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The Income based method of giving LPG subsidy

Ministry of Petroleum and Natural Gas has announced the exclusion of high-income households from the LPG subsidy cover. As per this decision, henceforth, subsidy would not be available for domestic LPG consumers, if the consumer or his/her spouse had taxable income of more than Rs. 10 lakh for the previous financial year. 

The decision makes eminent sense — why should the well-to-do be subsidised? Politically, the decision will win the government a lot of points with the poor, who will hopefully be the beneficiaries of the savings made by limiting the scope of the subsidy. The more the government saves, the more it can spend on expanding the reach of LPG connections among those who currently do not have one. The government’s initial Give It Up campaign has encouraged 57.5 lakh beneficiaries of the LPG subsidy to opt out. 

Background:

•   In March this year, the government had asked “well-off people” to voluntarily give up using subsidised LPG. So far, of the estimated 14.78 crore LPG consumers in the country, over 52 lakh are reported to have given up access to subsidised fuel voluntarily.

•   The number of LPG consumers in the country also fell from 16.35 crore to 14.78 crore after the start of Direct Benefit Transfer on LPG (DBTL) scheme that eliminated inactive customers and duplication in the rolls.

Significance of this move:

•   The subsidy saved from the ‘Give it Up’ campaign will be used for providing new connections to the BPL families. This enables the allocation of LPG to poor households and ensures that they replace the use of fuels such as kerosene, coal, fuel wood.

•   As on December 7, a total of 52,58,841 consumers have given up or surrendered their subsidy. Considering this, for the period from April to September, 2015, the annual saving would be approximately Rs 1,167 crore.

•   According to a study conducted by the Council on Energy, Environment and Water (CEEW) in 2014, the richest 15% of Indian households can easily be weaned of the subsidy, as the full market price (then Rs. 950 per cylinder) is well within their affordability limits. At present, these households account for 25% of the active consumer base.

•   The study also highlights that the richest 10% households in India corner 22% of LPG subsidy, while the bottom 50% households together receive only 30% of LPG subsidy. Thus, the government’s move to target beneficiaries by excluding well-to-do households from the subsidy net is well-founded and timely.

Cons of the decision:

•   Self-declaration: The government has planned to use taxable income (greater than Rs. 10 lakh per annum) as the basis for exclusion and self-declaration of income as the means for identification. So, the success relies entirely on the integrity of the respondent. To overcome this challenge, the government should consider enforcing the scheme by linking LPG consumer data with the PAN number.

•   Tax evasion and under-reporting:  Less than 3% of India’s population pays income tax and a significant proportion under-reports taxable income. Thus, exclusion based on reported income alone would not be as expansive a criterion as is needed indirectly benefiting the tax evaders. It would be more practical and efficient to exclude households based on multiple criteria like asset-ownership, four-vehicle ownership and possession of other assets. Each criterion, though, has its limitation when applied standalone. But, a combination of criteria such as taxable income and ownership of high-end assets, along with a robust database and stringent enforcement mechanism, would help identify and exclude well-to-do households from LPG subsidy effectively.

Conclusion:

The decision to limit the LPG subsidy by exempting those above a particular income is an attempt to address the mis-targeting problem. By doing this, the government is trying to ensure that the subsidy is only going to go to those who need it. The more the government saves, the more it can spend on expanding the reach of LPG connections among those who currently do not have one. The hope is that rather than using the resultant saving simply to shore up the budget deficit, the Centre will use it to ensure that LPG connections are provided for those who still depend on firewood and kerosene stoves. What will be results of this programme are still to be seen in the longer run.

 

 

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