India: Soaked by Oil Subsidies

Its state-controlled companies are losing a lot of money, and private rivals can’t compete

You’d think Sarthak Behuria, chairman of Indian Oil, would be one of the world’s happiest executives. His state-controlled company, with $59 billion in revenues, is India’s largest refiner of oil into such products as gasoline and diesel, which are eagerly bought by increasingly affluent consumers and expansion-minded companies. Its 17,800 gas stations are ubiquitous on Indian roads.

Yet Behuria, far from raking in the profits, is struggling to save his company from imminent bankruptcy. Indian Oil is running losses of $76 million a day, and will run through its line of credit of $21.4 billion by July. That’s because the government has insisted that Indian Oil subsidize all the gasoline, diesel, and cooking oil it sells, so much so that prices are a third cheaper at the pump in India than they are in the U.S. Since the oil it purchases abroad is so much more expensive than what it sells at home, Indian Oil basically loses money every time it makes a sale. So do the two other state-controlled oil companies, Bharat Petroleum and Hindustan Petroleum.


To defuse the crisis, the government of Prime Minister Manmohan Singh raised fuel prices an average of 13% on June 4. That will not be enough to rescue Indian Oil, but it has already kicked off a political storm. The country’s Communists and opposition groups are calling for nationwide strikes to protest the price hikes.

India’s dilemma reflects one of the big distortions in the energy industry today: the widespread use of state subsidies to soften the blow for consumers in Venezuela, China, Taiwan, India, and beyond. The soaring costs of these subsidies are hammering government budgets in many emerging markets. Indonesia was so squeezed that it just reduced its subsidies drastically. Malaysia is doing the same.

Business Week