dna edit: Government’s decision to raise cap on LPG subsidies flies in the face of basic governance and fiscal good sense

If Congress vice president Rahul Gandhi is to be believed, nine subsidised domestic LPG cylinders annually per individual consumer is not enough. The “people want 12 cylinders, not nine”, he informed Prime Minister Manmohan Singh in an AICC meeting last month. With its decision on Thursday to raise the cap to 12 cylinders, the government has shown that it is fully in sync with the people’s expectations as interpreted by the party vice-president. This is somewhat baffling if viewed from the perspective that government economic policies ought to be formulated on the basis of empirical data. But that is, perhaps, too high a bar to set when general elections are looming and the incumbent government is in choppy waters. And the government’s other decision on Thursday — to put LPG subsidy payments directly into bank accounts via the Aadhaar-based direct bank transfer (DBT) scheme on hold — complicates the situation even more.

As of now, 89.2 per cent of the 140 million strong consumer base uses nine cylinders or less per year. With this increase, about 97 per cent of the base will be covered by the LPG subsidy. As RBI governor Raghuram Rajan has pointed out, this jump in coverage means the scheme has now expanded to cover precisely those who can afford to pay for those extra cylinders at unsubsidised rates. And the cost to the exchequer will be an additional Rs5,000 crore to add to the existing LPG subsidy burden of Rs46,000 crore per annum; this at a time when inflation is still a concern and the fiscal deficit is far from under control.

The junking of the DBT scheme will further worsen this scenario. Rolled out in June for LPG, it has achieved substantial coverage in the subsequent half-year or so. There are admittedly teething problems — such as a time lag between consumers making the payment to the LPG distributor and the subsidy being transferred to the consumers’ bank accounts and a lack of clarity on whether the income tax department will treat the subsidy amount as taxable or not — but these must be ironed out quickly. The benefits of DBT are too stark to ignore; by narrowing the gap between the market prices of domestic and commercial LPG, it corrects the skewed dynamics that encourage widespread diverting of cylinders for commercial use. Factor in the widespread leakage in the subsidy system as well, and it shouldn’t come as any surprise that the government would have saved Rs12,000 crore-Rs14,000 crore if DBT had been fully implemented. Petroleum minister Veerappa Moily claims that the scheme has been temporarily shelved, not junked, but given the lack of fortitude and consistency, the administration has shown in tackling difficult governance issues, it is difficult to set much store by this.

In a sense, the situation is a continuation of the government’s long-running flip-flops when it comes to LPG subsidies. They were capped at six cylinders annually per consumer in 2012, then raised to nine in January 2013; the latest move is simply a further testament to politics as usual triumphing over policy imperatives. And it will make balancing the books that much more difficult for the government that comes to power after the elections.