Income Criterion For LPG Subsidy A Great Step, But Why Not Combine It With A Cap On Cylinders

Along with fixing an income criterion for subsidised cooking fuel the government needs to look at other ways to ensure the benefits reach their intended targets.

Finally the government has taken a relatively bold step in the direction of petroleum subsidy reform. After direct benefit transfer of LPG subsidy and the give-it-up campaign, it has decided that those with a taxable income of Rs 10 lakh will not be entitled to subsidised cooking gas.

This means that from 1 January these people will have to shell out around Rs 600 per cylinder against around Rs 400 they are paying now (prices vary from state to state because of local taxes).

This is a good logical step. Till now, the LPG subsidy reform  was based on voluntarism – genuine and forced. The PAHAL scheme, involving direct benefit transfer of the subsidy amount into people’s bank accounts, is an example of the latter. People who did not submit their bank details and Aadhaar number to their LPG distributor were knocked out of the subsidy loop, even if they may have wanted the subsidy. According to government data, out of 16.35 crore LPG subscribers 14.78 crore LPG subscribers are covered under PAHAL.

The give-it-up campaign (where people were requested to voluntarily renounce their LPG subsidy) is an example of genuine voluntarism. People came forward to give up their subsidised cylinders and, according to the latest count, 57.50 lakh consumers have opted out.

That means there are close to 1 crore subscribers who are neither covered by PAHAL nor part of the give-it-up brigade. Speaking at a seminar in July, chief economic adviser Arvind Subramanian said the two schemes had seen sales of subsidised LPG cylinders dropping by 24 per cent.

But no subsidy reform can rely only on voluntarism. As this author had argued in this article, “voluntary renunciation may be catching on, but the movement can well run out of steam”. The article had pointed out that the trend could reverse once global oil prices started going up and consumers started feeling the pinch if the government decided to increase prices.

Indeed, the Mid Year Review of the economy released recently had hinted that global oil prices could start rising next year. So it was time the government took some steps to deny the subsidy bill to people with a relatively high income. Why should very well-off people be getting subsidised cooking fuel at all?

Of course, the scheme has some flaws. One, the government has said it will initially rely on self declaration by LPG subscribers when they book refills from 1 January. But this is not a simple declaration of having or not having a PAN; it is declaring that one has an income above Rs 10 lakh. Would one be comfortable sharing that information with the LPG distributor; the front man for whom is the LPG delivery man who walks into one’s house? And would people, therefore, not do so?

But they may not be able to avail of the subsidy for very long. Thanks to PAHAL, the list of LPG subscribers is computerised and has details like Aadhaar and bank account numbers. The level of computerisation of income tax department’s operations is very high and a matching of databases may not be very difficult (though this will have implications for privacy).

And this will lead to the second problem. Would this not be unfair to salaried tax payers, who have no option but to declare their income correctly, and will get exposed in such a matching exercise? On the other hand, a large number of people earning much above Rs 10 lakh a year, who under-report income and do not pay any tax in spite of having a PAN (permanent account number) and may also not have a PAN, will get away.

One way – and perhaps a fairer way – of getting these people out of the subsidy bucket would be to limit the number of subsidised cylinders per subscriber. So everyone regardless of income gets only X number of subsidised cylinder per year; anything above that comes at full price.

The United Progressive Alliance had started this in October 2012 with six cylinders and later raised it to nine, before raising it further to 12. Subramaniam had, at the conference, referred to data that even the richest 10 per cent households in rural and urban areas used only between eight and ten cylinders while the poorest 10 per cent used only four. Nine is a reasonable number to cap subsidised cylinders at, allowing a margin for getting poorer households to switch to LPG from kerosene or other polluting fuels and also for the mid-day meals programme.

An income criterion for subsidised cooking fuel is a good step to moving away from voluntarism in subsidy reform and the government deserves a pat on the back for this. Good implementation will be the key to its success. But along with this, it needs to look at other ways to get the undeserving to pay more.