The government must remove the subsidy on diesel, LPG and kerosene, and protect the poor from the impact through cash transfers
While the Centre had indicated that it was ready to bite the bullet and increase prices of petroleum products — mainly diesel — a few months ago, the combination of the slowdown in the economy, the drought and the political battles that the United Progressive Alliance was fighting on several fronts rendered the move unlikely. With the monsoon session of Parliament nearly over, however, it seems about to happen.
A little over a fortnight ago, the Prime Minister virtually ruled out the deregulation of diesel prices, in line with petrol. This was due to the failure of the monsoon and the demand by major grain growing States, Punjab and Haryana, for a 50 per cent subsidy on diesel for running pumps to irrigate their parched crops.
The pressure on the national exchequer to keep the diesel price down has been tremendous. In 2010-11, the fiscal subsidy on diesel, liquefied petroleum gas (LPG) and kerosene — the three most highly subsidised fuels, accounting for two-thirds of petroleum product consumption — amounted to Rs 2,904 crore. To this, one has to add the “under-recoveries” of the government-owned oil marketing companies, which is the difference between the cost of these fuels and their selling price, in the absence of deregulation. In the same period, this amounted to Rs 17,156 crore, twice as much as the previous year. The total burden for 2010-11 thus amounted to Rs 20,060 crore.
However, there are other prices to be paid for this policy drift, quite apart from the “dieselisation” of the country. Owners of Mercedes Benz cars and gas-guzzling SUVs purchase highly subsidised diesel; this fuel is “dirty”, generating severe air pollution, not least carcinogens, from the exhaust. There is also the potential repercussion on direct and indirect tax revenues. The government budgeted for a 14 per cent growth in direct revenues this fiscal and 26 per cent in indirect revenue. Between April and June this year, they have grown by only 6.8 per cent and 14 per cent respectively. On April 25, Standard & Poor downgraded India’s rating to “negative”. If India does not ensure that the fiscal deficit remains within the budgeted 5.1 per cent of GDP, S&P will lower it to “junk” status, which will make foreign financial institutions think three times before entering the Indian equity market.
There has been political resistance from the Opposition and the Left parties (and, in all probability, several Congress leaders surreptitiously too) to raising diesel prices on the ground that it will affect the aam aadmi. However, a new study by the National Institute of Public Finance & Policy, under the aegis of the Geneva-based NGO, Global Subsidies Initiative (GSI), has shown, to the contrary, that raising diesel prices will not have any crippling impact.
The study shows that a 10 per cent increase in diesel prices — employing the economic caveat, ceteris paribus: assuming other prices and demand for commodities remain unchanged — will only cause the general price level to rise by 0.47 per cent. If prices of diesel were raised by 25 per cent, public transport costs would rise by 8 per cent, road freight transport by 10, railway transport by 3 and industry by 0.25 per cent. For energy and environment reasons, it is desirable to switch over from road to rail for long hauls of goods. For agriculture, assuming machine input comprises only the diesel costs of fuel and lubricants, omitting interest on the capital cost of farm machines and wages for manual labour, a 25 per cent hike in diesel prices would only raise the cost of cultivating wheat and sugarcane respectively by 2.75 and 0.75 per cent.
When it comes to the second petroleum product, LPG, reducing subsidies is more complex. As of May this year, a Delhi consumer paid an average of Rs 399 a cylinder, while the fiscal subsidy was Rs 23 a cylinder and marketing companies’ under-recovery Rs 480 per cylinder, adding up to a total of Rs 503 per cylinder, a subsidy of a little over Rs 100. LPG is generally used by the better-off in urban and peri-urban areas, many of whom can bear an increase in price. Around half the country’s total population never buys any form of commercial energy, not even wood, which is the most used fuel, and thus a LPG price hike does not affect the masses.
To make the LPG price hike more palatable, the Energy & Resources Institute (TERI) has recommended measures in a paper for the GSI sub-titled “Cash transfers for PDS kerosene and domestic LPG”. It recommends a “calibrated” decontrol of LPG prices. In 2010, a committee chaired by Dr Kirit Parikh, then in the Planning Commission, recommended gradual increases of prices of gas cylinders, to cushion the blow on consumers. Instead, TERI suggests capping the number of subsidised cylinders in each household to eight per year as an interim measure. Roughly, that would work out to two-thirds of a family of four’s consumption and might be a less acceptable step than increasing the price.
Poor person’s fuel
The most problematic fuel is kerosene, the poor person’s lighting and cooking fuel. If diesel prices are raised without following suit for kerosene, many users of diesel — auto-rickshaw drivers being a typical example — will substitute it with kerosene, causing severe pollution.
The National Commission for Applied Economic Research has found that 18 per cent of PDS kerosene was diverted to non-household use, both to the open market and to those who do not own ration cards. Bihar, Chandigarh, Delhi, Jharkhand, Orissa and Punjab register over 50 per cent of such diversion. TERI suggests that the price of kerosene can be raised by a rupee a month for a year.
The poor can be protected by direct cash transfers, as has been successfully experimented with in Alwar and Mysore. The Unique Identification (UID) and National Population Register (NPR) systems may in theory deliver this. If the total amount of savings on kerosene subsidies is given to a poor family, it will work out to an average of Rs 3,131 a year, or Rs 261 a month. If the kerosene subsidy is just halved, the payout would be Rs 131 a month. Between precept and practice, however, there is a yawning gap. When it comes to food rations, which are even more essential than fuel, there is officially estimated to be a 15-20 per cent leakage. For cash transfers, it can be safely predicted that the leakage would be higher.
In July, in the Special Bulletin on Food Justice in India published by the Institute of Development Studies in Sussex, U.K., Biraj Swain and M. Kumaran of Oxfam India’s Food Justice campaign identified three kinds of exclusion from both the PDS and the Integrated Child Development Services, which are entirely applicable to cash transfers for kerosene. The first is “official exclusion,” where the state deploys inadequate resources. Secondly, there are flaws in the implementation of the scheme, with poor monitoring and evaluation and what is euphemistically called “local elite control”, as happens with MGNREGA. The Institute of Dalit Studies in Delhi has been working on the exclusion of lower castes from food security and has identified no fewer than 98 forms of discrimination, which reinforce one another, compelling the Prime Minister to term it “a national disgrace”. Lastly, the policy itself can be flawed, particularly if the beneficiaries are categorised too narrowly.
Cash transfers for energy, therefore, are highly problematic in a country where “energy poverty” may not be directly correlated to “income poverty”, especially in certain tribal regions, where biomass is available in relative abundance. Last year, the Rural Development Ministry conducted a Socio-Economic and Caste Census, which laid down objective criteria for excluding households with certain assets, such as motorised vehicles, fridges, landline phones and even irrigated land, from receiving benefits. Such a yardstick could be applied, at least on a pilot basis, in certain districts, to cash transfers for kerosene. Together with raising diesel and LPG prices, this will save the country crores and could help to end distortions in the economy and society.
(Darryl D’Monte is Chairperson, Forum of Environmental Journalists of India, International Federation of Environmental Journalists, Mumbai. Email: email@example.com)