Reforming fossil fuel prices in India: Dilemma of a developing economy

Over the period between 1990-1 and 2012-3, fossil fuel use on farms has risen and its indirect use in farming, particularly for non-energy purposes, is also growing. Consequently, both energy intensity and fossil fuel intensity are rising for Indian agriculture. But, these are declining for the aggregate Indian economy. Thus, revision of fossil fuel prices acquires greater significance for Indian agriculture than for rest of the economy. There are significant differences across crops. The crop-level analysis is supplemented by an alternative approach that utilizes a three-sector input-output (I-O) model for the Indian economy representing farming, fossil fuels, and rest of economy. Fossil fuels sector is assessed to portray, in general, strong forward linkages. The increase in total cost of farming, for a given change in fossil fuel prices, is estimated as a multiple of increase in direct input cost of fossil fuels in farming. From the three-sector aggregated economy this multiple was estimated at 3.99 for 1998-9. But it grew to 6.7 in 2007-8. The findings have stronger ramifications than commonly recognized, for inflation and cost of implementing the policy on food security.