Petroleum product pricing in India is frequently seen as a black hole of subsidies. Economists and oil companies complain about the impacts those subsidies have on public finances, financial performance of oil companies and demand-side management. However, on closer analysis, the issue of petroleum product pricing in India is more complex than the one-way flow of subsidies reported in the press. So the question to be answered is: how high are subsidies really?
Contrary to common perception, India's retail prices for petrol and diesel are relatively high despite subsidies. In fact, the total Government (central and states) taxes and surcharges on petrol products exceed by far the annual budget subsidies for these products. There is thus a certain rationale for the Government to maintain the current system though it does have negative implications on the financial health of public oil companies and acts as a deterrent to private investments in the sector. In addition, the policy rationale of providing subsidies to allow poorer segments of society access to commercial fuels, cannot be proven conclusively and irrational choices among different fuels are being made due to distorted retail prices. The Indian energy market and the economy as a whole would be better off if the Government would implement a consistent, transparent and rational fuel pricing system but with a view to political imperatives, this is unlikely to happen in the short-term.