Now Target LPG, Kerosene Subsidies

Helped by a global decline in oil prices, the Modi government has made a clever and surprise move to deregulate diesel prices. It must not let this opportunity go, and go the whole distance.

When it comes to administering bitter pills, the timing and manner matter most. It’s best done when the tolerance level for bitterness of the person it is being given to, is on the higher side. And, as Mary Poppins famously sang, a spoonful of sugar always helps.

The Narendra Modi government has got it right on both counts in its first big bang subsidy reform measure. Diesel prices were deregulated yesterday along with a reduction in prices by as much as Rs 3.37. The general argument against deregulation has always been that it will lead to a price hike. The price cut has knocked the bottom out of this criticism.

What’s more, doing it the evening before the results of the Maharashtra and Haryana elections came in, was particularly clever, for two reasons. One, all attention would be focussed on the results. Two, if the Bharatiya Janata Party had not performed well, there would have been opposition from even within the party to the move.

But let’s be fair and give the United Progressive Alliance government its due – it had, after all, started administering the bitter medicine in small doses. The tolerance level for higher diesel prices would not have improved but for the UPA’s decision in January 2013 to increase the price by 50 paise a month till the oil marketing firms wiped out their under-recoveries under this head. The softening of global oil prices also helped.

Would – could – the Modi government have taken this step if these two factors had not eased the situation?

Unlikely. It would have been a difficult political sell.

As it turns out, the BJP has done extremely well in these elections. So, now, with politics not a hurdle, can we get going on dealing with the cooking gas and kerosene subsidy, please? According to latest data (16 October), oil companies are losing (despite softening global prices) Rs 31.22 a litre on subsidised kerosene and Rs 404.64 on each cooking gas cylinder.

It does not have to done immediately or in one shot. That would be political foolishness. Energy subsidy reform examples from across the world show that this is successful when it is gradual and the politically sensitive ones are left for the last.

So why not start with cooking gas and restoring the nine-cylinder cap on subsidised cylinders? Even this would cover 89.2 per cent of the population. Over time, the ceiling can be brought down to six (that was actually the original proposal in the UPA, which got diluted to nine before the ridiculous 12 cylinder cap was gifted to Rahul Gandhi). The cap on subsidised cylinders must be accompanied by gradual, regular price hikes, as was done in the case of diesel. Why not start with hikes of Rs 5 or Rs 10 a month till oil companies wipe out their losses?

The low income households from the intermediate class would be hit, but why not link the subsidy to a certain percentage of the actual cost of a cylinder and then say that subsidised cylinders will not be available to those in the top two income tax brackets?

Of course, that would mean those who don’t file income tax returns (property brokers, rich farmers and traders) will get the subsidy and less well-off salaried people who cannot escape the tax net, will not, but the number of such instances is not likely to be really huge. There will still be huge savings to the exchequer.

Phasing out the kerosene subsidy will perhaps be most difficult, not just politically but administratively as well. Kerosene is supplied through the public distribution system which is leaky across the country. Because of the systems put in place by the oil companies, it’s relatively easy to track the consumption of cylinders (this is not to deny that there is diversion and corruption in this area); but doing this in the case of kerosene is next to impossible. Kerosene subsidy reform has to be linked to direct cash transfers (which can also be done in the case of cooking gas subsidy once the exclusion criteria are firmed up).

The case for cutting down the kerosene subsidy bill is compelling. There is huge diversion of subsidised kerosene to adulterate diesel. A pilot project was conducted in the Kotkasim block in the Alwar district of Rajasthan some years back, under which people bought kerosene at market rates and got the subsidy in their bank accounts. Monthly sales came down to a quarter of what they used to be. That was because diversion was no longer easy with the direct cash transfer.

Yes, some genuine users were being denied subsidised kerosene because of administrative glitches, but even discounting that, it would be safe to assume that diversion came down by at least half. The pro-subsidy lobby insists the Kotkasim experiment was a failure. Perhaps it was, but there is a lurking suspicion that it was sabotaged – the agents of reform (the fair price shop dealers) were those who benefited most from the old system.

Scything the kerosene subsidy bill will be critically dependent on the poor getting their ration or BPL (below poverty line) cards and access to bank accounts or some other alternative to getting cash directly. This will not be something the central government can do, but it can certainly push the states to do this. It will be a long haul and that’s why the initial preparatory steps will have to be taken soon. Politically and economically, the time is ripe to kick off major subsidy reforms.

The Modi government must not let this opportunity go.