How to really fuel discontent - Macleans.ca
 

How to really fuel discontent

Tempers flare as the government moves to curb the country’s massive gas subsidies


 

Amit Dave/Reuters

India’s fuel subsidies have long been considered too hot to touch. To tweak them is to invite public fury. So it came as a bit of a shock last month when Prime Minister Manmohan Singh, hardly the political bruiser needed for the task, announced major reductions just ahead of Toronto’s G20 summit. The bold move, sure to hurt the poor who rely on kerosene to cook, will also sting politically. Massive strikes in response last week grounded planes, stopped trains and closed schools and businesses across India for a day. Goods were stranded at port when truckers joined in, using their parked rigs to gum up traffic. In places, violence flared, leading to thousands of arrests.

Singh was undaunted. An economist by training—“clean and upright,” though “not particularly charismatic,” according to Milind Kandlikar of the Liu Institute for Global Issues—he is vowing to carry on. India, whose deficit recently hit a 16-year high of seven per cent of GDP, can no longer afford its massive fuel subsidies, Singh said; they drain an annual $20 billion from the public purse, roughly one per cent of GDP. And with car ownership, the burden was growing rapidly (sales of cars are up 30 per cent year over year in India).

Singh’s new, reformist fiscal advisory team, led by Cornell University’s Kaushik Basu, is thought to be behind the move; recent reforms intended to liberalize distribution networks have produced powerful results, adds Canada’s former high commissioner to India, Joseph Caron. But the push didn’t just come from within. Fuel subsidies are now a global hot issue. Experts blame them for enabling our addiction to oil by making it cheap; pressure to end them is mounting rapidly. Public spending on fuel subsidies worldwide topped US$550 billion in 2008, up $215 billion over the previous year, according to the International Energy Agency, a Paris-based advisory agency. Globally, governments are handing the booming oil industry $2 billion a day to keep gas prices artificially low. Yemen and Indonesia, in fact, spend more tamping down the price of fuel than they do on health and education put together. Iran dumps $100 billion, fully one-third of its annual budget, to keep gas at 10 cents a litre. Phasing subsidies out, says the IEA, could cut carbon emissions by 30 per cent of the amount needed to keep global temperatures from crossing a tipping point of 2˚ C.

The issue is often painted as a developing world problem. But China and Malaysia—which along with India have been heavily criticized for holding fuel prices below market rates—have also recently pushed through major reforms. And there are two types of subsidies: consumption-side and production-side subsidies. Canada, like much of the industrialized world, offers oil and gas producers the latter, making it cheaper for them to get the stuff out of the ground. In the U.S., oil production ranks among the country’s most heavily subsidized businesses, with major tax breaks built in to the entire manufacturing chain. Despite joining other G20 nations in a firm pledge to phase out oil and gas subsidies, the Ottawa Citizen has reported that Prime Minister Stephen Harper will in fact be maintaining them. Blaming India is no longer viable.


 

How to really fuel discontent

  1. Subsidizing anything hides the true costs of it from the public/consumer. Unless it is indeed considered a necessity (basic health-care) then it should remain free market. This may not in the long run lead to higher prices since demand for product will drop; either freezing the price or forcing it to be lowered until the market allows inflation.
    The hand of government sends too many ripples every time it touches the pool.

  2. That's the problem with subsidies. Eventually you need to remove them. By then, individuals and/or businesses have built them into their budgets, their planning, their lives. Subsidies therefore inflict two distinct types of economic damage. The largely invisible but very real problem of resource misallocation while the subsidies are in effect, and the sudden economic dislocation when subsidies are removed.