The Hindu Business Line : PDS supply of kerosene

THE 55th round of the National Sample Survey Organisation (NSSO — June-July 2000) reported that around 51 per cent rural households, corresponding to 70-80 million families, burn kerosene in lanterns for light. Although 87 per cent of villages have been declared electrified, barely 43 per cent of rural households actually have power connections, leaving the un-electrified homes and poor dependent on kerosene.

Kerosene is one of the more important products sold through the Public Distribution System that aimed to distribute essential commodities in the rural areas. The PDS is largely decentralised and is coupled with the benefit of subsidies to the rural masses.

Though kerosene is largely poor man's lighting fuel, the distribution process is beset with problems of poor transparency, `rent-seeking' and diversion to more profitable uses.

Even the location of PDS outlets is not geared to serving the poor. There is usually one PDS outlet for six-seven hamlets in the biggest village. The main hamlet is usually populated by the economically better-off, and the smaller settlements are home to the poorer sections; access to the PDS outlet, therefore, becomes difficult for the latter.

The distribution itself leaves a lot to be desired. The poor are often unaware of their quotas and the days on which the kerosene supply reaches the PDS shop. The retailer has a vested interest in hiding information and diverts quota that is not picked up. Adding to this already woeful state is the fact that the Department of Food and Civil Supplies' guidelines on quota lack transparency. The declared norm allows distribution of five litres per card, but the actual allocation fluctuates month to month. This has made it easier for the distributor to divest kerosene to the black market.

Kerosene consumption in the rural areas is largely for illumination in the household, but its distribution has been linked to the supply of LPG, used primarily for cooking; households with a single-barrel LPG connection are entitled to only half the quota of kerosene, while double-barrel connection holders are not allowed to buy kerosene through the PDS at all. In Rajasthan's densely-forested Sawaimadhopur district, an odd situation has arisen — here, households, including some poor ones, have been provided free LPG connections and, therefore, must forfeit their kerosene quota. What do they use for lighting, then?

The economics of kerosene supply through the PDS also reveals some unsavoury practices. The oil companies pay the commission, but the administrative authority is vested with the District Food and Civil Supplies Office, which is directly responsible for overseeing the quality and quantity of kerosene distribution. Deficiencies in the district civil supplies distribution system and lack of transparency there have led to `rent- seeking' and diversion of PDS kerosene quotas to parallel markets run through petrol/diesel pumps.

The wholesale kerosene dealer gets a commission of approximately 15 paise per litre as also commission for transportation and related expenses normally fixed by the District Supply Officer. The total commission varies from 25 to 40 paise per litre depending on the location of the dealership. But according to estimates, pilferage and `rent seeking' bring the actual commission down to 10 paise. This translates into a monthly income of no more than Rs 2,500 for a 250-kilo-litre dealership — an inadequate sum that forces dealers to look at ingenious ways to maximise their earnings. Since a litre of diesel costs about Rs 10 more than kerosene, it is convenient to adulterate the former with the latter and sell it at a higher cost. The subsidy on kerosene has only encouraged its diversion for use as an adulterant in diesel.

The prevalence of unfair practices is also evident from studying the discretionary allotment of kerosene dealerships by ministers. In 1999, the Supreme Court cancelled some dealerships that were awarded under dubious circumstances, simultaneously directing the oil companies involved to publicly auction them. One such wholesale kerosene dealership distributing 125 kl kerosene per month was recently auctioned for Rs 55 lakhs in Uttar Pradesh.

Even at an impossibly high commission of 25 paise per litre, it would take at least 15 years to recover the cost of the dealership. The dealer is sure to search for means to divert a substantial quota of kerosene, to ensure a quick return on his investment. Here is a clear example of the misuse of subsidy and the potential for earning illegally through a service intended to serve the poor.

In 2002-2003, Indian Oil Corporation (IOC), Hindustan Petroleum Corporation Ltd (HPCL) and Bharat Petroleum Corporation Ltd (BPCL) had to bear a loss of Rs 4,000 crore due to non-revision of LPG and kerosene prices. The annual subsidy bill for kerosene alone is Rs 6,630 crore and the under-realisation on kerosene is approximately Rs 5.4 per litre. Overhauling the existing system to bring about greater efficiency would require drastic changes and might not be possible and it may be desirable to explore other options to prevent further draining economy. The subsidy could be used more profitably to promote alternative lighting options such as solar lanterns

A small solar photovoltaic lanterns costs Rs 1,200-1,300. Assuming this alternative is used and if the subsidy on kerosene distributed through the PDS is diverted for promoting lanterns, close to 100 per cent households can have light in three-four years. The money saved can be used for battery replacement and other repairs.

Given that the kerosene devices available in the market are highly inefficient, it may also be useful to consider diverting a significant portion of the subsidy for R&D related to improving the efficiency of the said devices. Considering that the poor get only a small portion of the subsidy meant for them, its continued use will only keep alive sloganeering and serve the vested interest of the indirect beneficiaries.

(The author is a fellow at TERI.)