State subsidies on oil products are doing great harm and barely any good in India, Indonesia, Malaysia and Thailand, the Asian Development Bank said today.

Manila-based ADB urged its four member-countries, which are spending billions of dollars every year to keep local pump prices artificially low, to scale back subsidies and align prices with the market.

"Current market conditions should be taken as an excellent reason to push through with reform, as the fiscal costs rise and as the escalation in the oil price may be more than just transitory," it said in its annual publication Asian Development Outlook .

It acknowledged that "public resistance to removing subsidies can be very strong, particularly during times of volatile oil prices." It also took note of the fact that these countries have taken steps to reduce subsidies as the fiscal strain began to show.

"Government intervention for redistributional and environmental reasons is justifiable only when the social gain or the environmental improvement exceeds the economic cost," the report said.

"Nonetheless, the existing practices in these four countries appear ineffective since the subsidies are poorly targeted and often distort resource allocation."

Moreover, "the distorted pricing encourages an excessive use of oil products, and the resulting deadweight costs can be substantial."

In Indonesia, where the oil subsidy budget quadrupled to about US$6.8 billion last year, or three percent of the gross domestic product, it "might balloon again in 2005 because of high world oil prices," the ADB said.

Malaysia's "market-managed approach", in force since 1993, led to subsidies of US$1.3 billion, or four percent of the total budget last year, and its scaling back is taking place only gradually despite a government move to raise diesel prices last month.

Fiscal liability

India and Thailand resort to "off-budget" subsidies to specific products like diesel, kerosene and liquefied petroleum gas (LPG) but this "may incur fiscal liabilities in principle," it said.

India, which heavily subsidises the public distribution system of LPG and kerosene, spent about three billion dollars for the purpose in its last fiscal year.

The scheme "would ultimately create a fiscal liability once the public sector oil-marketing companies no longer prove viable."

Thailand's oil price support is derived from an oil tax, but as the stabilisation fund's deficit mounted to about a billion dollars in October last year, the scheme "began to signal a possible fiscal liability."

The bank said opportunity costs inflicted by the subsidies are "substantial".

It discourages efficient use of oil products, "delays investments in cost-effective energy," and diverts funds for social welfare programmes, such as "direct income-support payments for the poor."