Phasing out subsidies is not bad in spirit, but the urgency with which it’s done is worrisome

Pricing reforms could be painful at times. From subsidised food grains to cooking gas, linking consumers to markets has been a very gradual and protracted process thus far.

 Liberal economists like former prime minister Manmohan Singh may have understood the nuances of price restructuring unlike the present day opposition party leaders. Even if they were aware, the Opposition party leaders may still like to oppose the process for short-term political gains.

 This is exactly what happened with regards to the monthly price revision at Rs 4 per cylinder cooking gas weighing 14.2 kilos brought into effect from June 1. Bereft of ideas to take on the Narendra Modi government, non-NDA parties have made valiant attempts to metamorphose the hike in cooking gas prices into a big issue to mobilise people. What they forgot was that when the differential between petrol and diesel prices grew to be outrageous, the UPA government  decided to increase it similarly by 50 paise per month so that parity of some sorts could be achieved given that only petrol prices were deregulated and diesel was not. This helped in bridge the deficit somewhat for India is a diesel economy and touching diesel prices isn’t bereft of political suicide. It is another matter that the BJP has since decontrolled diesel prices and even deregulated it to an extent where oilcos can take a daily view on the matter.

 For ideological reasons, virtually irrelevant Left parties may have opposed pricing reforms. Other centrist parties may not have even appreciated a well oiled mechanism put in place to link the consumer with markets. Of all, Congress to lead the NDA in creating a ruckus in and outside the parliament on cooking gas prices was rather laughable.

It’s not that one fine day, NDA government woke up to its responsibility of dealing with unsustainable subsidies on food grains, petroleum and fertilisers. First, the big clean up in cooking gas connections began by bringing in direct benefit transfer (DBT) to pay cash subsidies directly into bank accounts. By linking LPG connections with Aadhaar numbers and bank accounts, most bogus consumers were eliminated. Several commercial establishments that hitherto had domestic connections and availed LPG at subsidised rates were forced to forego those benefits. Ujjwala yojana was brought in to allow over two crore poor women to avail these benefits instead through new gas connections. This was made possible as over 2.5 crore people were persuaded to voluntarily give up subsidies on LPG.

It’s against this backdrop that the government move to reduce the subsidy on 12 cooking gas cylinders annually by Rs 48 has been done. In effect, the government is leveraging low crude prices globally at about $50 as against $113 per barrel in 2011-12.

Pay for what you consume may be the principle on which the government may like to offer petroleum products. It has already tested this on petrol and diesel in cities like Vishakapatnam, Udaipur, Chandigarh, Puducherry and Jamshedpur beginning May 1 this year. Consciously, the government had exempted diesel meant for agriculture and kerosene from this scheme to ensure that no extra burden was to be shouldered by BPL families. Way back in 2001, then petroleum minister Ram Naik had shown the way by revising petroleum and diesel prices by 50 paise per litre each month to tackle fiscal deficit. Even now, subsidy phase out could be the key to the government’s pricing reforms. Oil subsidy outgo may be below Rs 25,000 crore this fiscal from Rs 60,269 crore in 2014-15. Phasing out subsidies in itself was not bad in spirit, content and economic logic.

But then, seeking to achieve the complete phase out of oil subsidy by March 31, 2018 may perhaps be very ambitious. This is especially in wake of ringing in GST and higher tax incidence in several petroleum product categories. However, the government seems to be in a hurry to achieve several milestones in reforms within this year given that countdown for 2019 Lok Sabha elections may begin next fiscal.

Best option would have been to continue with phasing out subsidy on cooking gas for 19.2 crore consumers at Rs 2 per month without hastening the process. Allowing time for price adjustments would not have given room for opposition parties to make a hue and cry. Unfortunately the pass through in much lower crude prices hasn’t happened to common users due to government soaking up revenues through frequent excise hikes.