Linking subsidy to LPG/electricity the right policy
A sharp 10% fall in the consumption of kerosene across the country from April to August this year, combined with a policy to cut per litre subsidies by 25 paise per fortnight from July 2016 to April 2017, is perhaps the most sensible subsidy-reduction strategies followed by the government. Indeed, if a news report in The Economic Times is to be believed, the government may be looking at an even sharper cut, of as much as 5% per quarter. If that is achieved, it will make it one of the sharpest reductions ever seen in subsidies—and in case this is used to whip up sentiment against the subsidy cuts, it has to be kept in mind more than half the subsidies do not even reach the target population; to that extent, the government can cut kerosene supplies without affecting those who get subsidies. And, to the extent the stolen kerosene is used to adulterate petrol and diesel, eliminating this will also mean a substantial reduction in the levels of pollution in the country.
Kerosene supplies, to give previous governments their due, have been cut quite sharply in the past as well, but this has been erratic and not part of a well thought out strategy. In FY11, kerosene supplies were cut from 9.3 million tonnes the previous year, representing a 4% cut; the very next year, supplies were reduced another 7.8% to 8.2 million tonnes. The year after, in FY13, the cuts were even more radical, around 8.8%, and this took kerosene supplies in that year to 7.5 million tonnes. Thereafter, however, the momentum seemed to have been lost, and while FY14 still saw a cut of 4.5% in volume terms, FY15 saw a mere 1.1%—there was a pickup to 3.7%, however, in FY17, signalling the BJP is finally getting together its subsidy-reduction strategy.
The government’s success in LPG has been stupendous with over 4.5 crore people being moved off the list of subscribers through a process of linking the LPG database with Aadhaar numbers—this cut around 3 crore duplicate users from the list—and the prime minister’s well-publicised #GiveItUp campaign. But it cannot be denied that doing this is easier when there are just three government-owned public sector units that are distributing LPG across the country—when kerosene is distributed across state-government-run ration shops on the basis of lists provided by the states, the task is that much more complicated. This is where the government’s strategy of working with the state governments appears to be paying off. Petroleum minister Dharmendra Pradhan has explained to the states that, with 50% of PDS kerosene being used to adulterate petrol/diesel, they are losing out on Rs 3,500-4,000 crore of annual VAT revenues on these two fuels. As a result, it is the state governments that are pruning the list of beneficiaries that is allowing the centre to reduce its kerosene supplies. If, for the sake of argument, the government is able to reduce the supply of kerosene by 20%—based on the 5% per quarter target—based on this year’s likely subsidy, that will add to around Rs 2,000 crore of savings. Since cutting the subsidy by Rs 3 per litre (on average for the year) will also give a similar saving, the twin-pronged attack is well conceived.