The government to start direct benefit transfer scheme for kerosene from 1 April
Gireesh Chandra Prasad
New Delhi: The oil ministry’s decision last week to credit financial assistance directly to the bank accounts of poor consumers for buying kerosene would save the exchequer at least Rs.2,000 crore a year, when fully implemented, and help take subsidy reforms on fossil fuels to their conclusion, taking advantage of the prevailing low prices.
The poor man’s fuel is the last petroleum product to be chosen for market-linked pricing because of its political sensitivity and because it is sold through states’ vast public distribution network, unlike petrol, diesel and LPG which are directly sold by fuel retailers IOC, HPCL and BPCL.
Market-linked pricing of kerosene and transfer of financial assistance to the bank accounts of the poor would start as a pilot project in 26 districts across eight states from 1 April.
In case of LPG which is already sold at market rates, the government decided last week to limit subsidy transfers to the bank accounts of only those customers with annual incomes below Rs.10 lakh.
Both decisions come at a time when the Indian basket of crude oil is at $34 a barrel, the lowest in a decade.
“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 Rs.10.2 and Rs.9.97 a litre, respectively, in seven instalments since November 2014. While this did not pinch consumers, they were denied of the full benefit of the decline in global oil prices.
Although the previous United Progressive Alliance (UPA) government had in 2013 announced that fuel marketing companies could raise diesel prices 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.
The Narendra Modi administration was able to take advantage of the subsequent fall in global prices to decontrol diesel price fully in October 2014, which led to an immediate price cut of Rs.3.5 per litre. At present, retailers make no revenue loss on selling petrol or diesel.
The fall in global price is also reflected in the fact that the Central government’s share of oil subsidy, which had touched Rs.97,000 crore in 2012-13, is estimated to be Rs.30,000 crore in the current fiscal. Of this, Rs.22,000 crore is for LPG and the remaining Rs.8,000 crore for kerosene. At present, kerosene, which has a market price of Rs.28 per litre, comes at a discount of Rs.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 Rs.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 LPG available 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 annual income below Rs.10 lakh is expected to reduce subsidy by about Rs.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 Rs.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 Rs.608, on which the Central government pays a subsidy of Rs.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.
Gireesh Chandra Prasad
TOPICS: FUEL SUBSIDYKEROSENELPGNDASUBSIDY REFORMS