Direct LPG subsidy transfer – a ‘torch-bearer’

The Guinness Book of World Records has recognized India’s direct LPG subsidy transfer as the world’s largest direct benefit transfer [DBT] program. The program nick-named PAHAL [Pratyaksha Hastaantarit Laabh] has within its ambit 146.2 million households [as on December 3, 2015].

While, the recognition is for it gigantic coverage and unprecedented success in reaching out the benefit through the length and breadth of the country, it is symptomatic of metaphorical changes that could come about in the way subsidies are administered and the big push that it could give to Modi’s reform agenda.

For decades, Union government gave subsidy on LPG, diesel, kerosene etc by directing oil PSUs viz., Indian Oil Corporation Limited [IOCL], Bharat Petroleum Corporation Limited [BPCL] and Hindustan Petroleum Corporation Limited [HPCL] to sell these products at low price and reimbursing them for excess of cost over the price as subsidy. This led to multiple ill-effects.

First, since selling price [albeit subsidized] was substantially lower than the market price, there was a strong incentive for dealers to indulge in black marketing and rake in huge profits at the expense of exchequer. In plain words, subsidy money was used to fill the pockets of dubious traders and corrupt bureaucrats.

Second, the dispensation led to unbridled growth in consumption in complete disregard of efficiency in use and energy conservation. This in turn, led to ballooning subsidy throwing fiscal deficit completely out of gear on one hand and increase in foreign exchange outgo/current account deficit [CAD] on the other.

Third, since reimbursements to oil PSUs were made on the basis of actual cost of refinery throughput/import devoid of any norms in regard to efficiency, they had no incentive to improve efficiency and keep production cost low. The shift to payments on import parity in recent times made things no better as these included costs such as customs duty, port handling charges not incurred.

Fourth, due to subsidized sale only through oil PSUs, private companies were forced out of retailing. In fact, thousands of outlets set up by them post dismantling of APR [administered pricing regime] in 2002 had to be closed. This led to absence of competition and continued monopoly of oil PSUs.

In short, subsisting arrangements were leading to high cost/inefficiency, large-scale pilferage, high subsidy, high CAD and even adverse effect on environment [especially due to un-controlled use of fuels like diesel and kerosene]. Modi – government embarked on two-prong strategy to stem the rot.

First, it accelerated the process of increase in diesel price [started in January, 2013] to align it with cost leading to decontrol in October, 2014. This resulted in curbing a major source of wastage of national resources. Second, in case of LPG, it resurrected DBT from November 15, 2014 covering 54 districts initially and all 676 districts in the country from January 1, 2015.

Under DBT, while oil PSUs sell the products at full/market price, the subsidy is directly credited to the account of beneficiaries. Since, sale of all cylinders happen at market price only, there is no trigger for diversion/black marketing and pilferage. There is judicious and efficient use and above all huge saving in subsidy. The proof of pudding is in eating.

As on April 1, 2015, there were 181.9 million registered LPG consumers and 148.5 million active consumers. The difference 33.4 million consumers were duplicate/fake accounts which have been blocked under PAHAL scheme. Based on quota of 12 cylinders per consumer and average subsidy of Rs 366 per cylinder, the estimated savings works out to around Rs 15,000 crores annually.

The government is now asking better-off sections of the society to voluntarily surrender their entitlement to subsidy. According to the Economic Survey only 0.07% of LPG subsidy in rural areas went to poorest 20% households. In urban areas, poorest 20% got only 8.2% of subsidies. This shows the potential for drastically pruning subsidy by restricting it only to the poor.

Emboldened by the success of DBT in LPG, Team Modi is replicating this for kerosene. As prime minister eloquently brought out in his address at Hindustan Times Leadership Summit, this will help in stopping pilferage, targeting subsidy only to poor households, preventing adulteration of diesel with kerosene, reducing emission, saving foreign exchange and reducing subsidy.

The ball does not stop here. If, the present regime can successfully deliver LPG subsidy directly to around 150 million households spread in every nook and corner of the country, there is no reason why it cannot do this in case of fertilizers and food wherein the number of beneficiaries are 138 million and 800 million respectively. The scope for savings in subsidy in these areas too is huge.

In case of urea for instance, taking subsidy of Rs 53,000 crores and pilferage of 30-40%, switch-over to DBT will save about Rs 16,000-21,200 crores annually. In food, on total payout of Rs 125,000 crores and 40% leakage, savings will be Rs 50,000 crores. In both areas, savings will be much more if beneficiaries are restricted only to the poor. Imagine, the savings if food subsidy is given only to 25-30% of population [below poverty line] as against 67% coverage under the National Food Security Act [NFSA].

Under the extant dispensation of routing subsidy through producers/suppliers, as for oil products, these sectors are also afflicted by high inefficiencies, high cost of production/supply and distribution, excessive use and attendant damage to the environment [adverse impact of excess urea use on soil, water and air is well known] and wastage of national resources. All this will be substantially curbed under DBT.

The menace of leakages and overall inefficient administration goes much beyond fertilizers, food and petroleum products. It embraces almost every welfare scheme implemented by state governments and central machinery. The unprecedented misuse of funds under MGNREGA [Mahatama Gandhi National Rural Employment Guarantee Act], NRHM [National Rural Health Mission] and a host of others is too well known.

Modi’s decision to put the money directly in to the account of beneficiaries under all such schemes will unleash a multiplier effect saving mountain of resources even while protecting the poor through better targeting. The resources thus saved can be utilized for building infrastructure and funding other development activities on the required scale.

Clearly, the success of direct LPG subsidy transfer is not just a World Record. It is a torch bearer for catapulting India on to a high growth trajectory with huge benefits for majority of the poor. But, Modi will have to carefully navigate – overcoming resistance from vested interests – to deliver the results.

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