Ministry of External Affairs of India ‘advised’ IOC to withdraw LGP and Kerosene subsidies to Bhutan

The Bhutanese has found that the withdrawal of LPG and Kerosene subsidies might very well be a measure taken by the Government of India.

This comes to light because of the letter sent from the Indian Oil Corporation (IOC) to the Government of Bhutan that says, “The Ministry of External Affairs (MEA), Government of India has advised IOC through Ministry of Petroleum and Natural Gas regarding withdrawal of subsidy for supplies of SKO (Kerosene) and LPG to Bhutan with immediate effect.”

The letter does not state any commercial or financial reasons for the withdrawal of the subsidies, except a diplomatic one stating it is being done under the advice of the MEA, GOI.

Meanwhile, the Indian officials in the Indian Embassy in Thimphu have refused to confirm if such a decision was made on commercial grounds or not.

The Bhutanese upon calling the Ministry of Petroleum and Natural Gas offices in New Delhi found that the ministry had not put up any specific proposal to the Indian Government to withdraw subsidies to Bhutan.

In fact, the IOC through its parent agency of Ministry of Petroleum and Natural Gas had been advised by the MEA to withdraw the subsidy.

There are speculations in Bhutan that the withdrawal of subsidies is an entirely commercial decision since the subsidies in India are also being withdrawn.

However, the paper has found that this theory is not entirely correct as Indian consumers continue to get a subsidy of nine gas cylinders a year. Studies in India have shown that most families use an average of eight cylinders a year for cooking.

Subsidies in India will be gradually withdrawn to those earning above Rs 50,000 a month in the future, but the vast majority of Indians who earn below the line will continue to get LPG and Kerosene subsidies, either through direct cash transfers or subsidized LPG cylinders and Kerosene.

A prominent economist in Bhutan, on the condition of anonymity said, “The Indian government limited the number of subsidized LPG cylinders from September 2012 onwards at nine cylinders for its consumers, but did not stop it. If the same was done for Bhutan, at the time, then it would be a commercial decision. The question to be asked is why subsidies are being completely withdrawn from Bhutan, almost a year later, and that too when ordinary Indian consumers continue to enjoy a subsidy.”

The economist also said that the Government of India’s decision on withdrawing subsidy to Bhutan cannot be a commercial one, as firstly, the subsidy to Bhutan was negligible from India’s point of view, and secondly, all financial decisions for Bhutan by India would be made on diplomatic grounds.

The Indian government’s LPG subsidy bill was Nu 250 bn or Nu 25,000 mn (1 bn= 1000 mn) a year for 2011 and 2012. Bhutan imported just Nu 72.71 mn worth of LPG cylinders from India. Bhutan’s total LPG subsidy would just be 0.18 percent of the Indian subsidy bill.

Some government officials have pointed out to the other probable causes, such as the weakening Rupee, which in turns weakens the Indian economy, and causes the budgetary problems.

However, the latest economic data from India shows that the Indian economy, despite the weakening Rupee, is on the mend.

Historically, when India faced tougher economic crises, fuel shortages and other uncertainties- the subsidy to Bhutan that has been going on since the establishment of Bhutan and India ties was never withdrawn.

Indian subsidies to Bhutan, have in fact, continued even when it fought two major wars against Pakistan in 1965 and 1971, and a major war against China in 1962.

In 1991 when India faced one of its worst economic crisis with just USD 1.2 bn in foreign exchange reserves, barely enough for financing three weeks of imports and also about to default on international loan obligations, India still did not withdraw the subsidies to Bhutan. India, at the time, had to even pledge its gold reserves to get loans from the International Monetary Fund.

India’s Forex reserves today stands at around USD 300 bn, and it is the ninth largest economy in the world, and is targeted to be the third largest economy in a decade’s time after China.

Meanwhile, the Interim Government through the Bhutanese Embassy in New Delhi, India has requested the Indian Government to reconsider its withdrawal of subsidies.

The withdrawal of subsidies will mean that LPG cooking gas, which was ordinarily available for around Nu 400 to 500, has increased by more than 100 percent to 1,203 to 1,070 depending on which part of the country the LPG is sold.

Kerosene was available at a cost of between Nu 13.86 to Nu 17 per liter, and has now increased by 350 percent, costing between Nu 54.99 to Nu 57.68 per liter.

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