Given the political sensitivity around hiking kerosene prices, it is not clear if last week’s 25 paise per litre increase in prices is a one-time thing, or part of a gradual adjustment. While there was no public announcement of the hike, the PSU oil marketing companies (IOCL, BPCL and HPCL) have been told to charge 25 paise more. The government’s long-term plan is to reduce the consumption of kerosene by providing more LPG in rural areas and also to electrify villages—with 3.5 crore extra LPG connections already provided and another 5 crore in another 3 years, that’s 8.5 crore more people who will, eventually, no longer be eligible for kerosene subsidies; add to this the number of people who will no longer require it for illumination once their villages have electricity. With over 40% of PDS kerosene being sold in the black market to adulterate petrol and diesel, the government is also working with state governments—petroleum minister Dharmendra Pradhan says he has explained to them that they lose out on petrol/diesel VAT revenues of around R3,500 crore annually due to this. As a result, Pradhan says, states are going to give the Centre a list of persons who deserve the subsidy, as a result of which he will be able to eliminate the 40% annual theft.
The problem, however, is that this will take time, while the subsidy burden will mount. From R37.3 per litre in January 2014, kerosene subsidies fell to R19.5 in January 2015 and a mere R9.2 in January 2016. Since then, however, prices have gone up quite sharply—consumption, though, has fallen from 7.2 million tonnes in FY14 to 6.8 million tonnes in FY16. Between February and July 2016, while the price of the Indian crude basket has risen 53% from $30.2 per barrel to $46.2, under-recoveries on ration shop kerosene are up 2.6 times, from R5.1 per litre to R13.1.
At some point, the government will need to start thinking about cutting LPG subsidies in a gradual manner as well, just as the UPA did with diesel subsidies, by 45 paise per litre per month. Between the prime minister’s #GiveItUp campaign and weeding out due to Aadhaar-seeding, the government got 4.4 crore people out from the LPG users list. But it has already given out 3.5 crore LPG connections in rural areas, and plans to give out another 5 crore over the next 3 years. And, as in the case of kerosene, under-recoveries are rising dramatically here as well. From R762.7 per LPG cylinder in January 2014, under-recoveries fell to R235.9 in January 2015, and further to a mere R46.71 in March 2016—this has risen to R75.1 in July, well within the comfort levels for subsidies, but nonetheless a sharp movement upwards. While the government would be reluctant to follow in the footsteps of NDA-1—in 5 years, the Vajpayee government raised kerosene prices from R2.5 per litre to R9 while the Manmohan Singh government took it to just R15 in 10 years—it must keep in mind that since it is also ensuring there is no leakage and the poor get their full quota of kerosene, they are actually benefitting; and, in the case of LPG, a far superior fuel is being provided.