LPG cash subsidy: How oil cos will pay for UPA re-election

The PMO is planning to pay the LPG cash subsidy for only one cylinder upfront: this means the oil companies will bear a part of the UPA's re-election costs

The Business Blog December 20, 2014 17:59:28 IST
LPG cash subsidy: How oil cos will pay for UPA re-election

By R Jagannathan

That every action of the UPA government is now focused on winning the next election is becoming clearer by the day.

Last week, Finance Minister P Chidambaram announced that LPG (cooking gas) subsidies will be shifted to the direct cash transfers scheme - where the subsidy will be pushed into the beneficiary's bank account directly as cash, and the oil marketing companies will charge the full price from the customer.

For political reasons, the scheme has now been renamed as "direct benefits transfer (DBT)", but make no mistake, it makes no difference. The intention is still to transfer cash to beneficiaries - even though the hidden idea is to derive political "benefits" by doling out cash to voters in the name of cutting subsidies.

Nothing illustrates this better than the decision to shift LPG to DBT mode as soon as possible before the elections.

Why LPG?

The political answer is clear, even if the economic rationale isn't.

First, LPG is an urban issue. The Congress thinks it has the rural vote sewed up having proffered other goodies like the Food Security Bill and higher minimum support prices for rice and wheat for farmers. The LPG cash transfer to urban consumers makes it seem like the government is putting cash in your account - even though you have to pay more for LPG with the cash. The government hopes that you will discover the cash before you discover that LPG now costs twice as much.

LPG cash subsidy How oil cos will pay for UPA reelection

At Rs 434 per cylinder, and with nine cylinders set to receive the official subsidy, that's about paying the aam household in urban areas nearly Rs 4,000 a year. Reuters

Second, the money involved is substantial. At Rs 434 per cylinder, and with nine cylinders set to receive the official subsidy, that's about paying the aam household in urban areas nearly Rs 4,000 a year. In April-December 2012-13, LPG subsidies cost the oil companies Rs 29,148 crore. Even with lower crude prices, next year's subsidies will cost as much - since there are now nine cylinders to subsidise, and we are talking 12 months (not just April-December).

Third, given that nine cylinders will anyway be subsidised, there is no great benefit to be gained by shifting them to DBT in the short run. In fact, life will become more complicated for both consumers and oil companies - since Aadhaar numbers will have to be linked to bank accounts to claim the cash. Retaining the current subsidised price is simpler - since the subsidy can then be paid directly to three oil companies by the government. It's better and easier than crediting millions of accounts. As for removing bogus cylinder claimants, why can't Aadhaar be brought in anyway in due course? Aadhaar will work with or without DBT to separate real from bogus claimants. But that doesn't suit the government's purpose of putting cash in people's hands.

Fourth, this subsidy will probably be paid upfront - before you buy the cylinder. According to a report in Business Standard today, the cash will be credited before a customer buys the cylinder - though the mechanics are still to be worked out.

Fifth, the beneficiary numbers involved are huge: the oil companies have 140 million consumers - most of them urban, exactly the constituency that is moving away from the UPA right now.

Sixth, and this is the best part, the government is planning to let the oil companies pay for the subsidy upfront, and reimburse them later. According to the Business Standard report, the Prime Minister's Office is planning to reimburse LPG users for only one single cylinder directly - the remaining eight will be paid for by the oil companies.

Though the oil companies will be reimbursed later from the budget, these payments can well be shifted to the next government, or the next budget. Remember, the government is yet to pay last year's oil subsidies to oil companies. The provisions made for this year will be used to largely pay for last year's overdues, and this year's dues will go forward to next year. This means, the next government will pay the bills.

This schema shows political cynicism at its worst. The government is, in effect, asking the oil companies to pay for its re-election indirectly. It may also be shifting the burden of compensating the oil firms to a later date - when the UPA may or may not be in power. If the UPA goes, a fat bill will land on the next government's desk. If it stays, it can always find ways to blame global forces for the need to raise LPG prices.

Smart. But guess who will pay the bills ultimately. You, dear Taxpayer.

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