Targetting without price reform won't do the trick
The government, by all accounts, has done very well on not just weeding out over 3 crore duplicate customers from the list of those getting LPG subsidies but in getting over 1.5 crore persons to give up their subsidies voluntarily—over a crore did it in response to the prime minister’s #GiveItUp campaign and another 50 lakh simply refused to provide their bank details when the government moved to cash subsidies for gas cylinders. But now, as crude oil prices start their upward climb and as the government plans to increase the number who will get LPG subsidies—another 5 crore persons are to be added in the next 5 years—it will need a combination of better targeting along with price reforms if it wishes to curtail the subsidy bill. According to petroleum minister Dharmendra Pradhan, while the government has already said it will not give any subsidy to those earning over Rs 10 lakh per annum, it may even look at other ways to curtail subsidies to the better off—all told, he wants to remove another 2-2.5 crore people from the list.
In the case of kerosene, with over 40% of PDS kerosene being sold in the black market to adulterate petrol and diesel, he has explained to state governments, they too lose out on valuable VAT revenues. Taking an average VAT rate of 20%, that works out to an annual loss of around Rs 3,500 crore for the states. As a result, Pradhan says, states are going to give the Centre a list of persons who deserve the subsidy, as a result of which he will be able to eliminate the 40% annual theft.
That’s a laudable objective, but will take a lot of time, something the government may not have if oil prices rise suddenly. In the case of LPG, if 2 crore persons are removed as per the government’s formula, at the current subsidy of Rs s200 per cylinder, that’s a saving of Rs 4,000 crore. If, however, prices are raised by Rs 5 per cylinder per month—akin to the UPA’s diesel hikes of 50 paise—that’s an average saving of Rs 4,500 crore. In the case of kerosene, similarly, removing 40% of users will, at current levels of subsidy, reduce annual outflows by Rs 3,500 crore. A 50 paise monthly hike, however, will also yield savings of Rs 2,000 crore which are quite significant. In short, the government will better reach its goal of better-targeted subsidies while retaining a control over the outgo if it brings in an element of rationalising subsidies as well.