By Raymond E. Vickery, Jr. —
- Status: Incomplete – While the Modi government declared its intention to gradually reduce the subsidies on kerosene, market-friendly reforms have continued to elude the government as government controls and subsidies on kerosene remain in place.
- Difficulty: High – Completely deregulating kerosene pricing will be politically tricky. Kerosene is primarily used by the rural poor, a key voting group for both political parties. Moreover, the outsized role of state-owned oil companies makes market-friendly reforms difficult to implement.
This is the eleventh installment in a series of articles on the Modi Reforms Scorecard 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 what impact such reforms could have on specific sectors or the economy at large.
Prime Minister Narendra 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. Regarding the most common petroleum products, gasoline and diesel, the government has basically fulfilled its promise through price de-control and the withdrawal of subsidies. Accordingly, the first two purposes of Modi’s vow have been achieved and some progress made on the third for gasoline and diesel.
However, in regard to kerosene, the highly-polluting, petroleum-based fuel used mostly by the rural poor, progress toward achieving the Modi vow has been only marginal. Further, the realities of Indian electoral politics make it unlikely that further progress on kerosene pricing and subsidization will be made anytime soon.
About two-thirds of Indian voters are from rural villages. While substantial progress has been made under the Modi government in bringing electricity and liquefied petroleum gas (LPG) to the households of these voters, biofuels (mainly sticks, grass and dried dung) still predominate cooking. Kerosene is prominent for lighting and cooking. Primarily for fear of losing rural votes, any Indian government must deal carefully with the pricing and distribution of kerosene.
Historically, kerosene has been a featured product of the public distribution system (PDS). This system was established early in the history of independent India as a 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 has been slow. Kerosene is still referred to as “PDS” and “non-PDS,” with PDS kerosene died blue and the non-PDS kerosene sold as colorless (or “white”) in an attempt to prevent the corrupt diversion of subsidized kerosene into the non-subsidized market.
The Modi government took a major step forward in 2015 by freeing non-PDS kerosene from regulatory control. The statement of change 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 was about twice that of PDS kerosene, the vast majority of kerosene consumption remains from PDS sources.
Because a subsidy of the difference between cost and sales price was paid by the government to the state-owned oil marketing companies (OMC), the subsidies remained quite high. More importantly, 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 (a quarter of a rupee) per fortnight. This was continued in 2017. Combined with the increase in LPG use, the price increase has had some effect on subsidy. The total subsidy for kerosene in the 2019-2020 budget is 1.45 percent lower than in the 2018-2019 budget.
Moreover, since kerosene is significantly more polluting than LPG and natural gas, some cities took up the mantle to declare themselves as “kerosene free” in an attempt to curb pollution. However, this move had little effect on overall use and subsidies, and more remains to be done.
Kerosene is of lessening importance to India as the switch to LPG and natural gas continues, but movement toward market driven solutions for the production and use of kerosene has been cautious and slow. India as a whole would benefit from speeding up this process. Elimination of controls and subsidies would 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.