NEW DELHI: The Narendra Modi government is considering a “painless” revamp of the kerosene subsidy to complete the fuel pricing reforms that have resulted in significantly reducing the burden on the exchequer.
A plan prepared by the Expenditure Management Commission (EMC) is being examined as one of many options, a senior government official told ET. Chief Economic Advisor Arvind Subramanian has been asked to evaluate the formulation, which acknowledges the need for subsidised fuel to the rural poor. The key aim of the plan is reducing pilferage and a gradual shift to direct benefit transfer.
The oil marketing companies made a total loss of Rs 24,799 crore in FY15 for selling kerosene at below cost. In addition, the government provided a few thousand crore rupees for kerosene sold through the public distribution system. The oil companies currently sell kerosene at a loss of Rs 16.32 per litre. The EMC called for reforming subsidies that cater to the poor without hurting them in its January interim report.
It sought a scientific estimation of kerosene consumption based on National Sample Survey Organisation (NSSO) data for the allocation of quotas to states. States are responsible for the distribution of subsidised kerosene through the public distribution system, widely known to be prone to leakages.
Even with a 30-40% increase over NSSO consumption numbers, the government could easily bring down its kerosene subsidy bill substantially because the fuel will only go to those who deserve it. Kerosene consumption has been steadily declining with wider availability of cooking gas and electricity–consumption declined to 70.8 lakh tonnes in FY15 from 102.3 lakh tonnes in FY04. The fuel is used in rural areas for both lighting and cooking.
A switch to direct benefit transfer as in the case of LPG could drive this down further. A pilot scheme in Alwar district of Rajasthan saw a 67% cut in demand for kerosene under the direct benefit transfer system, indicating the extent of its diversion for fuel adulteration.
A key difficulty has been overcome thanks to the Pradhan Mantri Jan Dhan Yojana providing extensive banking coverage. Most households now have a bank account that can be used for direct transfer of subsidies and other social benefits. The kerosene subsidy reform is part of a wider strategy to bring to an end so-called ‘underrecoveries’, which refer to the difference between the market price of fuel and the subsidised rate.
Diesel and petrol are no longer subsidized. The cooking gas subsidy is being given directly to bonafide consumers through their Aadhar-linked bank accounts. Everyone else buys at the market price.
Eventually, the same thing will be done for kerosene. Expenditure secretary Ratan Wattal had said earlier that the government is looking at reforming the kerosene subsidy.