Deep State Economic Reform: Kerosene Going, LPG Coming

Deep State Economic Reform: Kerosene Going, LPG Coming

In July 2016, the Government of India has introduced a price hike of 25 paise per litre to subsidised kerosene, to be incrementally increased, every month.

In FY16, the government will save an estimated Rs. 760 crores by this. 

However, if crude prices hold steady, or drop further, its fixed kerosene subsidy, of Rs. 12/litre, announced a year ago, could be gone in 4 years.

With a steady to declining oil price outlook, this is a good opportunity to implement this quiet but far-reaching reform, particularly when the poor do not use kerosene to cook anymore, and 45% of the subsidised stuff is diverted to adulterate diesel for huge illicit profits.

Rs. 12/litre from the centre is not the total ‘under-recovery’ at present. Another estimated Rs. 6.51/litre, going forward, will still have to be paid by government owned upstream oil companies, ONGC, Oil India and Gail (India). And the remainder, if any, by the   government’s oil marketing ones -Indian Oil, Hindustan Petroleum, Bharat Petroleum. It was much more before, but the gap has narrowed.

With this creeping price rise strategy sustained, the total ‘under-recoveries’ on subsidised kerosene, could also be eliminated in 7 years, or so, if oil prices don’t spike.

In FY 17, itself, commentators anticipate a further reduction in under-recoveries and subsidies, as lower kerosene market prices converge towards the modest monthly price increases.

The innovation of fixing oil subsidy figures for the first time in 2015 came as a big relief to the predictability factors at the oil companies, improving their stock market fortunes as well. The previous UPA government, reeling from very high oil prices, deliberately left this open; and often passed on a large proportion of the burden.

But in 2016, with the elimination of diesel and petrol subsidies earlier, and their dynamic pricing, the sustained low oil prices, the government subsidy allocation has halved - from Rs 60,270 crores to Rs. 30,000 crores.

And of this, Kerosene is expected to account for just Rs. 8,000 crores.

By way of contrast, in 2015, the kerosene under-recoveries stood at Rs. 24,000 crores! And the total, from the sale of petroleum products, amounted to a painful Rs. 72,000 crores.

But even as the move to eliminate, not just the subsidy, but the use of kerosene from the PDS gains ground, the Modi government has laid a new emphasis on the use of LPG for cooking instead.

Accordingly, it has provided for Rs. 22,000 crores, to be used for LPG subsidy for the poor. The better-off have largely given up their LPG subsidies already, after an appeal from the prime minister earlier. Also, with most of rural India now electrified, there is no need to use kerosene for lighting. Less than 2% of the population use it to cook with anyway, preferring biomass or LPG instead.

Meanwhile, the last annual kerosene consumption figure is 71.3 lakh kilolitres. Accordingly, this year, the government has estimated a requirement of 86.85 lakh kilolitres.

On New Year’s Day 2016, the central government announced the first part of this ongoing reform. It said the eligible poor in 26 districts across 8 states would, from April 1^st, receive their kerosene subsidy directly into their AADHAR linked bank accounts.

The states that volunteered for this pilot project are almost all BJP/NDA run, namely, Haryana, Himachal Pradesh,, Jharkhand, Madhya Pradesh, Maharashtra and Punjab.

 The objectives of this reform were to directly target the intended beneficiaries, reduce pilferage of subsidised stocks, prevent black-marketing of kerosene, and the criminal diversion of between 41-45% of the subsidised kerosene towards the adulteration of the more expensive diesel.

This direct benefit transfer (DBT) was not routed via the public distribution system (PDS). The kerosene is still, technically sold in their fair price shops (FPS), but at the full fixed price of Rs.43/litre instead of the subsidised price of Rs. 12/litre then; upped since, to Rs. 15.28/litre. The subsidy amount of Rs. 31/litre, is now being disbursed, after the purchase, directly to the buyer’s bank account. But where are the takers?

The cost of production of kerosene is now Rs. 26.52/litre, according to the Petroleum Planning and Analysis Cell (PPAC). And the current market price of unsubsidised kerosene is Rs. 49/litre. It can still be mixed with diesel at this price, but is not as attractive a proposition as it was at Rs 12/litre! 

The market situation going forward will become even more dynamic. The days of PDS kerosene, a throw-back to an earlier, poorer, shortage-ridden, socialist era, are now decidedly numbered. 

For: ABP Live

(750 words)

July 15^th, 2016

Gautam Mukherjee