Thursday, January 18, 2007

Domestic Fuel : A case for targeted subsidy

From The Hindu

The government plans to restrict subsidised domestic cooking gas (LPG) and kerosene to poor people only, Petroleum Minister Murli Deora said today.

"Yes, we are in agreement with the suggestion that there should be dual pricing (subsidised price for poor and market price for the people who can afford) for cooking fuels," he told reporters here.

Public sector oil firms sell kerosene at just over Rs 9 a litre, cheaper than a bottle of mineral water, he said, adding kerosene was being subsidised by over Rs 15 a litre while LPG was being sold at a discount of Rs 155 per cylinder.

"Why should subsidised LPG cylinder come to my home or to any other people who can afford it," he said.


This is a welcome move. I do not see why the government should subsidize the rich or for that matter parts of the Hotel industry that thrives on diverted subsidized LPG.

What is the size of the subsidy bill we are talking about ?
From Business Line 23 March 2006

The Ministry hopes to deliver domestic LPG and PDS kerosene to households across the country at affordable prices during 2006-07.

It plans to make available 118 lakh kl of PDS kerosene and 74.42 crore domestic LPG cylinders to households at subsidised prices.


LPG subsidy alone would be 150*74.42 = 11,163 Crores. & subsidy on kerosene works out to 1180*15= 17,700 Crores. That is a total subsidy bill of 27,863 Crores.

A simple back of pad calculation shows that this amounts to Rs 3800 per family per year if targeted at the bottom 1/3 of the population ( Assuming pop=110 Cr & avg family size=5 ). This is a significant sum of money. It makes immense sense for the Government to target this subsidy at the poor instead of handing it over to every one in the country.

One way of operationalizing this, would be to restrict LPG subsidy to those families that possess a white ration card/Below the Poverty Line ( BPL) ration card. The scheme could be that if you possess a white ration card & want to avail of the LPG subsidy, you need to register that card with your Gas supplier. The gas supplier can then endorse your card. This would mean that you will get a lower supply of subsidised kerosene. So the BPL family can decide whether they want to take the fuel subsidy in the form of Kerosene or LPG. All the others would be supplied unsubsidized LPG and Kerosene. To prevent subsidy leakage, you would still need to impose rules that limit the number of subsidized refills that one can avail in a year, the gap between each subsidized refill etc.

What are the major weaknesses in the above scheme?
  1. BPL card administration is weak. It is possible for the undeserving to get hold of these cards
  2. BPL card administration is a state subject. One would need to convince states to fall in line with the above plan
The first weakness is manageable. After all instead of subsidizing every one, you are now subsidizing all the deserving & some undeserving. The second weakness will be quite tricky to overcome. One option could be the Central government restricts supply of subsidized LPG to each state. So states that are unwilling to implement that plan can devise their own ways of targetting who should get the subsidy.