Direct and Indirect Impact of Fossil Fuel Price Changes on Cost of Farming in India

1. Direct and Indirect Impact of Fossil Fuel Price Changes on Cost of Farming in India MukeshAnand, NIPFP mukesh_anand@hotmail.com December 11, 2013

2. Presentation Plan • Motivation • under-recovery (subsidy?) – large source of government revenue • Report on Diesel http://www.nipfp.org.in/newweb/sites/default/files/Diesel%20Price%20Reform.pdf • Working Paper version at http://www.nipfp.org.in/newweb/sites/default/files/WP_2012_108.pdf • Economic and political issue – right prices, growth, inflation, equity • Fossil fuel use - in economy, in agriculture • Direct purchase for farms • Indirect purchase • I – O Analysis

3. Under-recovery of Oil Companies and Fiscal Subsidy on Sale of Sensitive Petroleum Products (billion INR)

4. Federal and Provincial Revenue from Taxation and Quasi-Taxation of Petroleum Products (billion INR)

5. Federal and Provincial Taxes in Retail Sale Price in Delhi

6. Impact of Change in Fossil Fuel Prices • RBI, 2011 reports “…. every 10 per cent increase in global crude prices, ….., could have a direct impact of 1 percentage point increase in overall WPI inflation and the total impact could be about 2 percentage points over time……..” • Other studies {Bhattacharya and Kar (2005), Bhattacharya and Batra (2009), Kumar (2005)}: • economic growth rate may decline by between one to three per cent and • inflation may increase to between 6.5 and 18 per cent on account of rise in oil prices • Bhanumurthy et al (2012): 10 per cent increase in oil price would reduce growth rate by 0.9 per cent

7. Weight in WPI of Major Groups (per cent)

8. GDP, Consumption of fossil fuels: Trend growth rates

9. GDP, Energy Consumption in India

10. Fossil Fuel Use in Indian Agriculture • Direct • Diesel to run pump sets, tractors, harvesters, threshers, combines • Kerosene, natural gas • Indirect • Natural Gas, Naphtha, Furnace Oil: Feedstock for Fertilisers • Coal, Diesel, Natural Gas: Energy / grid-power used on farms

11. Direct and Indirect Use of Fossil-fuel on Farms (in ktoe)

12. Commodity * Commodity I-O Transactions Output Relation: x = Ax + f; x = [I – A]-1f Input or Price Relation: p' = p'A + ν'; p' = ν'[I – A]-1 Where, small case letters denote a vector, upper case letters denote a matrix, and ' denotes a row vector;

13. Interpretation • The matrix [I – A]-1 is the Leontief inverse matrix. • Elements of the Leontief inverse matrix capture both the direct and indirect effects of any change in the exogenous vectors (fand ν). • Let [I – A]-1 = R = {rij}, where rij is the i, jth element of the Leontief inverse. • Because of strict linearity in price equations, rij = δpj / δνi, that is the i, jth element of the Leontief inverse is the partial derivative of pj with respect to νi.

14. p' = ν'[I – A]-1 ν1 ν2 ν3 p1 p2 p3 = r11 r12 r13 r21 r22 r23 r31 r32 r33 That is, p1 p2 p3 = ν1 r11 + ν2 r21 + ν3r31 ν1r12 + ν2 r22+ ν3r32 ν1r13 + ν2 r23+ ν3r33 δpj / δνi, the partial derivative of pj with respect to νi, then is the i, jth element of the Leontief inverse matrix. For example, δp1/ δν2 = r21

15. Analysis of Coefficients of I – O Matrix and Leontief Inverse Matrix

17. Co-efficients for Direct and Total Effects of Fossil Fuels, 2007-8

18. Summary • Petroleum products are a major source of government tax revenue both at federal (15 per cent) and provincial (20 per cent) levels. • Under-recovery (November 16, ‘11: INR 10.17; May 16 ‘12: INR 13.64; July 1: INR 9.13; Sept 1: INR 17.05) on diesel is higher than tax realised from it. Situation reverses in Jan 18 ‘13: INR 9.16 under-recovery and tax INR 10.23; and as on December 01 ‘13: INR 9.99 under-recovery and tax INR 11.05 • Sale of diesel accounted for almost 57 per cent of total under-recovery in 2012-3. • Under-recovery on diesel (as on Dec. 01, 2013) was about 18.6 per cent of RSP in Delhi.

19. Summary • Indirect tax yield (federal plus provincial, December 2013) per litre of diesel (INR 11.05) is about 50 per cent from that on petrol (INR 21.32) • Wide divergence in total price between different (but jointly produced) petroleum products is undesirable. • Given the extant weight of diesel (mineral oils) in WPI, a 10 per cent increase in its RSP would cause price level to rise by 0.47 (0.94) per cent. • At the aggregate economy level fossil fuel intensity is declining – but, it is rising in farming sector. • Intensity of direct use of fossil fuels in farming has changed slowly from 0.005173 to 0.009826, between 1998-9 and 2007-8. • Further, including indirect use, fossil fuel intensity in farming has grown more than thrice over the same period (Inverse Demand) (from 0.020639 to 0.065810).

20. Summary • Fossil fuels constitute a relatively small fraction of farming costs (as compared to remainder of the economy). • A 10 per cent increase in price of fuel (diesel), could raise average cost of cultivation / production on farms by 0.56 per cent. • But, if price of all fossil fuels is similarly raised, and in turn these are reflected in the cost of inputs in agriculture, like power and fertiliser, then cost of cultivation / production on farms could be far higher. • Irrigation (perhaps even fertilisers and pesticides) use concentrated on relatively larger land holdings, perhaps owned by relatively richer farmers • Dominant rhetoric: that subsidy in input use (diesel, irrigation, power, fertilisers, and pesticides) disproportionately appropriated by larger and richer farmers. • But, subsidy policy on input-use subservient to the objective of food sufficiency - In turn, intended to raise productivity and output of farming.