Petroleum subsidy in India an econometric study

Abstract

Subsidies have become an integral part of our economic planning process. A lot of this can be attributed to the welfare objective of the state under which redistribution of state s wealth is often given primary importance. Since subsidies are associated with redistributive properties hence they occupy a core place in the planning process. But at the same time the subsidies also have an expenditure that needs to be financed. This financing is crucial as it can cause macroeconomic instability. It is widely believed that if subsidy is financed by current expenditure then it is acceptable, but if it is financed through deficit financing then it becomes regressive. It is between these two conflicting objectives that a balance has to be established. Like most countries, India too has its share of subsidies. Among all the other subsidies food subsidy, fertiliser subsidy and petroleum subsidy are the most important as they have been occupying more than 90 percent of India s total expenditure of subsidies since the last three decades. The current study focuses on petroleum subsidy. Primarily a part of the energy subsidy, a component so crucial for the economic development of any country, the petroleum subsidy has been a subject to much scrutiny because of its universal nature and also for the subsidy being provided to a commodity that is primarily imported. Since many petro products are higher end products with many of them having limited accessibility especially in the rural areas, thus limiting its utilisation to the urbanised upper segment of the society. Therefore, it is argued that this subsidy is mistargeted and hence failing in its objective of income re distribution. Moreover, the expense incurred by the subsidy also contributed towards macroeconomic instability a fact also reckoned by the policy makers. Also the subsidy is never an on budget subsidy and has remained largely off budget ever since its inception. During the Administered Price Mechanism (APM) regime