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The move has the potential to end the illegal diversion of an estimated 40% of the subsidized kerosene allocated to states for adulteration of diesel. Photo: Ramesh Pathania/Mint
The move has the potential to end the illegal diversion of an estimated 40% of the subsidized kerosene allocated to states for adulteration of diesel. Photo: Ramesh Pathania/Mint

The NDA government is rewriting subsidy rules

The government to start direct benefit transfer scheme for kerosene from 1 April

New Delhi: Ignoring underlying political risks, the National Democratic Alliance (NDA) government is rewriting the rules on fossil fuel subsidy, long considered a sacred cow, to prevent revenue leakages.

Last week’s decision to bring kerosene under the direct benefit transfer (DBT) scheme is the latest in a series of subsidy reforms that could also usher in competition from private sector refiners in the fuel retailing business which has so far been monopolised by state-run companies.

Market-linked pricing of the poor man’s fuel and direct subsidy transfer to the needy customers follows the total deregulation of diesel price in October 2014 and the recent announcement limiting LPG subsidy only to those with less than an annual income of 10 lakh. To prevent any hardships, kerosene subsidy would be transferred before purchasing the fuel to the bank accounts of customers in 26 districts across eight states, where a pilot project would begin on 1 April.

The move has the potential to end the illegal diversion of an estimated 40% of the subsidized kerosene allocated to states for adulteration of diesel. Currently, about 90% of the 16 crore LPG customers get subsidy in their bank accounts. The move started by the United Progressive Alliance (UPA) government in June 2013 and scaled up by the NDA regime has helped prevent diversion of subsidized LPG cylinders meant for households to restaurants. The UPA government had tried different ways of curtailing subsidy leakage, including by adding chemical markers to kerosene, and having differently coloured LPG cylinders for household and commercial consumption.

Although the Manmohan Singh government had in 2013 announced that fuel marketing companies could raise diesel price by 50 paise a month to bring the administered price close to the market-determined price, the companies often did not exercise that right in the absence of a green signal from the oil ministry as global oil prices were still high.

Jai Mrug, a Mumbai-based political analyst, said the NDA regime is able to make better use of tools like Jan Dhan and Aadhar to plug subsidy leakage, compared to what the UPA regime had achieved. Also, such measures were not so effective during the UPA rule because of “difficult" allies like the Trinamool Congress (TMC).

Mamata Banerjee-led TMC quit the UPA government in 2012, protesting against the restriction on the supply of household cooking gas. Unlike the second term of the Congress-led UPA which had troublesome alliances with parties like TMC and Dravida Munetra Kazhagham (which quit the UPA in 2013), the Bharatiya Janata Party (BJP) leads a majority government at the Center with allies.

“For competitiveness of the economy, one has to plug holes in kerosene and LPG subsidy so that the tax rates on fuel gets reduced. Rationalising subsidy will bring long-term fiscal discipline in the system and this is exactly what the NDA government is doing," he said, adding that the poor would benefit from the move.

The Modi administration was able to take advantage of the fall in global prices to decontrol diesel price fully in October 2014, which led to an immediate price cut of 3.5 per litre. At present, retailers make no revenue loss on selling petrol or diesel. The price of Indian basket of crude oil at $34 a barrel, the lowest in a decade, set the stage for taking subsidy reforms on fossil fuels to its conclusion.

Last week’s decision to credit financial assistance directly to the bank accounts of poor consumers for buying kerosene would save the exchequer at least 2,000 crore a year when fully implemented.

“The bearish trend in oil price might stay for some time, but would not remain so forever. The government seems to be making use of this window of opportunity to achieve subsidy reforms in the oil sector," said D.K Joshi, director and chief economist at research firm Crisil.

Lower oil price has also enabled the government to boost its revenue by increasing excise duty on petrol and diesel by 10.2 and 9.97 a litre, respectively, in seven instalments since November 2014. While this did not pinch consumers, they were denied the full benefit of the decline in global oil prices.

The fall in oil price is also reflected in the fact that the Central government’s share of oil subsidy, which had touched 97,000 crore in 2012-13 is estimated to be 30,000 crore in the current fiscal. Of this, 22,000 crore is for LPG and the remaining 8,000 crore for kerosene. At present, kerosene, which has a market price of 28 per litre, comes at a discount of 13.

The oil ministry has also promised financial incentives to states that volunteer for lower kerosene allocation. If it results in lowering the total allocation of subsidized kerosene to states from 86.85 lakh kilolitres this fiscal to 71.30 lakh kilolitres, which according to the National Sample Survey of 2011-12 is the estimated total consumption of kerosene a year, savings to the exchequer could be at least 2,011 crore a year. It is believed that about 40% of the subsidized kerosene is diverted illegally for adulterating diesel.

According to the government, the actual requirement of kerosene would be even lower considering the improvements in village electrification and in making available LPG to more poor households. Through the “Give-Back" scheme of the government, nearly 45 lakh new LPG connections have been given to the poor.

Limiting LPG subsidy to those with an annual income below 10 lakh is expected to reduce subsidy by about 300 crore a year at current price, assuming that each consumer who will be denied the subsidy from 1 January would be using 5-8 cylinders a year. According to rating agency ICRA, the savings for the government could be 500 crore, which could increase materially if the income threshold for LPG subsidy is lowered progressively. In Delhi, a 14.2kg LPG cylinder comes at a retail price of 608, on which the Central government pays a subsidy of 198. About 90% of the 16 crore LPG consumers get subsidy on their bank accounts.

In 2012, the UPA government first capped the total number of subsidized cylinders available to a household at six, but later raised it to nine and then to 12 by January 2014.

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