“Oil and
Natural Gas Price Reforms and its Impacts on Indian Agriculture”
Citation: Ganesh-Kumar, A. and N. Harak. 2015. “Oil and Natural Gas Price Reforms and its
Impacts on Indian Agriculture”. In S. Mahendra Dev (Ed.) India Development
Report–2015, Oxford University Press, New Delhi.
Abstract: This paper examines the impacts of
25% reduction in the subsidy on high speed diesel (HSD) and natural gas (NG) on
the economy in general and on agriculture in particular using a computable
general equilibrium (CGE) model of the Indian economy. The analysis shows that
the joint products nature of the Refinery sector and the existence of
substantial scope for substitution amongst alternative fuels in various sectors
of the economy are two important factors that has implications for the outcome
of changes in the pricing policy regime for individual petroleum products.
Incorporating them into the analytical framework is critical to arrive at a
proper assessment of the impacts of changes in the pricing regime for various
fuels.
Taking
account of these two factors, the analysis shows that reducing subsidy on HSD
is likely to be accompanied by a rise in price of other petroleum based fuels,
and hurts the economy by with the GDP contracting by about 0.6%, employment,
household real income, consumption and savings by a similar percentage. Though
the government support to the Refinery sector falls, it is offset by the rise
in support for the NG sector as end-users substitute HSD with NG.
In contrast,
a reduction in subsidy for NG triggers a substitution away from NG into HSD and
other fuels. The ensuing supply response of the Refinery sector brings down the
price of all the petroleum based fuels given the joint products nature of the
sector. Consequently, the energy cost and hence the total production cost falls
for all sectors including agriculture. Additionally, agriculture also benefits
from a fall in fertilizer price, which happens when the Fertilizer sector
itself faces a reduction in energy cost and also substitutes NG with cheaper
Naphtha as a feedstock. The fall in price of several commodities triggers a
demand surge, which in turn spurs output growth that results in 3.2% rise in GDP. Employment, household real income, consumption and
savings rise by nearly a similar percentage. Though beneficial to the economy
as a whole, merely reducing but not eliminating the subsidy on NG and other
fuels does not help improve the fiscal situation due to the substitution of NG
with other fuels that enjoy subsidy.
Thus, the
fear that rising fuel cost will result in an across the board rise in costs and
prices is not always warranted. As long as there is enough flexibility in the
production processes in various sectors that permits easy substitution amongst
fuels, profit maximising behaviour of producers can ensure that a
cost-minimizing efficient mix of fuels will be used, which can ensure that the
potential cost escalation remains largely muted. In particular, agriculture is
unlikely to be adversely affected because of a reduction in subsidies for HSD
and NG despite its strong direct and indirect linkages with the oil and natural
gas sectors. On the contrary the sector benefits when energy
use efficiency improves all around and in particular when the feedstock mix is
optimised in the Fertilizer sector. Another major conclusion of this
study is that partial reforms, either in the form of focusing on specific
commodities and/or a reduction rather than elimination of subsidies on fuels is
unlikely to aid in improving the fiscal position.