Millennium Post

A timely step

When the Minister of State for Petroleum and Natural Gas Dharmendra Pradhan told the Lok Sabha on Monday that the government has asked oil companies to raise prices of LPG by Rs 4 a cylinder from June 1 till the subsidy on the cooking fuel "is eliminated or till March 2018, or till further orders, whichever is earliest", he gave signal that a 'rationalisation' policy on the LPG subsidy could well be on the government's anvil. The move to "rationalise" the subsidy could have been prompted by the fall in global oil prices. With global oil prices falling appreciably after January 2014, a non-subsidised LPG cylinder today costs two-thirds of what it used to four years ago. Pradhan's statements over the past two days indicate the government's desire to derive more advantage from this situation. The directive to the oil companies to increase LPG cylinder prices incrementally could be based on the assumption that international oil rates will further soften in the coming months. Nothing appears wrong in this line of thought. The Union budget estimated an oil subsidy of Rs 25,000 crore for the fiscal year 2018 — more than two-and-half times the subsidy given in fiscal year 2013. Making LPG prices fall in line with the market would mean chipping away almost two-thirds of this subsidy burden. This is fine as long as the weather is fair. But in the long run, the government should continue to shield cooking gas customers, especially the poor, from the volatility of international oil prices.

The objective of LPG subsidy is that if provided across the country at lower rates, households will increasingly prefer this clean fuel to the more polluting alternatives. For women in poor households, LPG means freedom from the drudgery of smoke and biomass. It is environmentally benign nature makes LPG a worthy candidate for subsidies, which the government must treat differently from other fossil fuels. While framing policy, therefore, the government would do well to balance the demands of reducing the burden on the exchequer with the imperatives of environmental protection and equity. Following the implementation of direct benefits transfer for LPG to below poverty line (BPL) households, it makes no sense to provide such consumption subsidies for the non-poor. It may be noted that the amount involved in providing subsidies on household fuels is huge and rising, about Rs30,000 crore per annum. The government also needs to revamp market design for domestic LPG, complete with norms for sharing bulky infrastructure for supply and storage. What's required is proactive policy to have parallel marketing of LPG, instead of simply mandating the trio of public sector oil companies to monopolise and corner the market. It would boost entrepreneurship, step up supply and is actually likely to reduce costs and prices going forward, transparently. The move now is to fast-track the price revision, so as to better allocate scarce resources. The upfront subsidy distorts the market, breeds corruption and comes in the way of efficiency improvement.

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