Direct transfer of kerosene subsidy: All you need to know

Kerosene consumers will now have to pay the market price of Rs 43 per litre from April 1, while a subsidy of Rs 31 will be transferred later

The government yesterday announced that it will launch the direct benefit transfer (DBT) scheme for distribution of kerosene subsidy in 26 districts across eight states. 

Kerosene consumers, largely representing the poor population in rural areas, will now have to pay the market price of Rs 43 per litre from April 1. The government will then transfer the subsidy amount (Rs 31 per litre) into their bank accounts. 

The idea behind the move is to eliminate subsidised kerosene from the supply chain — for better targeting of beneficiaries, eliminate pilferage and black-marketing and cut down adulteration of the cheap fuel with diesel — while retaining provision of subsidy to the needy.  The previous UPA government had tried to implement the same scheme beginning with a pilot in 2011 and failed. Will the Narendra Modi government deliver by successfully rolling out the politically-sensitive scheme? Here is all that you need to know on the subject. 
 

1. Kerosene, or superior kerosene oil (SKO), is an oil distillate used primarily at a household level for lighting and cooking, with additional uses in industrial processes and as a fuel for generators, pumpsets, freight and passenger vehicles, and agricultural machinery.

2. Subsidised kerosene, which constitutes a large majority of total kerosene consumed, is provided through the public distribution system (PDS), a nationwide network of fair price shops (FPS) administered at the state level through which the central and state governments distribute subsidised food, kerosene and other commodities on the basis of household ration card allocations.

3. For every state, PDS kerosene allocations are calculated by the oil ministry and kerosene is released for delivery on a quarterly basis with the department of food and civil supplies within each state responsible for ensuring uplift of quota allocation and distribution to retail outlets. The Centre has allocated 86.85 lakh kilolitres of subsidised PDS kerosene to states in the current financial year even as total annual consumption stands at 71.3 lakh kilolitres

4. In 2014-15, oil marketing companies (OMCs) lost Rs 24,000 crore on subsidised kerosene sales, around a third of their total under-recoveries of Rs 72,000 crore. The Centre’s total petroleum subsidy burden stood at Rs 60,000 crore last fiscal and is budgeted to come down to Rs 30,000 crore in the current financial year. Kerosene would account for Rs 8,000 crore of this.

5. Except for minor amendments to dealer commissions and other adjustments, the retail price for PDS kerosene has increased only twice between March 2002 and August 2014. Thanks to the crude price slump last fiscal (2014-15), total per litre subsidy on PDS kerosene came down to Rs 27.93 from Rs 34.80 in the previous fiscal.

6. PDS kerosene is subject to high levels of diversion to the parallel market, both for sale to households and for a range of non-household uses, primarily as a diesel adulterant. A recent analysis of PDS allocations and household survey data from the NSSO’s 68th Round estimates total PDS kerosene leakage to parallel markets in 2011-12 at approximately 45% of total allocation, with a wide variance between states. As per the Economic Survey 2014-15, estimated leakage of PDS kerosene is 41% of the total allocation made to states for the year 2013-14.

7. A Nandan Nilekani-headed task force on “Direct Transfer of Subsidies on Kerosene, LPG and Fertilizer” set up by the previous UPA government had in 2011 recommended Aadhar-enabled cash transfer scheme. Kerosene would move at the market rate through the supply chain from the OMCs depot to wholesale dealers to FPSs and finally to consumers, it had said. It had proposed linking of the actual purchase by consumers with the corresponding calculation of subsidy entitlement based on each transaction. This, however, requires elaborate discussions with states, creation of a strong databank of beneficiaries and linking of their bank account details – fundamental reforms in the PDS at the state level.

8. The Modi government asserts that its latest plan follows detailed discussions with states on the DBT proposal. Oil minister Dharmendra Pradhan had last week told Business Standard that eight states had expressed willingness to move towards the cash transfer scheme for kerosene subsidy and had even digitised their database of beneficiaries. However, lack of clarity prevails on the preparedness of state authorities who will monitor the implementation in the 26 selected districts.

9. The districts include Raipur, Durg and Bilaspur in Chhattisgarh, Panipat and Panchkula in Haryana, Shimla, Solan and Una in Himachal Pradesh, Chhatra, Giridih, East Singbhum, Hazaribagh, Jamtara and Khunti in Jharkhand, Hoshangabad, Harda, Khandwa and Burhanpur in Madhya Pradesh, Amravati and Latur in Maharashtra, Taran Taran, Pathankot and Mohali in Punjab and Pali, Jhunjhunu and Kota in Rajasthan.    

Source: 

- GSI-IISD study on Kerosene subsidies in India

- Report of the Nandan Nilekani task force on Transfer of Subsidies on Kerosene, LPG and Fertilizer

- Economic Survey 2014-15

- PPAC, Ministry of Petroleum and Natural Gas