After a big step, why is govt sending confusing signals on its subsidy rationalisation efforts

If there was one policy that this government was being deservedly praised for, it was the attempt to trim the subsidy bill, especially through better targeting of subsidies to the deserving.

Representational Image. PTI

Representational Image. PTI

The biggest success here has been on the cooking gas front, with the direct benefit transfer of the subsidy amount into bank accounts (the PAHAL scheme) and the giveitup campaign, where people voluntarily and formally relinquished their subsidy and agreed to pay the market rate for their LPG refills.

It is also experimenting with cash transfers in lieu of food and is set to launch similar experiments in kerosene and fertilisers.

But now the government is taking two steps backward on this path. Petroleum minister Dharmendra Pradhan has been widely quoted in the media as saying (ironically at an event to announce that 11 million had signed up for giveitup) that those who had surrendered their LPG subsidy can reclaim it after a year.

The various reports are a bit confusing about whether the minister said that the relinquishing was only for a year and there will be no auto-renewal of the surrender (The Times of India) or whether a surrender will be considered permanent unless a person expressly applies for a subsidised connection again (The Hindu). But the broad point is this - people who feel the pinch when the price of LPG rises (when global oil prices go up) can once again seek a subsidised cylinder.

This just does not make sense.

The impression given, when giveitup was introduced, was that this was one way to get the better off sections out of the subsidy regime, since they could afford to pay non-subsidised rates. How does that rationale change? More importantly, why should it change? Why should the government protect better off sections against price increases? What next – bring the middle classes into the National Food Security Act ambit when prices of rice and wheat start to skyrocket?

Pradhan’s stand flies in the face of statements made by senior functionaries of the finance ministry as well as the Prime Minister that government welfare and subsidies should be targeted towards the economically vulnerable sections. That is the right approach. The LPG subsidy rationalisation was a good start, why are the gains being reversed?

During the United Progressive Alliance government, petroleum minister Jaipal Reddy had launched a transparency portal which showed that top industrialists and government functionaries had two or more subsidised LPG connections. This brought out the ridiculousness of the subsidy regime and prompted the search for solutions to keep the well-off out of the subsidy regime. The first step was the plan to cap the number of subsidised cylinders (later rolled back), then the DBT, which this government continued. This government went one step further in launching the giveitup campaign.

Late last year, it also announced that people with more than Rs 10 lakh annual income would not be given subsidised LPG cylinders. But this too was based on self declaration. And The Hindu report quotes Pradhan as admitting that they have not used income tax data to enforce this.

To repeat a point this writer has been making for long, subsidy rationalisation cannot rely on voluntarism alone and the resounding success of giveitup that the government has been tom-tomming could peter out when global oil prices rise. Pradhan’s assurance that people could opt back into the subsidy regime encourages this trend and sends out a wrong message.

“It is the people's belief in the PM that holds the key to the success of 'Give it Up'," Pradhan has been quoted as saying. It is possible that many people who may have given up their subsidised LPG connections in response to the Prime Minister’s emotional pitch may not be from rich families and would not be able to afford to pay non-subsidised rates when prices do go up. It is also possible that someone who has an income of Rs 10 lakh today may find income getting halved after retirement and would feel the pinch of non-subsidised cooking gas.

But the answer is not to have a revolving-door subsidy policy where people opt out and opt in again. Restoring the cap on subsidised cylinders is the best – and most fair – way of addressing this issue.

The Economic Survey 2015-16 has pointed out that even the richest 10 percent urban households generally used only 10 LPG cylinders a year, while the poorest 10 percent in both rural and urban areas used only four. What, then, is the logic in retaining the number of subsidised cylinders a year at 12?

Bringing the cap down to even eight will not affect the poor – they will still have a cushion of four subsidised cylinders. The middle classes and the rich will have to pay non-subsidised rates for consuming more than the quota, which they can well afford to.

This system will also take care of targeting issues. Using income tax data to deny subsidy is unfair to the salaried who cannot hide their income even as those who earn much, much more but are below the taxman’s radar continue to enjoy the subsidy. Now everybody will get only a certain number of subsidised cylinders. A cap on subsidised cylinders will also encourage less wasteful usage.

The principle underlying any subsidy regime should simply be this – the well-off should not get government doles and support; that should be reserved for the economically vulnerable sections. That should be the principle for LPG, kerosene, food, fertiliser, in fact, for any government welfare scheme. The LPG subsidy rationalisation was a big step; it should not be reversed or diluted under any circumstances. It needs to be extended to other areas.

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Updated Date: Apr 23, 2016 15:18:34 IST