New Delhi: The National Democratic Alliance (NDA) government is continuing to rewrite subsidy rules, tapping kerosene in the latest move to prevent benefits meant for the poor reaching unintended beneficiaries.

The idea is not just to replace the public distribution system, prone to diversion of the subsidized fuel, with direct cash transfers to the poor. It’s also intended to curtail use of kerosene for lighting and cooking through large-scale liquefied petroleum gas (LPG) supplies without upfront payments and an aggressive village electrification programme.

“Kerosene is on its way out. Eventually its use will be confined to a limited quantity. We are also making available 5 kg LPG cylinders through select grocery shops for the benefit of people in the hilly region and for people in cities who may not have the necessary papers to obtain a regular LPG connection," said an Indian Oil Corp. official, requesting anonymity.

Last week, the government allowed oil marketing companies to raise the retail price of kerosene by 25 paise a month for 10 months. Companies have advised states to notify the revised prices. Kerosene is sold in Delhi at 15.42 a litre, about 13 below its global price.

The government is now rolling out direct cash transfers to kerosene consumers in 26 districts in eight states, according to a plan announced in January. Eventually it will be scaled up, said the official.

The challenge lies in the fact that close to half of the nearly 80 million households using kerosene for lighting (out of the 250 million households in the country as per the 2011 census) live in rural areas where banking facilities are few and far between.

Prime Minister Narendra Modi said in March that the direct benefit transfer (DBT) scheme will be extended to food, kerosene and fertilizers.

The kerosene subsidy revamp follows a 29 December decision to limit subsidy on cooking gas only to those with annual income less than 10 lakh and a campaign led by Modi urging the financially well-off to voluntarily give up the benefit. In October 2014, the government deregulated diesel price.

While the low global crude oil price strengthened the Modi administration’s hands to implement subsidy reforms, it was the high oil price (see table) that prompted the previous United Progressive Alliance administration to dismantle the opaque way of accounting for subsidy, disguised as oil bonds.

In 2008-09, then finance minister P. Chidambaram started disclosing in budget documents the quantum of oil bonds issued to fuel retailers Indian Oil Corp., Bharat Petroleum Corp. and Hindustan Petroleum Corp. to finance their revenue shortfall from selling auto fuel below the international price.

From 2010-11, the practice of issuing oil bonds was dropped.

However, implementation of the subsidy reforms was marred by political opposition from UPA’s allies. The Mamata Banerjee-led Trinamool Congress quit the UPA government in 2012, protesting against a move to restrict the supply of subsidized cooking gas cylinders to households.

The cap of six subsidized cylinders introduced in 2012 was later raised to nine and then to 12 by January 2014. In 2013, the Manmohan Singh government also announced that fuel retailers could raise diesel price by 50 paise a month to bring the regulated price close to the market-determined price, but companies did not exercise that freedom and used to wait for the go-ahead from the oil ministry every time global prices warranted a price increase.

As a result of the NDA regime’s campaign, more than 10 million consumers have so far given up the cooking gas subsidy. Under the direct cash transfer scheme, more than 34,500 crore of subsidy has been sent to the bank accounts of 156.9 million beneficiaries, as per information provided by oil retailers. This helps in preventing diversion of subsidized LPG cylinders meant for domestic consumers to commercial customers like restaurants.

“The oil ministry stated on Wednesday that in 2014-15 and 2015-16, the government could save 21,261 crore of subsidy on account of implementing the direct benefits transfer scheme. It also said that after the elimination of bogus LPG connections under the scheme, non-subsidized commercial LPG sales grew 39% in 2015-16, compared to negligible growth or decline recorded in previous years."

Modi assured chief ministers at Saturday’s Inter-State Council meeting that three-fourths of the subsidy savings in kerosene will be shared with states as grants if they reduce consumption.

An official statement in January said kerosene consumption was not proportionately declining despite increased LPG availability and village electrification, indicating that “some part of the kerosene allocation is diverted for non-eligible purposes."

According to some estimates, nearly 40% of subsidized kerosene is diverted at the state level for adulterating diesel.

“The success of scaling up direct benefit transfer to include kerosene and fertilizer will depend on how bank accounts are opened in remote areas and last-mile financial inclusion is ensured. What we require is digital infrastructure which will make the initiative really effective, not physical bank branches," said D.K. Joshi, director and chief economist at ratings firm Crisil.