The overarching focus of the Government should be on giving relief to consumers sans subsidy as that will be in sync with fiscal consolidation

From June, 2020, the Union Government stopped depositing LPG subsidy in the accounts of eligible beneficiaries and the position continues till date. Even as the budget for 2021-22 has provided for Rs 14,000 crore under this head (down from Rs 36,000 crore during 2020-21), it is unlikely that any payments will be made during the current year. What has prompted this move? Was it orchestrated earlier but put into effect only now? To understand, let us reflect on some basic facts.      

Since January 1, 2015, the Modi–government has been running a scheme for direct benefit transfer of LPG. Nicknamed PAHAL (Pratyaksha Hastaantarit Laabh), under it, three major oil marketing PSUs -- Indian Oil Corporation Limited, Bharat Petroleum Corporation Limited and Hindustan Petroleum Corporation Limited -- deliver LPG to the target beneficiaries at full cost-based price which is arrived at by adding to the refinery-gate price freight, marketing costs, marketing margin, dealers’ commission and taxes and duties. They follow it up by depositing subsidy – as notified by the Union Government from time to time – in beneficiary accounts and claim reimbursement from the latter.     

Even prior to this, the Union Government was giving subsidy on LPG but the manner of administration was different. For comprehension, that period can be bifurcated in two sub-periods -- prior to 2002-03 and between 2002-03 and 2014.   

Prior to 2002-03, sale of LPG was subsidized under an administered pricing regime. Under the APR, oil marketing PSUs sold these products at a low price unrelated to the cost of supply which was higher. The shortfall was made up by higher prices charged on sale of products such as naphtha, ATF and fuel oil. This cross-subsidy was managed through the ‘Oil Pool Account’ maintained by the Oil Coordination Committee in the Ministry of Petroleum and Natural Gas. The system was prone to misuse as a lot of low priced products found their way to the market using modus operandi such as fake beneficiaries or diversion of stocks straight from the godowns.    

In 2002-03, the then NDA - Government dismantled the APR and along with it the OPA. Yet, it decided to continue subsidy on LPG, diesel and kerosene but on a commitment that money would be paid ‘directly’ from the Budget. The idea was to make these subsidies ‘transparent’ and to eliminate over time. Brushing aside this major reform, in 2004, the UPA-government continued with sale of these products at subsidized price sans any support from the budget.

For funding the subsidy, it resorted to disingenuous means such as ordering upstream oil PSUs such as Oil and Natural Gas Corporation and Oil India Limited to supply crude oil to the refineries of IOCL, BPCL, HPCL at discounted price and issue of oil bonds to the latter. This dispensation continued till 2014-15, in the process, inflicting huge losses on the former (for instance, ONGC gave cumulative discount of over Rs 200,000 crore) besides imposing perpetual burden on the central exchequer towards servicing of oil bonds.

Meanwhile, the government deregulated and abolished subsidy on petrol in June 2010 and diesel in November 2014 whereas in case of LPG, it initiated switched over to DBT in mid–2012, a process that was consummated in January 2015.   

After running the scheme for 6 years now if the government is saying good-bye, this was not unexpected. An indication was given in the 2002-03 decision of the then NDA–regime under Vajpayee. A decade later, the Kelkar Committee also recommended removal of 25 per cent of LPG subsidy in 2012-13 and 75 per cent in the following 2 years. As per this road-map, the subsidy should have ended by March 31, 2015; instead, the exit is coming with a delay of 6 years.

At the time of launch (January, 2015), the total number of beneficiary households under the scheme was around 185 million. Since then, about 45 million fake beneficiaries were eliminated, 10 million surrendered under Modi’s “give up” campaign and 15 million rendered ineligible because of annual income > Rs 10 lakh bringing down the total to 115 million. At the same time, about 80 million households (albeit poor) were added taking the total to around 200 million.   

To assess whether the Government is justified in withdrawing subsidy, the Economic Survey (2015-16) offers some clues. According to it, only 0.07 per cent of LPG subsidy in rural areas went to the poorest 20 per cent households. In urban areas, the poorest 20 per cent got only 8.2 per cent of subsidies. One does not need any further proof to recognize that in rural areas, the poorest had no access to subsidy at all, whereas in urban, they got a miniscule portion of it.

 True, between 2015-16 and 2019-20, there has been significant increase in the share of poor households in the beneficiary basket (savings of about Rs 70,000 crore due to elimination of fake stuff is bonus). Still, the better-off households continue to get a major portion of LPG subsidy. In this backdrop, exit from the scheme makes sense as this will help in getting rid of the non-deserving at one go. As for the poor and deserving, the government can explore some other option to support them.     

At present, retailing of petroleum products is monopolized by oil PSUs. Together, they account for about 90 per cent of the total petrol pumps. A major reason behind this is routing of subsidies only through them which puts private firms to a serious disadvantage as without subsidy, they are unable to match the effective price (cost-based price minus subsidy) offered by PSUs. After subsidy is abolished, their disadvantage will go away and there will be increased competition leading to lower price.    

Meanwhile, in 2019, the government had dispensed with the requirement of minimum investment of Rs 2,000 crore in oil or gas infrastructure — in hydrocarbon exploration and production, refining, import terminals, and transportation to grant a retail pump license. Henceforth, “the applicant needs to have minimum net-worth of Rs 250 crore and commit to invest in the marketing of at least one new generation alternate fuel such as CNG, LNG, biofuels and open 5 per cent of total outlets in rural areas”.

This was a good move to encourage private players enter the business. However, no less crucial is the need to ensure hassle free access to the supplies and infrastructure for storage, handling and distribution. To achieve this, the government should de-canalize POL imports and hive off the infrastructure to an independent entity which should make it accessible to all players on ‘common carrier’ principle in an ‘equitable’ and ‘non-discriminatory’ manner.  

Above all, there is an urgent need to take measures for increasing domestic production of oil and gas (currently, India imports 85 per cent of its crude requirement; 55 per cent in case of LPG) to reduce dependence on import, prevent exploitation in international market and lowering the price to consumers. All POL products including LPG should be brought under GST as this will help in reducing their price.

While steering various measures, the overarching focus of the Government should be on giving relief to consumers sans subsidy as that will be in sync with fiscal consolidation.

(The writer is a policy analyst. The views expressed are personal.)