Energy Subsidy Reform - International Monetary Fund · Energy Subsidy Reform: Lessons and...
Transcript of Energy Subsidy Reform - International Monetary Fund · Energy Subsidy Reform: Lessons and...
Energy Subsidy Reform: Lessons and Implications for India
Thomas Richardson IMF Senior Resident Representative—India
Indian Council for Research on International
Economic Relations (ICRIER) May 6, 2013
Outline
1. Global Experience with Subsidy Reform
o Consequences of Energy Subsidies
o Magnitude – by Product and Region
o International Lessons for Subsidy Reform
• 22 case studies (www.imf.org/subsidies)
2. Subsidy Reform in India (draft IMF WP)
o Emphasis on Equity Considerations
3
Consequences of energy subsidies
1. Depress growth
o Deter investment in energy sector
o Crowd out critical public spending
o Distort allocation of resources to energy-intensive sectors
2. Put pressure on fiscal and current account deficits
3. Create negative externalities
o Global warming (opposite of carbon taxes)
4. Exacerbate inequality (e.g., are regressive) 4
Definitions
1. Producer subsidies o Measured against international (reference) price
2. Consumer subsidies
o Pre-tax subsidies o If consumer prices < cost of supply
o Tax subsidies o If taxes are below efficient level (including taxes
to offset externalities)
o Pre-tax plus tax subsidy = post-tax subsidy 5
Magnitude of energy subsidies: Petroleum and electricity dominate pre-tax subsidies
Pre – tax: $480 billion (0.7% GDP, 2.1% revenues)
Petroleum
products
Natural
gas
Electricity
Coal
6
Magnitude of energy subsidies: Coal is also important for post-tax subsidies
Post – tax: $1.90 trillion (2.7% GDP, 8.1% revenues)
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Petroleum
products
Natural
gas
Electricity
Coal
Globally: post-tax subsidies are 4 times larger than pre-tax subsidies
Middle East dominates pre-tax subsidies, but advanced economies account for 40 percent of post-tax subsidies
Advanced
CEE-CIS
E.D. Asia
LAC MENA
S.S. Africa
Advanced
CEE-CIS
E.D. Asia
LAC
MENA
S.S. Africa
Pre-tax Post-tax
8
0
5
10
15
20
25
30
35
40
MENA E.D. Asia CEE-CIS S.S. Africa LAC Advanced
Under-pricing for externalities accounts for a large share of post-tax subsidies across all regions
VAT (% revenues)
Externality (% revenues)
Pre-tax (% revenues)
9
International Lessons for Subsidy Reform
o Based on 22 case studies
o All 5 regions of the world
o 28 reform episodes:
• 12 successes, 11 partial successes, 5 failures
• Uganda is one (success)
Six key reform ingredients
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Six Key Reform Ingredients
1. Comprehensive reform plan o Clear long-term objectives
o Assess impact of reforms (who wins, loses)
2. Extensive communication strategy o Transparency about size of subsidies
o Consult w/ stakeholders about benefits of reform
3. Appropriately phased, sequenced price hikes o Allow time to adjust, build safety net
o Sequence increases differently across products Petrol & diesel, then LPG, then kerosene
11
Six Key Reform Ingredients
4. Improve efficiency of state-owned firms
o Depoliticize, set performance targets, introduce competition if appropriate
5. Target mitigating measures to protect the poor
o Targeted cash transfers are preferred
o Expand other programs if cash transfers impossible
6. Depoliticize price (tariff) setting
o Automatic, rules-based price mechanism
May involve price smoothing
o Autonomous body to oversee price setting 12
Case Study: Ugandan Electricity Sector
Background: Power sector reformed in late 1990s
Problem (as of 2011-12): Politicization: “Independent” regulator left tariffs unchanged for 10 years
-- Subsidy (mainly on-budget) > 1% GDP
-- Little investment in sector (load shedding)
Solution: Broad discussion of incidence of benefits
(only better-off families had power)
One-off tariff hike & independent tariff setting mechanism
13
India: Background on Fuel Sector
14
-100
-50
0
50
100
150
200
2502
00
6-0
7
20
07
-08
20
08
-09
20
09
-10
20
10
-11
20
06
-07
20
07
-08
20
08
-09
20
09
-10
20
10
-11
Crude Petroleum Products
Mill
ion
Ton
nes
Dom. Production Imports Exports
Source: Ministry of Petroleum and Natural Gas
Crude Oil and Petroleum Products: Production, Imports, and Exports
India: Evolution of Fuel Product Prices & Subsidies
15 Source: IMF staff estimates based on authorities’ data
Petrol (rupees/liter)
(20)
-
20
40
60
80
100
Jan
-04
Ap
r-0
4Ju
l-0
4O
ct-0
4Ja
n-0
5A
pr-
05
Jul-
05
Oct
-05
Jan
-06
Ap
r-0
6Ju
l-0
6O
ct-0
6Ja
n-0
7A
pr-
07
Jul-
07
Oct
-07
Jan
-08
Ap
r-0
8Ju
l-0
8O
ct-0
8Ja
n-0
9A
pr-
09
Jul-
09
Oct
-09
Jan
-10
Ap
r-1
0Ju
l-1
0O
ct-1
0Ja
n-1
1A
pr-
11
Jul-
11
Oct
-11
Jan
-12
Ap
r-1
2Ju
l-1
2O
ct-1
2
Subsidies
Petrol - Formula price
Petrol -Pump price
India: Evolution of Fuel Product Prices & Subsidies
16 Source: IMF staff estimates based on authorities’ data
Diesel (rupees/liter)
(20)
(10)
-
10
20
30
40
50
60
70
Jan
-04
Ap
r-0
4Ju
l-0
4O
ct-0
4Ja
n-0
5A
pr-
05
Jul-
05
Oct
-05
Jan
-06
Ap
r-0
6Ju
l-0
6O
ct-0
6Ja
n-0
7A
pr-
07
Jul-
07
Oct
-07
Jan
-08
Ap
r-0
8Ju
l-0
8O
ct-0
8Ja
n-0
9A
pr-
09
Jul-
09
Oct
-09
Jan
-10
Ap
r-1
0Ju
l-1
0O
ct-1
0Ja
n-1
1A
pr-
11
Jul-
11
Oct
-11
Jan
-12
Ap
r-1
2Ju
l-1
2O
ct-1
2
Subsidies
Diesel - Formula price
Diesel - Pump price
India: Evolution of Fuel Product Prices & Subsidies
17 Source: IMF staff estimates based on authorities’ data
Kerosene (rupees/liter)
-
10
20
30
40
50
60
Jan
-04
Ap
r-0
4Ju
l-0
4O
ct-0
4Ja
n-0
5A
pr-
05
Jul-
05
Oct
-05
Jan
-06
Ap
r-0
6Ju
l-0
6O
ct-0
6Ja
n-0
7A
pr-
07
Jul-
07
Oct
-07
Jan
-08
Ap
r-0
8Ju
l-0
8O
ct-0
8Ja
n-0
9A
pr-
09
Jul-
09
Oct
-09
Jan
-10
Ap
r-1
0Ju
l-1
0O
ct-1
0Ja
n-1
1A
pr-
11
Jul-
11
Oct
-11
Jan
-12
Ap
r-1
2Ju
l-1
2O
ct-1
2
Subsidies
Kerosene - Formula price
Kerosene - PDS price
India: Evolution of Fuel Product Prices & Subsidies
18 Source: IMF staff estimates based on authorities’ data
LPG (rupees/14.2 kg gas cylinder)
-
100
200
300
400
500
600
700
800
900
1,000 Ja
n-0
4A
pr-
04
Jul-
04
Oct
-04
Jan
-05
Ap
r-0
5Ju
l-0
5O
ct-0
5Ja
n-0
6A
pr-
06
Jul-
06
Oct
-06
Jan
-07
Ap
r-0
7Ju
l-0
7O
ct-0
7Ja
n-0
8A
pr-
08
Jul-
08
Oct
-08
Jan
-09
Ap
r-0
9Ju
l-0
9O
ct-0
9Ja
n-1
0A
pr-
10
Jul-
10
Oct
-10
Jan
-11
Ap
r-1
1Ju
l-1
1O
ct-1
1Ja
n-1
2A
pr-
12
Jul-
12
Oct
-12
Subsidies
LPG - Formula price
LPG - Retail price
India: Under-pricing of Fuel Products (November 2012, rupees /liter or /cylinder)
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Import
Parity Price
Regulated
PriceDifference
Percent of
Regulated Price
Kerosene 46.9 14.8 32.1 217.4
LPG 911.5 410.5 501.0 122.1
Diesel 57.0 47.2 9.8 20.9
Petrol 72.7 68.1 4.7 6.8
Source: IMF staff estimates
India: Fiscal Cost of Fuel Subsidies
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0.0
0.2
0.4
0.6
0.8
1.0
1.2
1.4
1.6
1.8
2.0
2004/05 2005/06 2006/07 2007/08 2008/09 2009/10 2010/11 2011/12
Perc
ent
of
GD
P
LPG
Kerosene
Diesel
Gasoline
India: Financing of Fuel Subsidies
21
0.0
0.2
0.4
0.6
0.8
1.0
1.2
1.4
1.6
1.8
2.0
2004/05 2005/06 2006/07 2007/08 2008/09 2009/10 2010/11 2011/12
Perc
ent
of
GD
P
Upstream
OMCs
Oil bonds
Budget
India: Who spends what on fuel?
22 Source: IMF staff estimates based on 2009-10 HH Socio-Economic Survey
Composition of HH Fuel Spending by Income Group, 2009-10 (Rupees per capita/month)
0
2
4
6
8
10
0
50
100
150
200
250
Dec
ile 1
Dec
ile 2
Dec
ile 3
Dec
ile 4
Dec
ile 5
Dec
ile 6
Dec
ile 7
Dec
ile 8
Dec
ile 9
Dec
ile 1
0
Kerosene
LPG
Petrol
Diesel
Share in total monthly expenditure (%, right scale)
India: Who benefits most from fuel subsidies?
23 Source: IMF staff estimates based on 2009-10 HH Socio-Economic Survey
Welfare Loss from Subsidy Reform by Income Group (Rupees per capita/month)
0
20
40
60
80
100
120
140
160
1st 2nd 3rd 4th 5th 6th 7th 8th 9th 10th
Indirect benefit
Kerosene
LPG
Petrol
Diesel
24 Source: IMF staff estimates based on 2009-10 HH Socio-Economic Survey
Cumulative Fiscal Cost of Compensating HHs for Subsidy Reform (in 2009-10: Percent of GDP)
0.0
0.2
0.4
0.6
0.8
1.0D
ecile
1
Dec
ile 2
Dec
ile 3
Dec
ile 4
Dec
ile 5
Dec
ile 6
Dec
ile 7
Dec
ile 8
Dec
ile 9
Dec
ile 1
0
Other goods and services
Fuel only
India: Progress is being made
• Kelkar Commission recommendations aligned with most of 6 key reform ingredients
• Petrol already mostly unsubsidized; diesel price increased significantly – monthly path
• LPG cylinders limited per household, pilot
• Roll out of Aadhaar-based direct cash transfers is in pilot phase, to be rolled out across India
• Kerosene subsidy seen as delicate – poverty impact could be significant
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• Senior officials have spelled out ultimate goals, but sequencing, winners/losers not well understood by public
Comprehensive reform plan?
• PM, FM have made reform plans clear for diesel, less so for LPG and kerosene
Extensive communications strategy?
• Clear, sensible strategy: began with petrol, now diesel (gradual), then other products
Gradual, sequenced reforms?
26
India: Assessing subsidy reforms—to discuss:
• SEBs are raising power tariffs, but more work is needed
Improvements in SOE efficiency?
• Impressive effort to introduce direct cash transfers based on UID
Targeted social safety net?
• Mostly done at state level, so picture is mixed across India
Depoliticize price setting?
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India: Assessing subsidy reforms—to discuss:
Thank you
“Both goals of expanding new investment and achieving energy efficiency require a more rational pricing policy, aligning India’s energy prices with global prices. This cannot be done immediately, but we need to outline a phased programme for such adjustment and then work to develop support for making the transition.”
Prime Minister's Address to the Nation
December 31, 2011 28
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Want to know more? www.imf.org/subsidies: on energy subsidy reforms www.imf.org/asia: on our work in Asia Pacific www.imf.org/india: on IMF analysis of India
References & materials
IMF Fiscal Affairs Dept project, with IMF African and Middle East and Central Asian Depts
Includes case studies of 22 countries
Available at: www.imf.org/subsidies
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Draft IMF working paper: “The Fiscal and Welfare Impacts of Reforming Fuel Subsidies in India,” by R. Anand, D. Coady, A. Mohommad, V. Thakoor, & J. P. Walsh
Comments welcome!