For a direct illustration of the cost of fuel subsidies in India, one need only look at the disaster that has befallen private sector petrol pump operators in the country.
In August, frustrated by the government’s pricing policies, the heads of the three largest operators, Shell India, Reliance Industries and Essar Oil, took the rare step of sending Manmohan Singh, prime minister, a letter calling for a meeting with him on the issue.
“Approximately 2,000 dealers invested about Rs50bn (£610m, $1.26bn, €880m) in the private sector retail network. Their investment is now at risk,” the letter said. “It is our estimate that approximately 80,000 jobs, direct and indirect, will be lost if the level playing field is not restored.”
The root of their problem is moves by the Indian government, starting in 2005, to control domestic prices of petrol, diesel and other fuels to curb headline inflation.
The strategy has worked. Since the government’s last price adjustment in February, international oil prices have risen 35 per cent, none of which has been passed on to Indian consumers.
According to the Reserve Bank of India, however, wholesale inflation now stands at an annual rate of 3 per cent, well within its preferred range, partly thanks to artificially low fuel prices.
But this has come at a high cost. India’s fuel subsidy burden is expected to reach nearly Rs600bn this fiscal year ending March, up 70 per cent from a year ago.
The government partially compensates state-owned petrol pump operators by issuing them with “oil bonds” and by selling discounted oil from public sector producers.
But private sector retailers receive no such compensation. Their market share has fallen from 15 per cent two years ago to 4 per cent today, deterring further foreign and domestic private investment in the sector.
VK Sibal, head of India’s Directorate General of Hydrocarbons, said he believed in competition but India needed to keep transport costs low to help reduce the price of basic goods.
“India looks as if it’s growing but there is a diversity of wealth so huge that the government has to pay attention to that,” said Mr Sibal.