Subsidies on cooking gas, kerosene and diesel have resulted in perverse outcomes not envisaged when they were introduced
With the Aadhaar-based direct cash transfer scheme facing so many glitches in implementation, any hopes that the country’s energy sector can soon dismount the subsidy tiger it has been riding so dangerously have receded into the background. Had the Aadhaar scheme worked satisfactorily, the next logical step would have been to extend it to leaky petroleum subsidies in order to limit them only to those who need and deserve to be subsidised.
‘Lifeline energy’
Like all subsidies, petroleum subsidies too began with good intentions but soon spun out of control. In 2002, when the government dismantled the cost-plus administered pricing mechanism in the petroleum sector and linked petroleum product prices to import parity, it chose to subsidise through the budget, two products — kerosene and LPG. The rationale was that these constituted ‘lifeline’ energy which had to be supplied to all households irrespective of their ability to pay for it.
So far so good. But then, the oil marketing companies, at the behest of the government, failed to make the crucial distinction between those households that could pay the economic cost of cooking fuels and those that couldn’t. The subsidy was extended to every domestic LPG connection. Kerosene subsidy was extended to every ration card holder whether BPL or not.
In an unforeseen development, deregulation of petroleum product prices in India coincided with a steady and steep increase in the global price of crude, which accounts for almost 90 per cent of product cost. From around $23.65 for a barrel of Indian basket crude in March 2002, prices went up to more than $115 in 2012. Consequently, product prices had to be revised frequently to keep up with rising crude prices. However, both LPG and kerosene were insulated from such price increases to a very large extent. That encouraged rapid increases in LPG penetration to households as well as subsidised kerosene allocations through ration cards. Apart from spiralling budgetary subsidies, this has resulted in perverse outcomes not envisaged when these subsidies were first introduced.
While LPG penetration on the records of oil marketing companies soared, all one has to do is to just ask around to find out how many domestic maids, helpers, cleaners, drivers and a host of other blue-collar workers who live in our cities and towns have access to LPG connections. Most of them don’t, basically because they cannot produce an identity proof or give residence proof without which their neighbourhood gas agency would not even countenance their application. Many are itinerant workers and even those that are not rarely have a lease document for their rented homes. So, they end up procuring 5 kilo empty cylinders from the market which they fill illegally (and dangerously) every few days from their friendly gas shop in the same neighbourhood. And they pay at least five times the price of a subsidised LPG cylinder.
Not only does this class, which most needs the subsidised cooking fuel, not get it, worse, those who don’t need the subsidy — basically, the middle class — often have more than a single LPG connection. Some of the supplies accessed by the illegal neighbourhood gas shop may come from these middle class households with more than one connection, who are often culpable by default.
Diversion of cooking gas
Most households can get by with a single LPG cylinder a month and they do not draw their second subsidised entitlement of LPG, enabling the gas agency to divert it to whomsoever it chooses, for a premium. More often than not, it is supplied to commercial eateries and, at times, even established hotels which are supposed to get the bigger 19 kg cylinder at commercial prices. Enterprising private car-owners illegally convert their car engines to run on subsidised LPG meant for cooking. The oil marketing companies came up with Auto LPG cylinders to be sold at commercial rates, but it has been a cat and mouse game between the OMCs and the flourishing illegal LPG market. The ensuing rents have created a chain of beneficiaries all of whom have a stake in keeping LPG prices subsidised. They constitute a valuable vote-bank.
Only now oil marketing companies are waking up to the bane of multiple LPG connections in urban households which they are trying to weed out. The attempts to limit the number of subsidised LPG cylinders have witnessed some policy flip-flops.
Yet another perverse outcome of LPG subsidisation is the crowding out of piped gas in cities. While LPG is subsidised, piped gas is not. Even though currently piped gas is cheaper than even subsidised LPG, shrewd consumers foresee a steep increase in piped cooking gas prices, especially after the collapse of domestic gas production from KG basin. CNG prices in Delhi have more than doubled in the last three years. Eventually, piped gas prices will also go up as more and more city gas companies are sourcing LNG (liquefied natural gas) from international markets. Shrewd households used to subsidised cooking fuels are actually refusing piped gas connections. Yet piped gas is a far superior option compared to LPG. It is uninterrupted, cannot be diverted to other consumers and is safer than LPG in cylinders. Many a city gas distribution company has complained about lackadaisical response to their efforts to expand pipeline connections.
Kerosene subsidy has also produced equally perverse outcomes. Unsurprisingly, ration outlets report full drawal of subsidised kerosene quota. But only a part of it reaches the intended beneficiaries. At Rs. 27 a litre, the price differential between subsidised kerosene and diesel is indeed very significant, pushing the former into diesel tanks of cars, lorries and trucks. Kerosene mixed with diesel defies easy detection. It is estimated that half of all subsidised kerosene goes to adulterate diesel in cars and trucks, reducing their efficiency. Unlike LPG diversion which takes place at the level of the dealers and gas agencies, kerosene diversion is controlled by mafia-like operations often with local political patronage. Corruption at all levels has ensured that chemical markers that would distinguish subsidised kerosene from the rest used in other industries get neutralised within a few weeks of their introduction.
The most egregious perverse outcome of the government’s misguided subsidy regime, however, pertains to diesel which is not even a cooking fuel. Even though diesel prices were linked to import parity prices from 2002 onwards, they were not revised in tandem with global crude prices except in the initial two years, thanks to the invisible hand of government restraining the oil marketing companies. Diesel is used in irrigation pumpsets used by agriculture and in public transportation, especially trucks and the railways. Frequent elections to State Assemblies, even by-polls, can make the government jittery about raising diesel prices, as a result of which the gap between domestic market price of diesel and its import parity price begins to widen, giving rise to an implicit subsidy borne primarily by the oil marketing companies.
Diesel cars
Cashing in on this unexpected windfall, car manufacturers have been flooding the Indian market with diesel-fuelled cars. Initially these addressed the urban taxicab segments but, gradually, even luxury brands have come up with diesel-fuelled models to entice the fuel-price sensitive consumers. In fact, one study found that 40 per cent of the diesel used in the country is by diesel cars. Cheap diesel, primarily meant for freight, has also led to indiscriminate increase in truck-borne traffic as opposed to rail-borne freight, a more economical way to transport goods. Indian highways are perpetually clogged with truck traffic, endangering the environment as well as human lives, not to speak of the quantum jumps in diesel consumption in recent years. In fact, 60 per cent of the diesel consumed in the country is accounted for by the transportation sector. The share of diesel in the petroleum fuel basket rose to 43.7 per cent in FY 2011, up from 35.19 in FY 2002. Diesel car output growth has outpaced growth of petrol-driven private cars so much so that the diesel automobile lobby is threatening to become a forceful voice in ensuring that diesel remains a subsidised fuel.
That apart, the automobile manufacturers skim a substantial chunk of the subsidy by pricing diesel cars considerably higher than their petrol counterparts. The vehicle owner pays an upfront premium which unduly enriches the automobile manufacturer, a very perverse outcome indeed.
If the government is serious about fuel subsidies reaching only the intended beneficiaries, it must act fast to curb these unintended and perverse outcomes.
(The writer is an independent energy analyst and a former petroleum regulator).
Keywords: cooking gas subsidies, cash transfer scheme, Aadhar
even thou i agree mostly with the writer i don't agree with him when he says that middle class don't require subsidy.It is because of subsidies like this that middle class is remaining middle class or else they would become poor .Till the government can assure that everything will work almost perfectly subsidies should be extended to middle class also.
Baqar, You are spot on ! As long as they hide the fact that the so-called subsidy is given by govt on the tax burden imposed by itself shows the farcical nature of the above article.
the author does not mention taxes on crude oil. at present 50% of the
cost of petrol/ diesel is central or state taxes. these also need to be
abolished.
Yes what about taxes that we pay on every litre of petro fuel.
Almost 40-50% is tax cost. So govt. can reduce taxes a bit, can't they?
Totally agreeable article.
I may tell from my own unpleasant experience with the gas distribution agencies when they take 40 days to deliver a single LPG cylinder here in Bhagalpur.
The article makes a villan of middle class.
Why is the writer mum about the whole sale loot of the nation by politicians and Reliance.
If the SOPs provided to reliance are cancelled the nation will earn triple than what it can by cancelling the subsidies.
The authors like this are stooges of politicans and business tycoons.
Good clear write up. However, I believe the author has only focussed on root cause analysis while pointing out errors. Which is the easy part. The real meat in solving the problem is in robust execution which both the author and our governments have failed to address yet.
The disbursement of subsidy in India through various schemes of the
central Government is not up to the mark.The section of the society
which needs it deadly is deprived of it by various malpractices such
as mafia and black marketing of products.Oil Marketing Companies have
initiated certain steps to trace and block multiple connections of LPG
but investigation on ground must also be done to avoid malpractices
such as surprise visits in the houses of consumers and commercial
shops.On the other hand surprise visits by officers on ration shops
must be done to eradicate the menace of mafias and middlemen.
This article has come not a day too soon. Maybe the author is an
energy expert so he has confined his comments to that sector alone. I
wish he had extended his argument to cover all subsidies in any
sector. Subsidies introduce distortionary effects, and cannot be
sustained since hardcore economics will always rear its head sooner or
later and force a correction, which will be painful to all
beneficiaries. The most fundamental lesson of economics is that there
are no free lunches, and however seductive subsidy calculations might
look on paper, they never work in practice especially over the long
term. Since our collective IQ as Indians is on the lower side of the
range for human beings, even after sixty five years I am not sure we
have learnt this lesson. The only silver lining is that Dr MMS and
Chidambaram are making a determined effort to weed subsidies out, and
I wish them all success.
Very well drafted article, give insight about flaws in the current
framework. Government and Policy maker know what problem is and the
solutions too but lack of courage on the part of our top political
leadership to bring changes in existing framework which will hugely
undermine there political base not allowing them to bring changes.
Institutional hiccup, Diffusion of responsibilities, Huge gap between
what is and how is too be the gap should be narrowed down are some of
the fundamental challenge which are undermining energy security.
the article throws light on the true state of Indian society where the cost reduction is the main aim of every household. Illegal practices in fuel consumption have creped in due to this very reason. to remove all the subsidies and paying the subsidies to the people who really deserve to get the subsidies is a good way to cope up with the growing prices of crude oil as well as to remove the the illegitimate methods to procure the subsidised fuel
I totally agree that subsidies as in current form are not effective. But i do not agree to many points that writer make. first, The rational that because subsidised commodities does not go to its intended users, they should be abolished is flawed one. this tells that we need to find a better alternative to rightly identify the needy ones which i feel is impossible task in country like india. So only solution to prevent black market for these commodities sell them at market price.
Second, The writer seems to have grudge against midddle class, otherwise he would not make a sweeping statement like middle class families have multiple connections. he could have simply mentioned that multiple LPG connection for single family exist. i remember reading the report, about how many politician also hold multiple connections.
third, the claim that diesel cars share in diesel consumption does not seem to be ( 40%) based on facts. he should have mentioned the source of his information.
This is a very well written article and it gives us a clear picture about the scenario of petroleum subsidies in our country. The entire article says about subsidies not being targeted to the intended beneficiaries. But in my opinion, contrary to the writer, the Aadhar linked direct cash transfer scheme would be the best step possible at present for channeling the subsidies into the intended targets. Any new step taken would have glitches in the beginning but that does not mean that the step as a whole is futile. Since we do not have any alternate solution, let us go with the available one at present rather than waiting forever.
The article didn't consider the heavy taxes imposed by the central and
state governments. 40% of import duty + central tax + state tax + sales
tax. All these taxes amounts to more then 50% of crude oil prices.
Charging 40% tax and giving 10-20% subsidy, does it make any sense?
Instead of giving any subsidy government should consider to reduce taxes
which are not at all competitive if considered with any country.
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