Eliminating LPG subsidy should have happened long ago
It is not quite clear what petroleum minister Dharmendra Pradhan meant when he tried to pacify an irate Opposition in the Rajya Sabha by saying that LPG subsidies were only going to be ‘rationalised’ and not eliminated since, just the day before, he said quite the opposite to the Lok Sabha. In a written reply, he had said “the government … has again authorized OMCs to continue to increase the effective price of subsidized domestic LPG by Rs 4 per cylinder effective from 1st June, 2017 per month … till the reduction of Government subsidy to ‘nil’, or till March, 2018, or till further orders, whichever is earliest”. Given the current subsidy of around Rs 50 per cylinder—thanks to the fall in global crude prices as well as a steady Rs 2 per month hike in consumer prices from last year in July—if a Rs 4 hike is made every month, and if global prices remain at current levels, the subsidy should be down to just Rs 10 or so per cylinder. While only time will tell if the government is able to hold its nerve—subsidies have fallen from Rs 50,000 crore in FY14 to around Rs 15,000 crore in FY17—Pradhan used the right approach in trying to convince the Opposition.
It is easy to argue the poor will suffer if subsidies are not eliminated, but it is important to keep in mind the subsidy never reached the poor anyway. An impressive #GiveItUp campaign by the prime minister got around 1.5 crore people—around a tenth of the registered users—to forgo their subsidy, and another 3 crore users were found to be fake and eliminated by using Aadhaar. While eliminating the fakes and the rich—there is, of course, scope to cut out more well-off users—the government increased LPG supplies to rural areas and small towns. As a result of this, the total number of users rose from 16.8 crore when the BJP came in to 23.7 crore today—given even unsubsidised LPG is cheaper, and healthier, than either firewood or kerosene, the poor are a lot better off today than they were in 2014. If the government is able to build natural gas grids—this is cheaper than LPG even after taking into account pipe-laying costs—in big cities and transfer LPG to smaller cities and rural areas, the impact will be even larger. What matters is not the level of the subsidies—especially when the bulk was stolen in the UPA years—but what the money is being used for. If it is used sensibly, for investment or education/health, welfare benefits are larger. In Q4FY17, the 32% hike in government expenditure resulted in a 2.4ppt hike in GDP growth—given GDP rose just 6.1%, the impact of government expenditure was huge. That trade-off is something the government must not lose sight of while battling those looking to continue wasteful subsidies.