economy at large.

Kerosene has long been a featured product of the PDS and India is one of the world’s leading consumers of kerosene. The PDS was established early in the history of independent India as part of the socialist vision of providing necessities at subsidized prices through a system of “fair price shops.” Although kerosene is now being made a part of the government’s direct benefit transfer (DBT) scheme (in which subsidies are paid directly to the consumer who buys at market prices), progress on deregulation has been slow, deterring greater private participation in this important sector.

Now that Modi has been re-elected with an enhanced majority, more rapid deregulation may occur. Substantial progress has been made under the Modi government in bringing electricity and Liquefied Petroleum Gas (LPG) to the households of voters, thus lessening the demand for kerosene. However, for India’s poor, kerosene for cooking and lighting is still important. Thus, any Indian government must deal carefully with the pricing and distribution of kerosene.

Kerosene is still referred to as “PDS” and “non-PDS,” with PDS kerosene colored  blue and the non-PDS kerosene sold as colorless (or “white”), to prevent the corrupt diversion of subsidized kerosene into the non-subsidized market. Although state-owned distribution companies continue to have their prices influenced by government, the Modi government took a major step forward in 2015 by freeing non-PDS kerosene from regulatory control. The statement of decontrol read, “It is expected that this will reduce demand for diverted PDS kerosene by improving availability of non-PDS kerosene in the open market and will thus meet the demand of kerosene for various legitimate end uses for individual consumption by those who can afford it at market price.” However, since the market price for non-PDS is about twice that of PDS kerosene, most kerosene consumption remains PDS.

A subsidy of the difference between cost and sales price is paid by the government to the state-owned oil marketing companies or OMCs. The subsidies have remained even though some cities along with the states of Andhra Pradesh, Haryana, and Punjab have declared themselves “kerosene free”, in an attempt to curb pollution from this comparatively dirty fuel.

The Modi government in 2016, embarked on a program to cut the kerosene subsidy bill by raising the control price through small increases of 25 paise per liter per month, and by cutting the allocations of subsidized kerosene to the states. Combined with the increase in LPG use and electrification, these measures have had a significant effect on kerosene subsidy. The total subsidy for kerosene has dropped by about 40 percent since 2016, and is 1.45 percent lower in the 2019-2020 budget than the previous year.

Prime Minister Modi’s government came to power in May 2014 vowing to use market-driven pricing for petroleum products. The primary policy purposes of this promise were: (1) to curtail economic distortions caused by price controls; (2) to end the crippling burden of subsidies; and (3) to curb the pollution caused by burning of subsidized fuels at rates higher than they would be burned without subsidies. An end to subsidies has been accomplished with regard to diesel and petrol, but the price controls and the subsidies that go with them have remained for PDS kerosene.

India will benefit from speeding up the process of kerosene deregulation. Elimination of controls and subsidies will serve economic, fiscal, and environmental goals. As in other areas, targeted financial relief to the deserving poor would be a preferable substitute for remaining kerosene controls and subsidies.

Mr. Raymond E. Vickery, Jr is a former U.S. assistant secretary of Commerce and Senior Associate (non-resident) with the Wadhwani Chair in U.S.-India Policy Studies at CSIS.

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