LPG Quota: Mockery of subsidy reduction efforts? Or Unadulterated politics?

Bhamy V. Shenoy Consumer Activist, bhamysuman@hotmail.com Ever since the announcement to impose a quota of six LPG cylinders per family per year by the UPA government, there has been protests by every kind of stakeholders - from political parties to NGOs to social activists to trade unions. Every one has been critical of the new policy because it will hurt the common man. Has there been serious look to nd out what impact it will really have on the common man? According to the 2011 census, 65% urban households use LPG while only 11.4% rural households are able to secure LPG. Thus only 28.5% Indian households use LPG. While universal unlimited LPG subsidy was not equitable (which no one questioned), even the new policy of six cylinder quota or the proposed nine cylinders cannot be justied. After al it is enjoyed by only 28.5% when the rest are deprived. Still our politicians shed crocodile tears saying increased price for LPG will hurt the common man. Under MGNREGA when Rs. 15000 is given to help the rural unemployed, we happily give Rs. 4500 mostly to the rich and the middle class families to subsidize their cooking. Let us not forget the shocking revelations of LPG transparency portal which showed several VIP politicians using more than 30 cylinder in a year and thus getting a subsidy of more than Rs 15000. Jindal family seems to have got a subsidy of as much as Rs 150000 per year (use of more than 369 cylinders a year)! Because of the unrest even among the ruling Congress party members, its leader Sonia Gandhi recommended that the states where her party is in power should give three additional cylinders at subsidized rates. This was an indirect command to the newly appointed petroleum minister Moily, He has been discussing with the nance minister of changing the policy to change the quota to nine for the whole country. Should that suggestion be accepted by the UPA government, then a simple analysis shows that the total reduction in subsidy burden on account of LPG would be only around 10.8%.

If the total LPG burden per year is around Rs 46,000 crores, then the total reduction will be around Rs 5000 crores. The cost of elaborate bureaucracy needed to administer such a complex quota system would be enormous. In addition, whenever the complexity of selling a subsidized product is high, opportunity to beat the system and to earn economic rent (in simple terms black money) is also high. If the real and unannounced goal is to help all those involved in the long chain of distributing LPG (mostly the politically connected) to earn black money, then LPG quota system is an excellent one despite the use of direct cash transfer through aadhaar. The following two tables - one using the data for Kerala and the other for the whole country- shows that savings from LPG quota implementation can vary depending upon the actual consumption pattern of the LPG consumers. There is no hard and credible data available. Still there was enough published data to develop these tables. In the case of Kerala, subsidy savings resulting from adapting six or nine cylinders quota is not at all signicant. Just by increasing LPG price by Rs. 17 per cylinder, it is possible to get the same savings as nine cylinder quota. Is it really worth the effort to develop an elaborate system to administer the quota system? Even in the case of all India data, Rs. 53 per cylinder will give us the same result as the introduction of nine cylinders quota. Analysis different LPG quota on LPG subsidy burden - Using Kerala data
Number of cylinders % of consumers Average number of cylinders Total no of cylinders per year. Before quota 325 149 100 43 Total no of cylinders per year. Six cylinders limit 325 119 63 23 Total no of cylinders per year. Nine cylinders limit 325 149 95 34

less than 6

65.00% 19.82% 10.50% 3.76%

5 7.5 9.5 11.5

7 to 8 9 to 10 11 to 12

Number of cylinders

% of consumers

Average number of cylinders

Total no of cylinders per year. Before quota 18 635

Total no of cylinders per year. Six cylinders limit 6.5 536.5 98.5 15.5% Rs 77 per cylinder

Total no of cylinders per year. Nine cylinders limit 10 613 22 3.5% Rs 17 per cylinder

12 or more

1.08%

17

Reduction in subsidized cylinders against no quota case Reduction in subsidized cylinders against no quota case - % Required Increase in LPG price to reduce subsidy burden instead of having the quota

Analysis of different LPG quota on LPG subsidy burden- Using all India data
Number of cylinders % of consumers Average number of cylinders Total no of cylinders per year. Before quota 169 191 138 121 94 713 Reduction in subsidized cylinders against no quota case Total no of cylinders per year. Six cylinders limit 169 153 87 63 33 505 208 Total no of cylinders per year. Nine cylinders limit 169 191 131 95 50 636 77

less than 6

44.00% 25.50% 14.50% 10.50% 5.50%

3.85 7.5 9.5 11.5 17

7 to 8 9 to 10 11 to 12
12 or more

Number of cylinders

% of consumers

Average number of cylinders

Total no of cylinders per year. Before quota

Total no of cylinders per year. Six cylinders limit 29.2% Rs 145 per cylinder

Total no of cylinders per year. Nine cylinders limit 10.8% Rs 53 per cylinder

Reduction in subsidized cylinders against no quota case - % Required Increase in LPG price to reduce subsidy burden instead of having the quota

Any objective look of these two tables would have resulted in increasing the LPG price marginally rather than imposing a new LPG quota policy which is extremely difcult to administer. Petroleum ministry would have carried out an analysis like the above one before taking the decision to implement the six cylinder quota policy. Why did they fail to do it? A charitable explanation could be that the petroleum ministry wanted to oat a trial balloon to see how its small efforts to reduce the LPG burden will be accepted by the political class. If there was no resistance they might have reduced the limit gradually to zero and limited the subsidized LPG only to those below the BPL. On the other hand if they have not done any analysis and they really thought that they would reduce the subsidy burden then increasing the quota to nine is to make a mockery of their efforts to reduce subsidy. It would be much better to drop the quota policy and increase the price marginally. One can also argue that the whole episode of LPG quota is another drama enacted to show how the Congress is taking care of the common man. After giving the impression that the government is reducing the burden of subsidy by limiting the number of cylinders, Congress party can get browny points by showing how it has helped the common man by increasing the quota. If this was indeed the case then it is a crass populism at its worst. Unfortunately when our politicians are indulging in dirty politics, our navaratna oil companies will soon be facing bankruptcy like our state electricity boards. Only then we will realize the foolishness of our failure to deal with petroleum sector subsidy.