x Abu Dhabi, UAEWednesday 26 July 2017

India advised to bite the bullet over its huge bill for handouts

Subsidies and price-fixing remain common features of economies from India to the US.

The Middle East is not the only place where government subsidies are an integral part of economic life.

Subsidies are commonplace from India to the US, and the cost of maintaining them is coming under increasing scrutiny as surging commodity prices squeeze public budgets.

India, which has one of the world's biggest subsidy bills, was urged last week to take "hard decisions" to pass on rising energy prices to consumers. The government had to convince itself it could still lead in an economy with high energy prices, Montek Singh Ahluwalia, the deputy chairman of India's planning commission, said after the release of an Organisation for Economic Co-operation and Development report about the country's economy.

"Energy subsidies encourage wasteful consumption, fuel adulteration and smuggling and create a system that is overwhelmed by corruption," the report said.

"Globally, by blurring market signals, they push up the level and volatility of energy prices, since when world prices rise, India's consumption does not fall commensurately."

India's energy subsidies - estimated at US$5.3 billion (Dh19.47bn) a year - provide cheap fuel to poor households for lighting and safeguard consumers from volatility in global prices.

The problem is that up to half of subsidised kerosene is sold outside the public distribution system at higher prices.

Indian oil companies hit by higher prices still sell at a loss despite receiving government compensation.

tarnold@thenational.ae