UPA (United Progressive Alliance) Government always talks loud on economic reforms. However, it moves at a niggardly pace when, it comes to taking hard policy decisions. Moreover, there is no guarantee that it would stick to those decisions. A classic example is LPG subsidy.
For decades, sale of LPG (besides diesel and kerosene) was subsidized under an administered pricing regime (APR) for petroleum products. Funds for subsidy came by way of revenue generated from sale of products like naphtha, ATF (aviation turbine fuel), fuel oil, LSHS (low sulphur heavy stock) etc at higher price.
Essentially, this involved cross-subsidization by consumers of high end products like naphtha and ATF through what was euphemistically described as Oil Pool Account (OPA). OPA was intended to be self-supporting and there was no burden on Government.
In 2002-03, based on recommendations of Dr Kelkar Committee, NDA (National Democratic Alliance) Government dismantled APR/OPA. Yet, it decided to continue subsidy on LPG, diesel and kerosene but on a categorical commitment that money would be paid ‘directly’ from the Budget.
Government of the day wanted to make these subsidies ‘transparent’ and ‘focused’. The idea was to make it known to the nation how much of stress these put on tax payer so that pressure could be kept up to progressively eliminate in a time bound manner.
Yet, UPA Government that took charge in 2004, kept itself immune from this imperative for more than 8 years. All through this period, subsidy kept on proliferating to un-sustainable level (despite ONGC, OIL & GAIL – upstream oil PSUs – roped in to contribute vide ‘discount’ on sale of crude oil on an increasing scale).
In September, 2012, based on recommendation of another Committee – also under Dr Vijay Kelkar (it recommended removal of 25% subsidy in 2012-13 and 75% in next 2 years) – Government decided to limit subsidy on LPG to 6 cylinders (14.2 kg each) in a year. For additional requirement, consumers were required to pay ‘full price’.
The ruling dispensation could sustain this barely for a few months. From January 2013, Government increased the cap on subsidized cylinders to 9. And, now it is contemplating to increase this further to 12 even as Prime Minister in his press conference today maintained a stout silence in response to a question.
Thus, even though as per Kelkar Committee road-map, the subsidy on LPG will have to be fully eliminated by 2014-15, far from that, Government would have ended up granting this on a much bigger scale. A typical scenario of ‘one step forward and two steps backward’ is being played out here.
The oil PSUs are on an indiscriminate spree of increasing price of non-subsidized cooking gas. In December, 2013 alone, the price was hiked three times and is now ruling Rs 1241 per cylinder. At this rate, subsidy works out to Rs 763 per cylinder.
With a calibrated plan to allow oil companies to increase price of diesel by 50 paise per month (in vogue since January, 2013), diesel subsidy has remained unchanged – thanks to spike in crude price and rupee depreciation that offset potential savings from price hike. Subsidy on kerosene increased by 22%,
In view of much steeper increase in subsidy on LPG, its share in total oil subsidies has increased from 24.5% during 2012-13 to 30.5% in first half of current year. During current year, total oil under-recoveries expected to be around Rs 140,000 crores, subsidy on LPG alone would be about Rs 42,000 crores (US$ 7 billion).
LPG subsidy does not reach the poor. This is acknowledged even by Government. According to the Economic Survey – an official document presented to Parliament on eve of Union Budget – only 0.07% of LPG subsidy in rural areas went to the poorest 20% of households. In urban areas, 8.2% of subsidies went to poorest 20% of households.
The impact of ceiling on LPG subsidy (introduced in Sept, 2012) was getting absorbed in the system. Thus, consumption of LPG during April-November, 2012 grew 4% down from 8.7% during April-November, 2011. During April-November, 2013, growth in consumption fell further to 1.8%. Yet, there was no protest or adverse reactions from public!
LPG subsidy is appropriated mostly by better off sections of the society. This goes against the very ‘genesis’ of granting subsidy i.e. it should benefit only those who cannot afford. For a country facing resource crunch and constant threat to its fiscal consolidation program, this is unconscionable.
Continuation of LPG subsidy is by itself unethical and wholly un-warranted. This is all the more so when its recipients will hesitate to openly resist its withdrawal as this would be morally repugnant. Even if it were to continue, the least it could do is to cut inefficiencies and leakages in its administration.
This is best done by implementing a direct benefit scheme (DBT). Launched in January, 2013, Government intended to bring within its ambit all welfare schemes to distribute subsidies (LPG included) worth Rs 300,000 crores (around US$ 48 billion).
In case of LPG, it has already run a pilot project covering 184 districts since June, 2013 under which around 18 million customers have been given Rs 1700 crores of subsidy transfers. Yet, it seems to be in no mood to proceed with alacrity to use DBT whole hog.
The existing dispensation of asking oil companies to actually supply cylinders at subsidized price is prone to leakages/misuse. Given the huge difference between this and full/market price, diversion for use in commercial establishments is inevitable!
Yet, if Government is not willing to move to DBT which will eliminate these leakages completely with additional bonus of forcing oil companies to lower cost – due to sheer competition, the signal is; it is not serious about combating this menace.
The message is abundantly clear. Government must walk the talk if it is really serious about reforms. If, it cannot then, it should stop the narrative and the pomp & show that goes with it.