The Government should have created a genuine market for LPG cylinders by empowering consumers to actively shop around.

After fixing an annual cap of six subsidised LPG cylinders for every household, with purchases above this attracting “market rates”, the Government seems to be in rollback mode. The public sector oil marketing companies, which had announced a Rs 26.5 hike in the price of non-subsidised cylinders from November 1, have already been told to put it “on hold”. Moreover, the six subsidised cylinders a year cap is itself under “review”. It was apparently based on an erroneous calculation, which did not account for the fact that only 10 crore out of the country’s 14 crore LPG connections are genuine. If the total number of LPG cylinders sold were divided by these bonafide consumers, their average requirement would be higher at nine per year. This belated admission amounts to the Government not only knowing how many fake connections exist, but also having an idea of the number of cylinders that these account for every year, allowing the consumption by genuine consumers to now be precisely reworked. But shouldn’t all this have been suitably factored into the original decision? Or, is it a case of realisation dawning on the Government that the move has implications for the main ruling party in the assembly polls in Himachal Pradesh and Gujarat?

Clearly, LPG decontrol has been totally botched up, for which the Government has only itself to blame. To start with, it wasn’t a great idea to allow non-subsidised cylinders to be sold at so-called market rates, when there is no ‘market’ at all. A market where all the players are state-owned firms — and they announce uniform prices every month – isn’t any market really. That exists only when there are competing suppliers, with consumers able to exercise genuine choice. In this case, the Government should have attempted to create a market for LPG cylinders first. How? By transferring cash — equivalent to the difference between an indicative market rate (say, Rs 900) and the subsidised price (Rs 400) multiplied by the number of proposed subsidised cylinders (six/nine) — directly into the bank accounts of all LPG consumers. That would have, then, laid the ground for all LPG cylinder purchases to take place at market rates, making it attractive for new suppliers to enter as well. The new entrants, willing to operate on smaller margins and offering delivery without long waiting times, would have triggered competition similar to what Indian consumers have experienced through private mobile telecom operators. In due course, even the cash subsidy could be restricted to only the poor and vulnerable households.

The above system, including cash transfers through Aadhaar-enabled bank accounts, would be easier to implement in LPG than in distribution of subsidised foodgrains or fertilisers. Unlike in the latter, the consumers of LPG are far less in number and overwhelmingly in urban areas, making it more amenable for tracking. Instead, what we have now are effectively three LPG ‘markets’ — for subsidised, officially non-subsidised and diverted/blackmarketed cylinders — that would only create undesirable arbitrage opportunities without benefiting any class of consumers. It only betrays lack of imagination on the Government’s part, which is also exacting a heavy political cost.

(This article was published on November 5, 2012)
XThese are links to The Hindu Business Line suggested by Outbrain, which may or may not be relevant to the other content on this page. You can read Outbrain's privacy and cookie policy here.