Subsidy burden could rise rapidly as more households turn active consumers
By: Renu Kohli | March 23, 2016 12:27 AM
LPG-subsidy savings from shifting to direct benefits transfers (DBT) using Aadhaar has been controversial due to vastly varying estimates. The savings accrued are mainly attributable to the elimination of nearly 33.4 million ghost consumers. The ministry of petroleum and natural gas claims to have saved Rs 14,672 crore in FY15. Researcher Kieran Clarke of International Institute for Sustainable Development (IISD) figures that the sum of savings directly due to LPG DBT (DBTL) could be far less—Rs 12-14 crores in FY15 and Rs 120.9 crore in FY16. The contention here is that a larger chunk of savings came from measures taken to eliminate ghost/duplicate accounts by the oil marketing companies (OMCs) before DBT was even implemented.
Whatever be correct, it is undeniable that budgetary savings on LPG subsidy from elimination of nearly 33.4 million ghost accounts must have been significant. And the fact that another 16.5 million active consumers are no longer availing the subsidy must have further increased the sum saved. From a fiscal perspective, however, the more important point to recognise is that these savings are one-off, and future subsidy payouts could rapidly rise as more households are brought under coverage through issuing fresh gas connections. Thus, while Aadhaar-linked direct benefits transfer does exclude the possibility of a return of ghost consumers, per se it may do little or nothing to reduce or get rid of the LPG subsidy burden in the medium- to long-run.
Here is how this could pan out. Period 1 (t): LPG subsidy savings one-time only
The current estimated reductions in the LPG subsidy or savings arise from knocking off any false, fraudulent claimants who had opened numerous accounts with the oil marketing companies (OMCs). Such customers bought subsidised gas cylinders for either personal use or black-marketing. Before and after introduction of DBTL, the OMCs have been weeding out the duplicate and ghost customers; in the process, millions of previously fake gas connections have been freed. Let us call this time period ‘t’. Savings in the subsidy bill, whatever be the amount, genuinely accrue to the government in the first round, i.e., in t. This comes from reduction in the number of beneficiaries. The freed gas connections will show up as excess or surpluses with OMCs in the current period and can potentially be sold at market prices.
LPG subsidy rises in t+1, t+2, t+3…
In the next round, or periods t+1, t+2, t+3… onwards, the surplus LPG connections that have reverted to the OMCs will be sold or given as fresh, genuine LPG connections to new consumers as there is still a large gap between demand and supply. The active consumer base size of 162.7 million is 66% of the total households (246.7 million) and the LPG-subsidy exclusion threshold has been set at much higher income level of R10 lakh per annum. Given the strong buzz around Aadhaar-based benefits being directly credited to individual bank accounts, it is reasonable to expect the demand for subsidised gas cylinders will soon begin to rise.
From the standpoint of the subsidy load, the relevant parameter is the rate at which the demand for new gas connections increases. The addition of new customers, or subsidy claimants/beneficiaries, will be determined by the pace at which information and awareness about subsidised LPG connections under DBTL spreads. Note that a supply constraint that previously restrained the expansion rate of new LPG connections, is considerably relaxed at present because of the millions of freed gas connections lying surplus with the OMCs. As new customers are added, the demand for subsidised LPG cylinders and hence, the government’s LPG subsidy payout, will once again begin to rise. Simultaneously, the one-off gains from getting rid of duplicate, false accounts will also begin to dissipate.
Government intervention could accelerate the pace
The previous scenario can be regarded as a normal rate of expansion, i.e., one that is determined as well as restricted by a standard rate of information spread and rise in household incomes. But the normal rate could accelerate due to government intervention. Schemes like Ujjwala, announced in the recent budget, could be one such example. This aims to provide LPG connections to 15 million women belonging to below poverty line (BPL) families during FY17.
What’s more, the scheme will continue for at least two more years to cover a total of 50 million BPL households. The targeted addition of these new customers will thus advance an otherwise normal expansion rate of new LPG-subsidy beneficiaries. The LPG subsidy, in that case, may not just return to previous levels, but is well likely to exceed those simply because of accelerated inclusion of new beneficiaries into its fold as well as augmented supply conditions. In other words, the scale and scope of coverage of the LPG-subsidy—availability and the budgetary weight—will rapidly increase in the next two-three years!
Thus, while the Ujjwala-scheme has laudable objectives, viz., health and ecological benefits, from a purely fiscal (subsidy) perspective, its contribution of R1,600 for each LPG connection to BPL households can be viewed as re-routing or diversion of yesterday’s ghost accounts that are now free and lying surplus with the OMCs. Ujjwala beneficiaries will be identified in consultation with state governments and Union Territories; however, previously uncovered populations will be prioritised. This means that information spread about cooking gas subsidy from the government will accelerate. It is anybody’s guess if, at a later date, state governments start adding on as they have been doing with the popular rice-wheat schemes. The incontrovertible facts are that the LPG-subsidy payout could increase sharply in t+1, t+2, t+3…and so on, while the roots of cooking-gas subsidy culture will get more deeply entrenched.
So while Aadhaar-linked direct benefit transfers are likely to result in substantial benefits from better targeting of universal schemes like food security, DBTL in the case of LPG-subsidies is unlikely to yield any significant budgetary savings beyond the short-run. DBT or no DBT, the fiscal burden from LPG-subsidies will continue to rise for a very long period. That is, until the entire population’s needs for cooking gas are satisfied and/or exhausted – five, ten, fifteen or as many years it may take. Further, it also needs flagging that when international gas prices begin to harden the problem could multiply manifold in no time. There is no way that the cooking gas subsidy burden is going to reduce because of DBT. The only logical solution is outright elimination with a shift to market-based pricing and purchases by consumers.
The author is a New Delhi-based economist
TAGS: Aadhaar Bill
