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Will MODI end the subsidy raj?

With the drop in international LPG price, there has been a significant over-recovery of subsidies on LPG – of Rs 120 per cylinder in May 2020. Now is the ideal time to end subsidies on kerosene and LPG.

The government spending zero amounts to subsidise PDS kerosene and domestic LPG has not received the attention it deserved.

Since World War II, kerosene has been a controlled commodity and in 1957 sale of kerosene through the Public Distribution System (PDS) was introduced to stabilise prices. In the case of LPG, subsidies were introduced in the late 1960s to encourage the use of LPG for cooking as a clean fuel.

Kerosene-free states & UT
Kerosene consumption has been dropping from 9.3 million tonnes (MT) in 2009-10 to just 2.4 MT last year. This has been an encouraging development driven by NDA’s 100 per cent electrification drive and the UJWALA scheme of promoting the use of LPG by below poverty line [BPL] families through free connections. On the other hand, LPG consumption has been increasing from 13.1 MT in 2009-10 to 26.4 MT in 2019-20. With consumption of PDS kerosene dropping steeply, several states like Andhra Pradesh. Haryana and Punjab along with Union Territories (except J&K) are declaring kerosene – free!

Government doles out subsidies on several essentials; the amount spent on kerosene and LPG is significant. In the 2020-21 budget, provision for food security, fertilizer, LPG and kerosene are Rs 115,570 crore, Rs 71309 crore, Rs 37256 crore and Rs 3659 crore respectively. More attention is needed to curb the use of fuel subsidies for adulteration of diesel with kerosene.

Sensible correction…
LPG and kerosene subsidies are today at zero levels due to oil prices falling to as low as US $19.90/barrel in April after a high of US $ 64.31/barrel in January. Also NDA government started the process of decreasing the subsidy by increasing the prices of subsidised kerosene and LPG by small increments from 2016. Now with the drop in international LPG price, there has been a significant amount of over-recovery of subsidies. In May of this year over-recovery was Rs 120 per cylinder.
Oil Marketing Companies (OMCs) are making a huge profit as a result of pricing LPG significantly higher than their cost.

Extend lpg subsidy only to bpl families…
Currently there are 280 million LPG consumers and only 20 million do not receive any subsidy. Eighty million consumers are BPL families who have been given free LPG connections under the Pradhan Mantri Ujjwala Yojana (PMUY). Reduction of LPG subsidy has been helped by the direct benefit transfer (DBTL). During Covid-19 crisis, government has helped all BPL families (covered under PMUY) by giving three free LPG cylinders.

Now is the ideal time for the government to end both subsidies on kerosene and LPG. Since consumers are not getting any subsidy currently, there is unlikely to be any protest by the consumers. At the least, the government should consider scrapping the universal LPG subsidy policy and announce a new policy extending subsidised LPG only to BPL families.n

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