Kerosene and LPG subsidies: What is the best way to support BPL families?

October 02, 2020 8:00 AM

End the subsidy raj, and give special assistance to BPL families when oil prices go above $75 per barrel

Indeed, BPL families can and should be helped when prices go up, but without having multiple prices.Indeed, BPL families can and should be helped when prices go up, but without having multiple prices.

By Bhamy V Shenoy

In some articles I had written a few years ago (here is one, published by the International Institute of Social Development, I had revealed how the diversion of PDS kerosene and residential LPG resulted in a Rs 50,000 crore loss per year. By any standard, it was the mother of all corruption. But, this analysis did not get any headlines.

Similarly, today, news of the subsidy cost of the government on these two products falling to zero should have got the headlines. Corruption fighters, along with thinktanks, should have argued for the end of the subsidy raj. But there is deafening silence. Why?

Indeed, BPL families can and should be helped when prices go up, but without having multiple prices. The current mechanism is misused to generate black money, even in developed countries.

Since World War II, kerosene has been a controlled commodity. In the case of LPG, subsidies were introduced in the late 1960s to encourage its use for cooking, as it was a clean fuel. Once any subsidy is implemented, ending it in a democracy is next to impossible.

In recent years, however, kerosene consumption has slowly decreased, from 9.3 million tonnes (mt) in 2009-10 to just 2.4 mt last year. This is indeed an encouraging development, driven by the NDA’s 100% electrification drive and the Ujjwala scheme, which promotes the use of LPG by BPL families by giving free connections. On the other hand, LPG consumption has increased from 13.1 mt in 2009-10 to 26.4 mt in 2019-20.

The diversion of fuel subsidies results in the generation of a large amount of black money. Also, we should recall the sacrifice made by upright officers like IOC’s Manjunath (murdered in 2005 by kerosene mafia) and a district collector Y Sonavane (murdered in 2011), which made news headlines and attracted national attention. My house was attacked, and even I had received murder threats after my exposé on diversion of PDS kerosene in Mysuru.

LPG and kerosene subsidies, after having reached a high of Rs 809,450 million in 2013-14, had come down to Rs 240,000 million last year. Currently, they are at the zero-level—an event that needs to be celebrated. There are many reasons for such a dramatic drop. One of the factors in recent months is the drop in oil price driven by Covid-19 lockdowns.

In addition, the NDA government needs to be credited for initiating the process of decreasing the subsidy by increasing the price of subsidised kerosene and LPG in small increments.

With a drop in international LPG prices, there has been a significant over-recovery of subsidies—this issue has not received media attention. In May, over-recovery was Rs 120 per cylinder.

Initially, the UPA tried to take some baby steps to reduce the subsidy burden of LPG. It tried to limit the number of cylinders per family per year to six.

However, because of pressure, first, by Sonia Gandhi and then by Rahul Gandhi, it was increased to 12. On average, each family consumes only about 6.3 cylinders per year. Thus, putting a cap of 12 became meaningless since less than 3% use more than 12 cylinders.

The NDA did not alter this irrational policy. They must have expected backlash from consumers. Instead, they took recourse to increasing the price of LPG in small doses, which went unnoticed by consumers. Even more significantly, the opposition parties also did not protest.

When Modi urged Indians to give up subsidy voluntarily, only an insignificant number opted out. Later, LPG subsidy was cut-off for those earning more Rs 10 lakh per year. Currently, out of 280 million LPG consumers, only 20 million do not receive any subsidy. Eighty million consumers are BPL families who have been given free LPG connection under the Pradhan Mantri Ujjwala Yojana (PMUY).

Adoption of direct benefit transfer for LPG has helped reduce the subsidy burden. The UPA started this, and the NDA later modified it. This has also helped minimise diversion and strike off duplicate or bogus LPG connections.

The total budgeted amount for PDS kerosene and residential LPG for FY21 is Rs 409,150 million—Rs 372,560 million for LPG and Rs 36,590 million for kerosene. If there is no increase in prices, India stands to save this amount.

So, now is the ideal time for the government to end both these subsidies. Since consumers are not getting any subsidy currently, other than the one-time Covid-19-related three free cylinders per family, there is unlikely to be any protest either by the consumers or the opposition. At least, the government should seriously consider dropping universal LPG policy and announce a new policy of giving subsidised LPG only to BPL families.

When oil prices increase in the future, the government will come under pressure to support the poor to continue to buy LPG or kerosene. Instead of supplying LPG cylinders or kerosene below the market price, the government should adopt a modified policy of helping only the BPL families. They can be given a special fuel assistance grant when oil prices are above, say, $75 per barrel.

Such a progressive policy will also get public support for the government to continue with the liberalised marketing policy. Whenever there is multiple pricing for any product as we have had before (domestic price, commercial price and auto price), it gives rise to corruption and black money generation. This is the case not just in India, but even in the most developed countries.

It is unlikely that India will find a more ideal time than now to end the subsidy raj for kerosene and LPG. The NDA had taken the right step of moving towards reducing subsidy by slowly increasing price for these sensitive products. By ending the subsidy raj now, PM Narendra Modi can make history, like former PM PV Narasimha Rao did by liberalising the Indian economy in 1991.

The author is Former manager, Conoco. Views are personal

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