Fuel subsidy should suit user profile

Dilip James | Updated on August 10, 2011

Freeing premium diesel pricing will help the oil companies without impacting the common man.

Be it diesel, kerosene or LPG cylinders, the price increase and subsidy ought to be determined by the socio-economic status of the consumer.

It is a salubrious Sunday morning in Bangalore and I have just driven into a petrol pump in the heart of the city.

The numerous high-end passenger cars and SUVs catch my attention and I walk by to look at a particularly uncommon German beauty. It struck me that all were diesel-powered variants waiting their turn to fill premium diesel (branded Xtramile, Speed etc).

“Will they, won't they”? After this chant for a year, the Government finally increased the price of administered fuels. Under-recoveries are still significant at about Rs 7 per litre for diesel, Rs 21-22 per litre of kerosene and around Rs 300 or so for an LPG cylinder!

As I do not own a diesel vehicle I had not paid much attention to the actual price of diesel. It was hence surprising to find price of premium diesel still indexed to ordinary diesel and only Rs 3-3.5 per litre more than ordinary diesel!

I could not but help wonder what stops the government from freeing premium diesel pricing and bringing it on a par with petrol or market price?

In countries where fuel pricing is free, there is hardly any difference between diesel and petrol prices. Additional revenue to oil companies if premium diesel is priced on a par with petrol could be Rs 17-18 per litre!

Only passenger cars and luxury vehicles seem to consume this fuel. Hence, no inflationary impact need be factored in as is the case with increase of ordinary diesel prices.

Would such a step not lead to providing some additional recovery for the oil companies reeling under the current mountain of subsidy losses?

LPG pricing

That also set me thinking about other subsidised fuels used by the consumer i.e. LPG cylinder supplied to homes and kerosene supplied through the public distribution system.

After the latest price revision, under-recovery continues for these fuels. The other anomaly is that the burden of price increase and the subsidy is the same, irrespective of the socio-economic status of the consumer.

There could be minor differences among States in the way public sector LPG customer criterion is implemented.

That aside, a dip stick analysis nationally seems to throw up three broad categories of consumers. Those who hold a Below Poverty Line (BPL) or Above Poverty Line (APL) ration card and those without a ration card.

Why can't we immediately free up LPG pricing for the last category, i.e. those who are not ration card-holders as they possibly belong to high and upper-end households of India?

This data (ration/non-card holder) should already be available with LPG dealers. It should hence be operationally easy to implement the pricing change for this category to pay market rates for their LPG supply. As a corollary, we could also offer enhanced services and get them to pay more — for instance, a committed ‘next-working-day-delivery cycle' at a meaningful service charge, adding to the overall realisation for oil companies.

It then leaves the two categories of ration card-holders. Clearly there is a case for continuing subsidy on LPG supply to BPL ration card-holders. However, could we not consider a limit on the number of cylinders supplied per year to a BPL consumer?

The category of APL card-holders possibly has a wide spectrum of households across low and middle-income strata.

A steep rise in LPG prices on account of removal of subsidy could be a burden for the lower-income category of APL card-holders. At the same time, the impact of an increase on middle and upper-income groups would not be significant, relative to their household expenditures.

According to data on Socio-Economic Classes (SEC), over 28-30 per cent of urban households are in SEC A&B category. At least a similar percentage of households among APL card-holders possibly belong to SEC A&B category and should be ideally out of the subsidy net. Unfortunately the heterogeneous mix of households in this group does not lend itself to finding an elegant solution for this category as a whole.

Cap on cylinder

May be the policy makers could consider the rather inelegant option of providing only six cylinders (or an appropriate number) in a calendar year at subsidised prices to a consumer under the APL category. Any additional supply during the year could be at market rates.

I am hazarding a guess that lower-income households are more frugal on usage of this fuel compared with the more well-off middle-income ones and may not be significantly impacted by this differential pricing.

As far as kerosene is concerned, why do we not restrict supply of subsidised kerosene only to the BPL ration card-holders? In today's time and age, it is unlikely that any other category of households use kerosene as their primary cooking fuel. Its availability to others, such as APL card-holders, probably leads to misuse by the public distribution system, adulteration of other fuels, etc.

Of course, elimination of misuse of subsidised fuels requires major surgery of the PDS system, and finding political consensus at the Centre and States for this may be tough.

It may, however, be easier to implement less invasive steps like those suggested.

A welcome consequence over time could also be a change in our consumer mindset away from one not used to paying market rates for goods and services, a legacy of our socialist roots as a nation. I am sure our policy-makers have more innovative solutions, but in the interim they may want to consider these suggestions?

(The author is a Bangalore- based independent corporate advisor).

Published on July 20, 2011

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