The National Democratic Alliance government’s decision to limit the liquefied petroleum gas (LPG) subsidy to those earning Rs.10 lakh or less per year is one of those rare moves that will be cheered by economists and the poor alike. The decision makes eminent sense — why should the well-to-do be subsidised? Politically, the decision will win the government a lot of points with the poor, who will hopefully be the beneficiaries of the savings made by limiting the scope of the subsidy. The more the government saves, the more it can spend on expanding the reach of LPG connections among those who currently do not have one. And given that the effect of removing this subsidy will, at current prices, mean an increase in the LPG bill of a household consuming 12 cylinders a year by just a little more than Rs.2,200, or about Rs.188 a month, it is not going to receive brickbats from that section of society either. The message is clear: if you are not going to give up your LPG subsidy on a voluntary basis, then it will soon be compulsorily taken away from you. The government’s Give It Up campaign has encouraged 57.5 lakh beneficiaries of the LPG subsidy to opt out. But that clearly is not enough, considering there are 16.35 crore LPG consumers in the country. However, the government is still opting to trust the people, with the declaration of income above Rs.10 lakh being a voluntary move at the moment. The assumption is that once the Ministry of Petroleum and Natural Gas gets its hands on the full list of people declaring an income of above Rs.10 lakh a year from the Income Tax Department at the end of this financial year, this leeway will also be removed. (Technically, the subsidy is being removed for those who earn more than Rs.10 lakh, or whose spouse does.)
And it should, given the economic merits as well of such a move. At the moment, the government’s revised estimates show that it spent as much as Rs.2.66 lakh crore on subsidies in 2014-15. With such a large subsidy bill, it is imperative to fix the two major problems plaguing most subsidy schemes in India: leakages and mis-targeting. Leakages refer to the phenomenon where the subsidy does not reach the intended recipient due to corruption, pilferage or a variety of other causes. This has been quite successfully addressed via the government’s decision to transfer the subsidy payments directly to the recipient’s bank accounts, something made easier with the Pradhan Mantri Jan-Dhan Yojana. The decision to limit the LPG subsidy by income groups is an attempt to address the mis-targeting problem. By doing this, the government is trying to ensure that the subsidy is only going to go to those who need it. The hope is that rather than using the resultant saving simply to shore up the budget deficit, the Centre will use it to ensure that LPG connections are provided for those who still depend on firewood and kerosene stoves.