Baby steps work

But kerosene subsidy reform must be backed by better targeting

The decision to allow oil marketing companies (OMCs) to increase the retail price of kerosene sold through the public distribution system by 25 paise a litre per month for 10 months is a welcome development as it signals the Narendra Modi government’s intention to reduce subsidies on environmentally harmful fuels. The idea is also to narrow losses from selling the fuel below the market price and discourage its diversion for adulterating diesel. The move comes at the back of the decontrol of diesel prices in October 2014 and raises hopes that the kerosene subsidy might as well be phased out in the near future.

On the face of it, a 25 paise increase in kerosene prices initiated last month – the first such increase in the past five years – may appear too small an amount. After all, even at the end of the 10-month period, the total selling price would rise by just Rs 2.5 per litre, which is a small fraction of the Rs 13 per litre under-recoveries at present. And even though, analysts suggest, every Rs 1 per litre hike in kerosene price lowers the under-recoveries by up to Rs 900 crore, the current set of hikes will only ease the government’s fiscal burden by just 0.01 per cent of the GDP. Yet, the small quantum of shift is essentially what makes the move a prudent one. Predominantly, kerosene is used by the rural poor. According to one estimate, close to 27 per cent of all rural households in India use kerosene as the primary source of lighting. In Bihar and Uttar Pradesh, which is due for election next year, these figures are in excess of 73 per cent and 58 per cent, respectively. As such, sudden and sharp jumps in prices can effectively derail the possibility of a sustained reform. A 25 paise increase does not shock the consumer while succeeding in tempering the demand over the medium term. In essence, this 10-month period may well lead the way to eliminating the subsidy altogether.

In many ways, fuel subsidies have proven to be chasms that are better crossed by taking such baby steps. The decontrol of diesel prices is a good example. In the past, most efforts at slashing a significant amount of subsidy in one go have been met with massive opposition. But a minimal and gradual strategy has worked. It is important that the government clarifies on the LPG (liquefied petroleum gas) pricing schedule as well. However, apart from being detrimental to the environment and the state exchequer, such subsidies have also had a shoddy record of reaching the targeted people. The Economic Survey has shown how 97 per cent of the LPG is consumed by the richest 30 per cent of the households. In the case of kerosene, too, almost 50 per cent of the subsidy benefits went to the well-off sections of the society. So while the government tries to bring down the subsidy burden through pricing reforms, it is important to keep working on improving the targeting of such subsidies. In this regard, while a direct benefit transfer for kerosene has been announced for 39 districts in nine states, the pace of reforms needs to be much faster.