The government has announced that from January 1, 2016, all those earning more than Rs 1 million per annum will forgo subsidy on LPG [liquefied petroleum gas] on self-declaration basis. This appears to be a grandiose announcement but in terms of reforms, it is a typical case of “too little and too late”.
At present, there are a total of 163 million registered LPG customers. Of these, 147 million are availing of subsidy. The difference 16 million is accounted for by about 10 million [bogus/fictitious persons] who were eliminated following government’s drive to credit subsidy directly in to the bank account of customer under PAHAL [Pratyaksha Hastaantarit Laabh] and around 6 million who voluntarily surrendered their subsidy entitlement under Prime Minister’s “GiveUp” campaign.
Those earning more than Rs 1 million and paying tax constitute a mere 5.5% out of a total of 32.5 million taxpayers in India. That translates to less than 2 million a trifle 1.3% of the total number of those availing subsidy now [true, there is a huge number earning more than 1 million but not paying tax; but, it would be wishful thinking to expect that they will come forward to give up]. So, minus these 2 million, we will still have 145 million availing of 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 the subsidies. Carrying forward that decision, the NDA government under 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 UPA – dispensation [II], S Jaipal Reddy then in-charge of ministry of petroleum and natural gas [MPNG] in July, 2011 proposed to deny the benefit of subsidy to economically well-off as part of overall plan to prune LPG subsidy. Broadly, Reddy’s idea was to deny subsidy to those households who own a car, house or two-wheelers. But, the proposal did not move beyond drawing board due to opposition within Congress and its allies.
Meanwhile, a committee under Dr Vijay Kelkar [former finance secretary] recommended removal of 25% subsidy on LPG in 2012-13 and 75% in next 2 years. Initially keen to go ahead with this road-map, in September, 2012, the government capped number of subsidized cylinders in a year at 6 which in a span of 3 months, was increased to 9 in January, 2013.
In June 2013, UPA – government had launched direct benefit transfer (DBT) earlier incarnation of PAHAL. The scheme was run barely for 6 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 subsidized cylinders was also restored to 12 [January 30, 2014].
On November 15, 2014, Modi-government resurrected DBT – nick-named PAHAL – covering 54 districts to begin with and from January 1, 2015, the scheme was extended to 676 districts thus having all-India footage. Under DBT, even as consumer pays to dealer market price say, ‘X’, the subsidy amount [X – subsidized price] is directly credited to his bank account.
At the beginning of current fiscal, the market price on an average was Rs 788 per cylinder against subsidized 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 declining crude price] in turn, leading to reduction in subsidy to Rs 188 per cylinder, subsidized 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 saving in subsidy estimated to be about Rs 15,000 crores annually. The overall subsidy payments on LPG have declined from around Rs 46,000 crores during 2013-14 to Rs 40,500 crores during 2014-15 and Rs 8800 crores so far during current year.
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 of 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 1 million 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. This is completely out of sync with Modi’s commitment to restrict subsidy only to the poor. According to the Economic Survey only 0.07% of LPG subsidy in rural areas went to poorest 20% households. In urban areas, poorest 20% got only 8.2% of subsidies.
The direction given by Hon’ble 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 “GiveUp” campaign and bring 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 complete within 3 months and reach them the subsidy under DBT mode. Given that the market price is low now and 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 Rs 188 per cylinder extra.
From subsidy angle also, this is the time to strike. Today, paying subsidy to 145 million does not prick because oil price is low. Tomorrow, when price shoots up then, this number could push subsidy to unmanageable level. Therefore, Modi needs to get in to action mode now to restrict beneficiaries only to poor or else, he would have missed the bus.