A half done reform on lpg subsidy

A half done reform on lpg subsidy

The government has informed Parliament about its decision to completely do away with the subsidy offered to cooking gas used for household purposes. In an order issued in May this year, public sector oil companies were authorised to incrementally hike the “effective price” of LPG cylinders until the entire subsidy is wiped off by March next year, the Union Minister for Petroleum and Natural Gas, Dharmendra Pradhan, told Parliament. Interestingly, political pressure from Opposition parties following the announcement forced the Minister a day later to argue that the government is merely “rationalising”, rather than cutting, the subsidy. But the initial announcement left very little to interpretation. Previously, in July last year, the oil companies were given the green signal to increase the effective price of subsidised cylinders by Rs. 2 a month. So the latest order to increase the effective price by Rs.4 a month, but with the clearly stated aim of eventually doing away with subsidies completely, signifies a more aggressive pursuit of the policy of cutting the fuel subsidy. It should be noted that the fall in global crude oil prices, which has reduced the price difference between subsidised and non-subsidised cooking gas in the local market, has already eased the burden on the government. In the latest Union budget, the government allocated about Rs. 25,000 crore towards oil subsidy, which is a fourth of the total oil subsidy bill (of almost Rs.1 lakh crore) incurred in fiscal year 2013.
The cut in subsidy would further strengthen fiscal discipline. The implementation of the direct transfer of cash benefits in the last few years has already helped in the better targeting of subsidies to the poor, thus substantially reducing wasteful spending. The fall in oil prices over the same period may have led the government to believe that this may be the right time to withdraw the cooking gas subsidy without causing too much pain to consumers. It is estimated that about 18 crore people, many of them below the poverty line, depend on subsidised gas cylinders. It would therefore be difficult to argue that a complete abolition of subsidy will not adversely affect them. In fact, it will not be surprising if the government steps in to foot the bill if oil prices rise in the future, as it probably should to ease the pain. Much depends on how the government makes use of the current spell of relatively low oil prices. The foremost aim should be to sustainably lower the price of cooking gas once and for all, getting the government out of the business of managing subsidies. In the long run, this is the only way to ease the burden on consumers and also free the budget from the pressure of international oil prices. Deregulating the market for cooking gas, thus opening it up to more widespread market competition, would also help.