The oil subsidy

The Soviet Union subsidized the economies of some developing nations if they leaned politically towards Moscow and were considered strategically important. Supplying raw materials at discounted prices is one way to provide a subsidy to the buyer. Today, if Indian refiners are buying crude oil from Russia at unusually low prices, it should be fair to say that India’s economy is being subsidized by Russia.

How significant is this subsidy when measured against India’s economy? Based on this report from the late April, let’s assume – going forward – that Russian crude sells in India at a discount of $10 per bbl relative to its hypothetical price under “normal” conditions. Let’s keep the volume fixed at the April 2023 reading, 1.7 mmbpd. The subsidy works out to $6.2 bln a year.

With a $12 per bbl discount on 2.0 mmbpd of imports, the annual subsidy would grow to $8.8 bln; with a $8 per bbl discount and 1.5 mmbpd, it would shrink to $4.4 bln. India’s GDP was about $3.39 tln in 2022 in nominal US dollars. The subsidy then equals 0.13% to 0.25% of GDP. A modest share but not quite zero. By way of comparison, the Indian government’s cooking-fuel (LPG) subsidy to households comes up to 0.1% of GDP.

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