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Subsidising LPG: Who is paying the actual cost?
Mon, 3 Feb Pre-Open

Fuel subsidies have often been targeted for the economic mess in India. What's even more unfortunate is that most of them hardly serve the purpose of helping only the needy. Take for instance the case of LPG subsidies. As per Petroleum Planning Analysis Cell (PPAC), the oil marketing companies are incurring under recoveries worth Rs 762.7 per cylinder (effective Jan 16, 2014). In FY13 and 9MFY14, the overall under recoveries on domestic LPG amounted to Rs 396 bn and Rs 306 bn respectively.

But the key question remains: Is it helping the intended beneficiaries?

Mr. Raghuram Rajan, the Governor of Reserve Bank of India does not think so. In fact, he has termed the subsidy 'misdirected'. The reaction follows recent decision by Union Cabinet to raise the cap on LPG cylinders from 9 to 12 per connection. As per an article in Times of India, the same is expected to raise subsidy burden by around Rs 50 bn.

We could not agree more with Dr. Rajan on this. Afterall, we are all too well aware about the diversion of the domestic cylinders for other commercial purposes. And a huge segment of population that can afford it is also getting undue benefits. The real cost of this is being borne by those who are lesser privileged in the economic strata of the society. This is because there are huge opportunity costs associated with this subsidy. The tax payers' money thus squandered should rather have been used for the benefit of the poor.

However, in bid too voters ahead of elections, the government, far for making amends in the much flawed fuel subsidy policy, has taken another regressive step. In de-linking subsidy on fuel from Aadhar cards, the Government has questioned its own credibility and intent. The pretext to do so is to avoid the complicated procedure of buying gas cylinder at market price and then receiving subsidies in the bank account. The other excuse is a likelihood of disruption in the supply in case fuel subsidies are linked to Aadhar. With every change, some teething troubles are bound to trail along. Leave alone energy sector, with this attitude of the government, it would be naive to expect any significant reform in the country.

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