Removal of LPG subsidy for the well-off a welcome move. Will kerosene, urea follow soon?


LPG_Cylinders_ReutersFinally, there is something coming from the Narendra Modi- government, which, both the number-crunching economists sitting in air-conditioned rooms and the poor on the street would cheer in the same voice.

By withdrawing the LPG subsidy for those with taxable annual income of more than Rs 10 lakh, the 18-months old Narendra-Modi government has made a move that would make good economic sense for the government’s exchequer and handhold Asia’s third largest economy to eventually get rid of the subsidy raj. It’s also a step no one can politically blame the government and possesses the virtues of good economics.


India, which has a population of 120 crore, has 16.35 crore LPG consumers. There aren’t any estimates of how many are above Rs 10 lakh taxable income bracket. The government made an LPG subsidy payout of Rs 40,551 crore in 2014-15. During April-September, the subsidy outgo stood at Rs 8,814 crore.

This was coming as the government had to somehow wriggle out of the immense subsidy burden eventually. In the case of LPG subsidy, the government began with the ‘GiveItUp’ subsidy campaign in March this year. Under this, some 57.50 lakh LPG consumers opted out of LPG subsidy voluntarily or only a minor fraction of the whole consumer base. Evidently, the progress of the campaign, as indicated by this number, didn’t satisfy the government prompting it to take the efforts to next level i.e forced giving up of subsidy. The message is clear: If you aren’t doing it on your own, do it anyway.

The whole process of LPG subsidy rationalization began during the UPA regime which restricted the number of subsidized domestic cylinders per household to six every year in September 2012, subsequently revising it to nine the following January. Further, the cap was revised in January 2014 to 12 cylinders a year, starting April 1. The subsidy for 12 cylinders in a year is paid directly in the bank account of consumers, which they use to buy LPG at market rate.

To be sure, the number of LPG consumers with taxable annual income of Rs 10 lakh would be a small fraction of the total, hence the money freed up wouldn’t be huge. But, more than that figure, what is critical to note here is the intent of the government to move from the subsidy regime which is critical to bring fiscal discipline in the economy over a period of time. The money generated thus can be directed to the deprived sections.

The routing of LPG subsidy through DBT channels has helped the government save Rs 15,000 crore in fiscal year 2015. The same should be tried in cutting down other subsidies as well.

Can kerosene, urea be next?

The fuel price deregulation—both petrol and diesel—has taken off a big chunk of the burden. With the LPG subsidies being rationalized, the government should next move to other areas where further mis-directed or unproductive use can be cut, such as the Kerosene subsidy reforms. But this will be a bigger challenge for the government than the LPG subsidy reforms since the government doesn’t seem to have the list of kerosene users available with it, which makes the rationalizing subsidy process difficult.

The current system of kerosene subsidy system is vague and highly inefficient with the government giving the subsidy money in bulk to the state governments, who in turn, distribute to the beneficiaries.

In an interview with Business standard, Petroleum minister, Dharmendra Pradhan, had said the government has already begun dialogues with few state governments including Madhya Pradesh and Andhra Pradesh to work out the details of kerosene subsidy rationalization. One must remember that oil companies also have to partly bear the burden of LPG, kerosene subsidies, thus impacting their ability for capital investments as well. Hence rationalizing kerosene is critical.

Next can be urea, where, again, the subsidy burden is huge. Total urea subsidy for fiscal year 2016 is budgeted around Rs 73,000 crore. This part of the subsidy has increased in India from around Rs 18,500 crore in 2005-06 to Rs 73,000 crore in 2015-16.

According to D K Joshi, chief economist at Crisil rating, there is an urgent need of subsidy rationalization in this sector and free up funds for other productive use for farmers. Boosting domestic production of urea should also be effectively pursued to lessen the import burden.

Currently, about 75 percent of the total cost of production is subsidized. When it comes to food subsidies, the government can’t do much at this stage since food is a much bigger politically sensitive issue. It would require much more serious home work.

Besides subsidies, the government should also look at tackling the puzzle of interest rate
subvention for farmers. On Monday, a Reserve Bank of India (RBI) panel headed by executive director, Deepak Mohanty recommended doing away with interest subvention scheme and plough back the subsidy into a universal crop scheme.

Under the interest rate subvention scheme, the farmers get loans from state run banks at 7 percent interest rate, while the government compensates banks for 2 percent. On proper repayment, farmer can avail the loan at an even cheaper rate. The panel has observed that this has led to distortions in the agriculture credit system and should be done away with.

The very idea of subsidizing a large number of population has been a daunting task for the government over years since the distribution often lacked proper direction. For an aspiring economy, which is struggling to set its balance-sheet in order, it is highly critical to cut out unproductive subsidy expenditure and channel this money for productive use.

More than cutting the overall subsidy burden, what is even more important is to direct the subsidized resources to the right beneficiaries. The gross mishandling of the subsidy outgo has only helped damage the country’s exchequer than ensuring the welfare of

the poor

Source From;Firstpost

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