Q: You served at a time when we came pretty close to market pricing of petrol and diesel and then abandoned it when petrol prices starting shooting up -.what do you think is the way to go about fixing the mess especially of fuels?

Sharma: As far as petroleum prices are concerned, you should know that almost Rs 96,000 crore of revenues are generated from the petroleum products. Actually the price of petrol for example, 55% of it is taxes, diesel is about 34%, LPG is about 11% and kerosene, a common man’s fuel is about 4% of the prices is taxes. How if the government had just, the state government and the center had just foregone some tax revenue you would not have really needed this subsidy burden. We make it look as though that we are giving subsidy to the poor man but actually we are taxing him on the other side so it is a lopsided situation. I think the first thing to do is this states and the center should review their taxation structure. I think Dr Rangarajan Committee, they have actually analyzed some of these figures and have taken these figures from that.

The second thing is that I feel that the subsidies in India, it is made to look as though it is a bad word. If you look at the total subsidy it is less than 1.5% of the GDP and imagine a country with about two hundred seventy five million below poverty line (BPL) population and in the demorrow states the percentage of BPL population is high as 40% and 46% of the children suffer from malnutrition. In a situation like this when people cannot get their fuels, unclean fuels, they collect fuel wood so this 1.7% is nothing. But as you rightly pointed out some of these subsidies are not reaching the genuine people, the beneficiaries.

Fertiliser subsidy, when I was in government I use to point out a part of it actually goes back to fertiliser companies. There maybe a cash problem but actually a part of the subsidy goes back indirectly to the fertiliser companies. Somewhere I feel that instead of all this rationalize the prices, sell the fertilisers at the right prices but transfer whatever you want to give to the farmer directly.

Q. What is your idea?  What according to you should be the roadmap by which the key features of returning to market based pricing should be resorted to for fuel products?

Jha: Actually the right time to have phased out the subsidies on petrol and diesel was really when the international prices were low and when it corresponded to our administered prices more or less. We missed that chance but even now it is not too late. We can for instance lay down a roadmap in next two - three years the subsidy on petrol as well as diesel will be removed in phases so that maybe three years down the road we would have administered prices which should have been removed and market prices would take over the pricing of these products. The other point here is when we subsidies petrol and diesel, it is not generally known that almost 30% of new cars that are being sold in the country are diesel cars. Why should a person who buys a diesel Mercedes be subsidized as compared to a chap who buys Maruti 800 petrol? Actually as far as LPG subsidy is cornered, it should have been abolished long ago. There are no sound economic arguments  for continuing to subsidies people like you and me. It really the poor targeting of subsidies so it should really have gone a long time ago but I think for various reasons mainly political compulsions, successive governments have thought it fit to continue with this but it is a classic example of very poor targeting of subsidies.

Q: Do you think that the government stance is correct   - in the recent announcement this week they said that cooking fuels the government will take care of and it is only auto fuels that the subsidies will work through fuel companies or oil companies. Do you think that is atleast a good start that cooking fuels are taken out of the mess and the mess is sorted one by one- is that a first good step?

Sharma: Purely as an economist, any economist would say that we have priced in the fuels correctly and transfer whatever subsidy you want to give directly that is much better, more efficient way of transferring this benefit. But in practice it does not work so well. To some extent subsidies are inevitable. Only thing is target the subsidies carefully.

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