How oil under recovery affects India?

In India, we fulfill 80 % of our petroleum needs through imports. Crude prices change according to the global demand and supply scenario.  

Theoretically petroleum prices in India should vary as per the international prices - Import cost + Taxes.

But in India petroleum products are sold at subsidized rates that means below the cost price (import price plus taxes).

The difference between the cost price and the sell price is called oil under recovery.

Thus OMCs (Oil Marketing Company) sell petroleum products below their cost prices and accumulate losses.

This loss is compensated by the government by issuing oil bonds (to OMCs).

What does that mean?

Government is just a managing custodian of the nation’s money and compensation to Oil Marketing Companies is nothing but the citizen’s money- the money collected through various taxes.

This means citizens who are not directly using the petroleum products, too are forced to pay the petroleum expenses incurred by other citizens.

If we see the under recovery chart, it is evident that how diesel under recovery is skyrocketing.This is why for the betterment of the Indian economy Diesel subsidy should be restricted to needy-ones only.

How this problem is aggravated?

Falling rupee against the USA dollar and rising international crude prices have resulted in the further bloating of the oil under recovery.

How it affects the economy?

(1)  Fuel subsidy results in higher fiscal deficit. Fiscal deficit of India is continuously rising. Higher fiscal deficit forces the government to borrow from the central bank and thus it deprives the businesses and the industry of funds -which is a prerequisite for their growth.

(2)  This also puts the upward pressure on interest rates. Indian economy has already come to a standstill due to higher interest rates (besides Euro Debt Crisis and Slowing US Economy).

(3)  Businesses especially capital intensive ones have been hit on the profitability front and are desperately waiting for the slashing of the interest rates.RBI is not able to slash rates as rising inflation in India prevents it to do so. Government is forced to reduce the expenditure for welfare schemes and the infrastructure development.

(4)  Government finds it difficult to lower the taxes- This is a necessary step for the better tax compliance.

Government should decontrol the all petroleum products and for transporters, farmers and the lower and middle class people direct subsidy should be given. 

For this task Aadhar card by UIDAI shall play a pivotal role and therefore govt. should seriously pacify the allotment of Aadhar cards.

But ruling government seems to be in a mood to defer the direct subsidy proposal till 2014 general election. Earlier, government was toying with the idea of hiking the excise duty on Diesel cars but this move was a non-viable one in many ways.