PM Modi needs to shed his soft-pedalled approach displayed in the “GiveItUp” campaign and bring the LPG subsidy to a full halt.
The government has announced that from January 1, those earning more than Rs 10 lakh per annum will forgo subsidy on LPG on a self-declaration basis. This appears to be a grandiose announcement but in terms of reforms, it is a typical case of “too little too late”.
At present, there are a total of 163 million registered LPG customers. Of these, 147 million people are availing subsidy. The remaining 16 million is accounted for by about 10 million–bogus/ fictitious persons–who were eliminated following the government’s drive to credit subsidy directly into the bank account of customers under Pratyaksha Hastaantarit Laabh (Pahal) and around 6 million who voluntarily surrendered their subsidy entitlement under the “GiveItUp” campaign.
Those earning more than Rs 10 lakh and paying tax constitute a mere 5.5 per cent out of a total of 32.5 million taxpayers in India. That translates to less than 2 million – a trifle 1.3 per cent of the total number of those availing subsidy now. True, there is a huge number earning more than Rs 10 lakh but not paying tax, but, it would be wishful thinking to expect that they will come forward and “GiveItUp”. Minus these 2 million people, we will still have 145 million availing subsidy.
For close to two decades, successive governments have talked big for slashing subsidy on LPG but none had ever walked the talk. In 1997, the then United Front government had unveiled a comprehensive oil reforms package with timelines for deregulating fuel prices and removing subsidies. Carrying forward that decision, the NDA government under Atal Bihari Vajpayee decided in 2002 to first freeze and then gradually phase out LPG subsidy by increasing the price in small doses, but the plan was dumped.
Under the UPA II government, S Jaipal Reddy, then minister for petroleum and natural gas (MPNG) in July, 2011, proposed to deny the benefit of subsidy to the economically well-off as part of an overall plan to prune LPG subsidy outlay. Broadly, Reddy’s idea was to deny subsidy to those households who own a car, house or two wheelers. The proposal did not move beyond the drawing board due to opposition from within the Congress and its allies.
Meanwhile, a committee under Dr Vijay Kelkar, former finance secretary, advised removal of 25 per cent subsidy on LPG in 2012-13 and 75 per cent in the next two years. Keen to go ahead with this, in September 2012, the government capped the number of subsidised cylinders in a year at six which, in a span of three months, was increased to nine.
In June 2013, the UPA government launched the direct benefit transfer (DBT) scheme which was run barely for six months and was abandoned from January 2014, arguing that there were some voids/discrepancies in implementation which needed to be sorted out. The number of subsidised cylinders was also restored to 12 on January 30.
On November 15, the Narendra Modi government resurrected the DBT – nicknaming it Pahal – covering 54 districts and from January 1, the scheme was extended to 676 districts, thus having an all-India outreach. Under the DBT, even as the consumer pays to the dealer a market price X, the subsidy amount, X – subsidised price, is directly credited to his bank account.
At the beginning of the current fiscal, the market price on an average was Rs 788 per cylinder against the subsidised price of Rs 420 per cylinder. The subsidy was Rs 366 per cylinder. Since then, the market price has dropped substantially to Rs 608 per cylinder, in tandem with the declining crude oil prices, in turn leading to reduction in subsidy to Rs 188 per cylinder, the subsidised price remaining the same.
Under DBT/Pahal, all LPG sales happen at market price. Consequently, there is no incentive for black marketing. This in turn, has led to elimination of bogus customers leading to huge savings in subsidy, estimated to be about Rs 15,000 crore annually. The overall subsidy payments on LPG has declined from around Rs 46,000 crore during 2013-14 fiscal to Rs 40,500 crore during 2014-15 and Rs 8,800 crore in the current fiscal.
A miniscule step
It must, however, be noted that the expected steep decline during 2015-16 reflects the predominating effect of decline in international price, though contribution of plugging leakage cannot be wished away (Modi deserves full credit for this). But, the country just cannot afford to stop at this. The decision to ask persons earning more than Rs 10 lakh is a miniscule step forward.
The core issue staring at our face is the huge number of beneficiaries at 145 million which includes a large chunk of better-offs. According to the Economic Survey, only 0.07 per cent of the LPG subsidy in rural areas went to the poorest 20 per cent households. In urban areas, the poorest 20 per cent got only 8.2 per cent of the subsidies.
The direction given by the prime minister is apt. He has made a strong pitch for taking away subsidy from the rich/better-off and giving to poor. But, his pronouncements ad infinitum are not matched by credible action on the ground. He needs to shed his current soft-pedalled approach encapsulated in “GiveItUp” campaign and bring the LPG subsidy to complete halt, like it was done for diesel.
Concurrently, the government should take up identification of poor on fast track mode, to be completed within three months, and provide them subsidy under the DBT mode. Given that the market price is low now and the softness will continue – with crude expected to dip to US$ 20 per barrel – this is the time to crack the whip. Consumers won’t mind paying extra Rs 188 per cylinder.
From the subsidy angle, too, this is the time to strike. Today, paying subsidy to 145 million does not prick because oil price is low. Tomorrow, when the price shoots up, this number could push subsidy to an unmanageable level. Hence, Modi needs to get in to action mode now to restrict beneficiaries only to the poor, or else, he would have missed the bus.
(The writer is a New Delhi-based policy analyst)
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