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Riddle wrapped in a mystery

 The cost to subsidise domestic LPG in India has declined during the last two years in step with the decline in international oil prices. This coincided with the introduction of the modified Direct Benefit Transfer rechristened PAHAL by the NDA. The CAG report has questioned the savings claimed by the government.

To reduce the diversion of subsidised domestic LPG to higher priced commercial sectors, the UPA government introduced the Aadhaar-linked Direct Benefit Transfer (DBT) strategy. However, because of the court restricting the use of Aadhaar, it was discontinued. PAHAL is a refined version of the DBT. To reduce the subsidy burden, the NDA government urged consumers to voluntarily give up their quota. So far about one crore customers have given up their quota. Since January 2016, the government withdrew subsidy to those earning more than Rs 10 lakh per year. About 60 lakh consumers meet that criterion.

PAHAL was designed to reduce pilferage and diversion of subsidised LPG while ensuring supply to eligible consumers by crediting the subsidy amount directly to their bank accounts.

As shown in the Chart, the cost incurred to subsidise domestic LPG during the last five years has increased from Rs 29,967 crore to a high of Rs 50,327 crore in 2013-14. It fell to Rs 16,074 crore in 2015-16, the first full year of PAHAL.  PAHAL had succeeded in weeding out a significant number of ghost connections. However, as the CAG report showed, PAHAL has a long way to go to completely eliminate them.

 

20.41 crore registered connections...

 

According to the Petroleum Ministry, as of 2015-16 there were 204.1 million registered LPG connections out of which 201.8 million were domestic connections and 35.6 million were found to be ghost. Less than 10 per cent of registered consumers received subsidised cylinders bypassing PAHAL. This is remarkable.  The government estimated that since the ghost/fake connections did not get subsidy, it resulted in savings of Rs. 14,818 crore in 2014-15 and Rs. 6443 crore in 2015-16.

Since PAHAL was implemented nation-wide only from January 2015, the savings for 2014-15 are theoretical. Also, the estimate was based on each connection using the maximum allowable 12 cylinders per year rather than average consumption of 6.27 per year. If we assume that all the domestic sales of 16 tons and 17.2 million tons in the previous two years received subsidy, the total cost would be Rs 40,479 crore and Rs. 19,322 crore. When we compare it to the reported subsidy, there were no savings in 2014-15 and savings of Rs. 4255 crore in 2015-16. If we take into consideration the savings from “Give It Up” initiative, then the actual savings from PAHAL is only about Rs. 3248 crore. Using a different methodology, CAG report has estimated the savings of Rs. 3500 crore which is comparable to my estimates.

 

Violations galore!

 

The audit of the CAG has shown that there are households using the same Aadhaar or Aadhaars of multiple family members to secure multiple connections.  Many households have managed to secure more than 12 cylinders a year despite the limit. A properly developed software should have been able to detect such violations and prevent them from exploiting the subsidy as intended by PAHAL.

The CAG report also discussed how families managed to sell cylinders they did not need through agents. The report also commented on how even non-subsidised domestic LPG was diverted to higher priced commercial, industrial and auto sectors to exploit the huge difference between LPG sector price. When LPG prices are higher in commercial and auto sectors, it is tempting to divert even non-subsidised LPG which can easily be secured. Assuming just 15 per cent of non-subsidised LPG was diverted to higher priced commercial and auto sectors, it would have generated about Rs 4300 crore of black money. When the crude oil price was higher before 2014 subsidy was higher (as high as Rs 763 per cylinder), before the introduction of PAHAL, black money generated was between Rs 20,000 crore and Rs. 25,000 crore per year.

The LPG pricing system should be rationalised (by reducing high taxes for non-domestic sectors) so that domestic LPG is not diverted to sectors where it commands higher prices. Only that way black money generation and the resulting corruption can be minimised.

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