The UPA Government is prone to talking loud on economic reforms. Yet, it is reluctant to take hard decisions. The government committed two blunders recently: it backtracked on the LPG subsidy reduction and — what’s worse — withdrew the direct benefit transfer (DBT) scheme.

By doing so, the government has let go an opportunity to prune massive leakages in food, fertiliser and LPG subsidies and bring about a much-needed fiscal correction. Let us first look LPG subsidies.

Flip-flops all along Prior to 2002-03, sale of LPG (besides diesel and kerosene) was subsidised under an administered pricing regime. This was paid for by higher prices charged on products like naphtha, ATF (aviation turbine fuel), fuel oil, LSHS (low sulphur heavy stock). This cross-subsidy was managed through the ‘ Oil Pool Account’.

In 2002-03, NDA Government dismantled administered prices and oil pool account. Yet, it decided to continue the subsidy on LPG, diesel and kerosene but on a commitment that money would be paid ‘directly’ from the Budget.

It wanted to make these subsidies ‘transparent’, to eliminate them over time. The UPA Government allowed the subsidy to grow. In 2012-13, it got all worked up about fiscal discipline and in particular, reining in food, fuel and fertiliser subsidies.

The Kelkar Committee had recommended removal of 25 per cent of the LPG subsidy in 2012-13 and 75 per cent in the next 2 years.

In September, 2012, Government capped number of subsidised cylinders (14.2 kg) at six which in a span of 3 months, was however increased to nine in January, 2013. On January 2014, this was raised to 12, negating the subsidy reduction initiative.

Direct benefit transfer However, in a rare demonstration of its seriousness to reform subsidies, the Government in June 2013 launched direct benefit transfer for LPG (DBT).

Under DBT, even as consumer pays to the dealer the full price ( ₹1,143 per cylinder), while the subsidy amount of ₹728 (₹1,143 minus the subsidised price of ₹415) is transferred to his Aadhaar seeded bank account. The purpose behind this initiative was to weed out subsidies going to bogus connections – a benefit that would accrue to food and fertiliser as well.

Under DBT, announced in January 2013, the Government’s intent was to make subsidy payments of over ₹300,000 crore annually under 29 schemes (including subsidies on fuel, fertilisers and food) on the Aadhaar platform.

It was to begin in 51 districts and cover the entire country by April 2014. Under DBT so far, 17 million customers (out of a total of 150 million) in 184 districts have received ₹2,574 crore.

A real shocker was the Government’s decision to put DBT on hold. Two critical issues are involved here: (i) logic of putting a cap and (ii) the concept of DBT.

LPG subsidy wasteful First, a cap on number of subsidised cylinders assumes that families which consume more are better-off. This premise is flawed. The amount of LPG consumed depends on fuel needs and efficiency of use. It has no connection with affordability.

For determining whether a family should get a subsidy or not, the sole criterion should be affordability. If, it is poor then, it should get a subsidy to cover its full requirement without any cap. If, it is better-off, it must not get any subsidy.

According to Economic Survey, only 0.07 per cent of LPG subsidy in rural areas went to the poorest 20 per cent households.

In urban areas, 8.2 per cent of subsidies went to the poorest 20 per cent households. Against this backdrop, giving a subsidy to all and sundry cannot be justified.

Yet, by capping the number of LPG cylinders at six initially, the Government decided continued to give a subsidy to 69 per cent of the consumers who consume six or less in a year. In January 2013, it increased the cap to 9 thus covering close to 90 per cent and now, with the cap at 12, coverage is nearly 100 per cent.

Nearly 20 million LPG connections are ‘fake’ entailing an annual subsidy of ₹17,500 crore (728x12x20). This is cornered by dubious operators and could be saved under DBT. If the subsidy is restricted only to those who cannot afford, Government need not give more than ₹2,000 crore (5 per cent of the current payout of about ₹42,000 crore).

If retailing of LPG (likewise for diesel and kerosene) is opened to the private sector, this will trigger competition and bring down market price. Alternatively, the Government could go for a calibrated hike in price of, say, ₹25 per month till subsidy is fully eliminated. A similar road map in vogue for diesel since January 2013 (price hike at 50 paise per month) is working well.

Other benefits lost DBT holds huge promise in other areas. In food, prevention of leakage (estimated to be a minimum 50 per cent) can lower subsidy payments under Food Security Act (FSA) by around ₹100,000 crore annually. Likewise, stopping diversion of subsidised urea (estimated at 40 per cent) can save around ₹15,000 crore.

As in LPG and diesel, the benefit of subsidy on food and fertiliser goes to all and sundry.

Limiting this to poor consumers and farmers can lead to much higher savings. But the story here is one of lost opportunities.

(The writer is a policy analyst)

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