LPG Subsidies: Pros and Cons

Recently some of us were invited by IOC on SMS to be a part of the nation building process by giving up our subsidies on LPG. This follows the appeal of our PM to the affluent to do the same. A bold request in a highly price sensitive country and on an even more politically sensitive subject.

The Govt and Oil Marketing Companies (OMCs) have economic reasons for doing so. Let’s take a look at some of the numbers here. The total under recoveries of OMCs as of FY14 is a whopping $24billion out of which LPG accounts for 33%. In FY 16 alone the subsidy is around $6.5billion So then should we eliminate this subsidy?

Fuel subsidies were part of the socialist policies of our Government post-Independence to protect consumer interests against volatile price movements. Another agenda was to help the people especially in the villages to upgrade from firewood and kerosene to a cleaner fuel. However over the years the biggest challenge of the policy makers has been to ensure that subsidies reached the targeted segment. Black marketing, underground refills and subsidy leakages are perhaps the biggest negatives of this policy. The misuse of domestic subsidized cylinders for commercial purposes as in hotels and hazardous trends like using it in automobiles and refilling of gas lanterns prevailed till recently inspite of the fact that it is a non-bailable offence in India.

Implementation of recommendations to address these issues is by itself a task as there are a lot of socio economic factors involved. Capping of Cylinders per connection and introduction of Direct transfer Benefit Schemes (DBT) are some steps which aim at eliminating these malpractices.

Another major drawback has been the benefits not reaching the poor. A statistic reveals that more than 50% of the LPG subsidy is received by the richest 30% of Indian population, whereas the poorest 30% receive a meagre 15% of the total subsidy disbursed.

So that brings us back to the question of whether we need to continue with subsidy Raj. The middle income salaried class would answer in the affirmative. For this section of the society already burdened with taxes and EMIs a little relief via cooking fuel subsidy is always welcome. In certain metros people have the option of choosing from other alternative cooking fuels which are cheaper.

The rural poor are the ones who would benefit the most if these schemes are made available to them. Greater penetration and efficient distribution in these areas where firewood and kerosene are still used would help gain acceptance of LPG as an alternative. Transition into a less polluting fuel also has its health benefits. DBT would probably eliminate the misuse of the funds.

Fine tuning of the structure like pricing against affordability as recommended by CEEW coupled with a wider distribution network to reach the remotest of villages is needed. Diversion of savings on account of people opting out of subsidized LPG to benefit the truly needy. Currently around 3 lakh consumers have heeded to the request and have opted out of the Subsidy Scheme. A small number, but nevertheless a big step in the right direction. When the benefits of policies reach the poorest sections of the country the true process of Nation building has begun.