The recent spurt in the price of LPG (liquefied petroleum gas) in the wake of Ukraine crisis has triggered demand for resurrection of subsidy which Modi – government had stopped depositing in beneficiary’s account since June, 2020.
Is the demand justified?
By definition, subsidy on purchase of any given product is subvention or financial assistance provided by the state to a certain class of persons who cannot afford to pay the market-based or cost-plus price from their limited income. In case of LPG, the current price of a 14.2 kg cylinder is around Rs 2000/- (in Delhi). Assuming that the person can’t pay more than Rs 600/- the government will give her Rs 1400/- as subsidy so that she is able to buy the cylinder.
How much a person can afford to pay? What should be the level of subsidy? Who should be in the beneficiary’s list?
The government needs to carefully and comprehensively look into these questions even as it decides to spend tax payers’ money on giving subsidy. While, doing this exercise, it should keep in mind an overarching principle that ‘the beneficiaries are poor’. It also needs to consider that subsidy can’t be given eternally; it should be withdrawn once their financial status improves.
Yet, in the administration of the LPG subsidy by successive regimes, these basics were thrown to the winds. In the past, anyone irrespective of his income who managed to get an LPG connection automatically became eligible. Therefore, it was only natural that all and sundry including the rich/very rich enjoyed the benefit of subsidy. The proof of pudding is in eating.
According to the Economic Survey (2015-16), only 0.07% of LPG subsidy in rural areas went to the poorest 20% households. In urban areas, the poorest 20% got only 8.2% of subsidies. Thus, in rural areas, the poorest had no access to subsidy at all, whereas in urban, they got a miniscule portion. There were other flaws too.
Prior to January 1, 2015, the subsidy was embedded in the sale price. The Union government (GOI) asked the three major oil marketing PSUs viz. Indian Oil Corporation Limited (IOCL), Bharat Petroleum Corporation Limited (BPCL) and Hindustan Petroleum Corporation Limited (HPCL) to sell LPG to eligible beneficiaries at a low price unrelated to the cost of supplying it (at the retail point) which was higher. The PSUs would then, get reimbursement of the excess of the cost over the price as subsidy from the GOI.
The system was prone to misuse as the higher market price gave incentive to the distributors to divert low priced/subsidized cylinders to commercial users such as hotels, restaurants etc – using modus operandi such as fake/non-existent beneficiaries or diversion of stocks straight from the godowns.
The other aberration has to do with reimbursement of cost to PSUs using a mix of the ‘formula’ and ‘actual’. This is arrived at by adding to the refinery-gate price or RGP (taken as import parity price or IPP and export parity price or EPP in the ratio of 80:20), freight, marketing costs, marketing margin, dealers’ commission and taxes and duties. This results in inflated payments and avoidable increase in subsidy.
From January 1, 2015, Modi – Government launched direct benefit transfer (DBT) of LPG under a scheme nicknamed PAHAL (Pratyaksha Hastaantarit Laabh). Under it, subsidy is not embedded in the price. The marketing PSUs deliver the cylinder to the beneficiaries at full cost-based price (say Rs 2000/- in our example). They follow it up by depositing subsidy (Rs 1400/-) in beneficiary’s account and claim reimbursement from the GOI.
This system addressed the problem of fake beneficiaries (around 45 million fakes were eliminated till 2020) and diversion of stocks. However, it failed to make a dent on the undeserving beneficiaries as also inflated payments to oil PSUs.
Even as Modi – government has added about 80 million households (albeit poor) over a 5 year period, no serious effort was made to exclude the better-off. The moves made so far viz. Modi’s clarion call to surrender under the “Give up” campaign or making those with annual income > Rs 10 lakh ineligible were half-hearted. These measures resulted in exclusion of only 25 million. In June, 2020 (when the government stopped giving subsidy), the undeserving households accounted for nearly 60 percent of the total beneficiaries at about 200 million.
Was the stoppage intended?
From the way things unfolded, it appears that it was not. In the budget for 2020-21, the government had made a provision of Rs 36,000 crore towards LPG subsidy. This allocation albeit for the full year won’t be necessary if the intent was to discontinue in June 2020 i.e. within three months of the year start. During 2021-22 also, it had no intent of disbanding subsidy as it allocated for Rs 14,000 crore under this head. Yet, if the government has not paid for nearly 21 months now, the reason is elsewhere.
It had to do with a fortuitous circumstance created by world-wide destruction of demand in the wake of the Covid – 19 pandemic which led to steep decline in the international price of crude oil (in April 2020, it had plummeted to below US$20 per barrel). Correspondingly, the price of all petroleum products including LPG also declined. As on June 2020, the cost of supplying LPG at the retail level was coming to Rs 600/- per cylinder. That indeed was the target price during the earlier period but reached with subsidy support.
In this scenario and consumers getting access at a low price of Rs 600/- even on cost-plus basis, it was only natural that the government stopped depositing any amount towards subsidy. Thereafter, crude price started moving northward from US$ 22 per barrel in May 2020 to US$ 72 per barrel in August 2021; the international price of LPG too increased in tandem leading to hike in its cost at retail level to Rs 900 per cylinder. As a result, consumers paid a higher price of Rs 900/- (cost based) as they didn’t get subsidy.
Now, in the wake of Ukraine crisis, with crude price skyrocketing to US$ 130 per barrel and correspondingly, the cost of LPG shooting to over Rs 2000/-, the question haunting Team Modi is: whether to resurrect subsidy or not?
From the day one, the very idea of subsidizing LPG was flawed. It was neither meant for the poor, nor any sun-set date ever fixed. Way back in 2002-03, then NDA – government under Vajpayee decided to make it transparent (by giving subsidy from the budget) and eventually disbanding it but no deadline set. In 2012-13, Kelkar Committee recommended removal of 25% of subsidy and 75% in the following 2 years. This recommendation was not acted upon.
Now, that subsidy has been stopped, though belated, it makes no sense to resurrect it. Until 2020, over 60 percent of the beneficiaries were getting unjustifiable access and it must not be restored for them. As for the poor (around 80 million) who feel the pinch of price hike, Modi may consider giving them cash assistance ‘directly’ for as long as international price remains at elevated level.
Meanwhile, the government should focus on reducing price (sans subsidy) by reducing import dependence, fostering competition in LPG marketing by involving private entities and bringing it under the Goods and Services Tax (GST).